The deeper Fair Finance Co.’s bankruptcy trustee digs in his quest to unearth money, the bleaker the outlook appears for the company’s beleaguered investors.

For six months, an army of professionals has been trying to recover funds for the investors—5,000 largely blue-collar Ohioans who purchased more than $200 million in investment certificates with interest rates as high as 9.5 percent.

Regretfully, the investigators have discovered you can’t recover what isn’t there. They found that Indianapolis businessman Tim Durham, Fair’s co-owner and CEO, burned through staggering sums on a lavish lifestyle, loans and gifts to friends, and loans to businesses he partly owned that performed dismally.
 

Durham

“I would be surprised if we approached 25 cents on the dollar,” Cleveland attorney Kelly Burgan said of the potential recovery for investors.

This is the first time anyone associated with the investigation has provided a recovery estimate. Burgan, an attorney for bankruptcy Trustee Brian Bash, hopes she’s wrong, and she’s continuing to follow leads in hopes of unearthing more cash.

But here are a few examples of why the outlook is bleak:

• Durham’s Indianapolis-based leveraged-buyout firm, Obsidian Enterprises, owes Fair $31 million but apparently has no means to pay it back. It moved out of its offices on the top floor of downtown’s Chase Tower early this year because it couldn’t even pay its rent.

• Obsidian’s U.S. Rubber Reclaiming, a Vicksburg, Miss., firm that is the oldest rubber recycler in the United States, owes Fair $16 million, according to the bankruptcy trustee. Fair allowed U.S. Rubber to mortgage all its assets for a bank loan. The bank is attempting to sell the business, but because its property is contaminated and its equipment out of date, the best offer so far is just $200,000.

• Obsidian’s Danzer Industries, a Hagerstown, Md.-based maker of truck bodies and cargo trailers, went out of business in 2006 and has no assets with which to repay the $3.4 million it owes Fair.

• Durham spent $14 million on real estate and household expenses. Many of the properties have mortgages close to or exceeding the value of the real estate.

• Durham provided at least $16 million to friends and family in the form of gifts or loans. Many of the borrowers have little or no ability to pay the money back.

Through an attorney, Durham, 48, declined to comment. He has acknowledged owing lots of money to Fair but denied doing anything improper. In court papers, he argued that the risks of purchasing Fair’s unsecured investment certificates were fully disclosed in offering circulars provided to prospective investors.

The U.S. Attorney’s Office in Indianapolis launched a criminal investigation of Durham last fall. The probe continues, and officials won’t comment. But in a November court filing, they alleged Fair operated as a Ponzi scheme, using money from new investors to pay what it owed prior investors, thereby “lulling the earlier victims into believing that their money was being [handled] responsibly.”

Fair began doling out loans to insiders and related parties with abandon after Durham and fellow Indianapolis businessman Jim Cochran purchased it in 2002. Previously, Fair, which was founded in 1934, had stuck to its core business of purchasing consumer-finance contracts from retailers and other firms that extended credit to their customers.

That Durham and Obsidian ended up owning so many struggling businesses reflected his investment strategy—buy troubled companies, return them to profitability, and sell them for a tidy profit. As an LBO specialist, he relied heavily on borrowed money—a tactic that juiced potential returns but also boosted risk.

As Durham himself told IBJ in 2005, “This model works extraordinarily well in great times and extraordinarily badly in bad times.”

Durham launched Obsidian in 2000 after he and partners hit pay dirt on a couple of early deals. But he had trouble repeating that success. Nearly all the firms he scooped up in recent years appear to have fallen on even harder times.

“I have heard that he was in the turnaround market, but he doesn’t seem to have been very good at it,” Burgan said.

The economic meltdown didn’t help, of course. Joan SerVaas, Durham’s ex-wife, said she thinks Durham had hoped to keep his businesses afloat but found the downturn too much to withstand.

The couple divorced in 1999 but stay in touch. “He is not a bad person,” SerVaas said. “He feels terrible” and is doing what he can to cut investors’ losses.

But Burgan has seen plenty that makes her doubt Durham was on the up and up. For instance, when companies that received loans went out of business, he would assume the debt himself—a move that allowed Fair to avoid loan write-offs that might have sounded alarms with investors and regulators.

Burgan also noted that when Fair issued loans, it sometimes didn’t file public documents protecting its security interest. That allowed borrowers to take out more loans, and for those lenders to put themselves ahead of Fair for repayment.

“I don’t have any formal opinion, but it looks like a Ponzi scheme,” Burgan said.•