Banking & Finance and Investing and Securities fraud and Tim Durham

Investors let down guard, opening door to Durham fraud

December 8, 2012
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Tim Durham heads into federal court earlier this year. (IBJ file photo)

When the economy was cratering in 2008, Akron, Ohio-based Fair Finance was preparing to come to market with $250 million in investment certificates boasting interest rates as high as 9 percent.

To be sure, the ads that ran in newspapers across northern Ohio were attention-grabbers. After all, anyone walking into a bank and buying a CD was settling for perhaps 3 percent.

Which begs this question: Shouldn’t the 5,100 Ohio investors who lost more than $200 million when Fair collapsed three years ago have seen Fair’s lofty interest rates as a red flag?

Shouldn’t they have realized that, for those rates to be sustainable, Fair would need to redeploy their cash into something earning even loftier returns—an unlikely feat even in a robust economy?

Over the seven years Indianapolis businessman Tim Durham owned Fair, he steadily increased the interest rates it paid—an apparent reflection of his insatiable need to bring in ever-more money to feed his Ponzi scheme.

Durham finally is getting his due. Federal Judge Jane Magnus-Stinson on Nov. 30 sentenced him to 50 years in prison for looting Fair, using investors’ funds to support a lavish lifestyle and prop up other failing businesses he owned. Fair co-owner Jim Cochran, who reassured investors everything was fine when things actually were dire, received a 25-year sentence, and Chief Financial Officer Rick Snow got 10 years.
 

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But Durham’s success in luring so many investors—many of them small-town, blue-collar Ohioans—is strong evidence of the low level of financial literacy in this country, said Mark Maddox, an Indianapolis attorney who for more than two decades has represented investors in disputes against investment firms.

“I don’t think the average investor has a very good understanding that, in periods where interest rates go down, the returns you can get from safe investments are going to go down with them,” Maddox said.

Sugato Chakravarty, a Purdue University professor who teaches personal finance and has researched Ponzi schemes, thinks the explanation is more complex.

He noted that Bernie Madoff reported improbably steady double-digit returns to sophisticated investors—from prominent executives to university endowments—for more than two decades without having his Ponzi scheme exposed.

“I think it is more of a behavioral bias,” he said. “We are so caught up in making these monies that we don’t ask the questions. We don’t want to look at the goose that lays the golden egg too closely.”

He said even skeptical investors have trouble staying on the sidelines “when you see your friends and neighbors making money in a tough climate. You feel stupid missing out on it.”

Chakravarty added: “It just shows that, at the end of the day, greed is a major component of our psyche, and none of us is too far away from it.”

James Coco, a Medina, Ohio, certified public accountant, isn’t sure it was greed that led him to start buying Fair certificates in 2004 and eventually increase his investment to $200,000.

He said he saw Fair’s ads in his local paper many times before he requested an offering circular from the company detailing the ins and outs of the business.

The ads played up that Fair had been around since 1934—longevity Coco found reassuring. And the offering circular said Fair’s core business was buying finance contracts from furniture stores and other businesses offering customers extended credit.

“To me, it sounded safe,” Coco said, though he acknowledged only skimming the circular and not really understanding the “confusing footnotes” detailing related-party loans to Durham and other insiders.

“Maybe it was greed,” he said. “But maybe it was just looking for higher returns and not analyzing it properly.”

Whatever mistakes investors made don’t diminish Durham’s betrayal of their trust. Judge Magnus-Stinson made clear during the sentencing that she found his conduct revolting. She said three words describe Durham and the crimes he committed: “Deceit. Greed. Arrogance.”

Such fraudsters know how to prey on the naivete and frailties of human beings, Purdue’s Chakravarty said. While the term Ponzi scheme dates to a fraud executed by Charles Ponzi a century ago, hucksters have been around far longer than that—and continue to find new victims.

“There doesn’t seem to be a collective institutional memory that warns the next generation of people who are going to be duped that if something seems too good to be true, it probably is,” Chakravarty said.•

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