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Fair Finance's past gave investors, regulators false comfort

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James Coco would seem to be the last person to fall victim to an alleged investment fraud. The 49-year-old Medina, Ohio, resident is a certified public accountant, has no debt, and tries to be careful with his money.

He’d scoff when he saw ads in his local newspaper for investment certificates sold by Fair Finance Co., an Akron firm owned by Indianapolis businessman Tim Durham. He liked their outsized interest rates, but not that the certificates lacked the government guarantee that comes with certificates of deposit.

“I saw their ads a number of years before I invested,” Coco said. “I would think, ‘What’s this scam? Who would put their money in there totally on faith?’”

Durham

Coco would, it turns out. He made his first investment in 2004 and when that worked out well, he kept adding more. He now holds certificates valued at $200,000—much of which he fears he will never get back.

Similar anxiety is playing out across Ohio, now that company offices sit dark and federal prosecutors are calling the business a Ponzi scheme. Some investors initially thought the rates—as high as 9 percent for two-year certificates—seemed too good to be true. But reassured by the company’s longevity, they cast aside those reservations.

Fair Finance, founded in 1934, had been meeting its obligations for decades, building legions of loyal investors along the way. Many of Ohio’s Amish families grew so comfortable with Fair that they bought the certificates as their sole investment, said Beverly Keller, the local-edition editor of The Budget, a weekly Amish newspaper based in Sugarcreek, Ohio.

“It’s a generational thing,” she said. “They have been investing with Fair for years, and things have just now gone sour. It’s something their parents did, and their grandparents did.”

But what Coco and other investors in Ohio—the only state where Fair was authorized to sell—failed to fully grasp was how drastically Durham and partner Jim Cochran changed the business after buying it from Donald Fair seven years ago, business observers said.

As IBJ reported in an investigative story in October, the pair and related parties have tapped the business for more than $168 million in loans, with much of the money going to fund Durham-controlled businesses that struggled. Failure to repay the loans would imperil Fair’s ability to repay the purchasers of investment certificates, who are owed more than $200 million.

The story noted that what had been Fair’s core business—buying and collecting on consumer-finance loans—has been in steady decline since the company changed hands. Interest rates offered to purchasers of the company’s investment certificates, meanwhile, have risen sharply.

In a Nov. 24 federal court filing, the U.S. Attorney’s Office in Indianapolis alleged that, instead of using investors’ money for the core business, “it was used to make interest and redemption payments to earlier victims of the scheme, thereby lulling the earlier victims into believing the money was being [handled] responsibly.”

Offering circulars reviewed by securities regulators and provided to prospective investors documented the ballooning related-parties debt. But investors said they didn’t spend much time scrutinizing the documents after their early investments paid off as expected.

Securities regulators may have fallen into a similar trap, said James Klimek, an Indianapolis attorney critical of the Ohio Department of Commerce’s Division of Securities for giving the company clearance in recent years to sell additional certificates.

“Maybe the Securities Division got lulled into this, too,” said Klimek, a former chief counsel to Indiana’s securities commissioner. What might have started as plain vanilla investments “began changing a little bit, then a little bit more and a little bit more, and pretty soon half the assets were in related-party loans.”

Dennis Ginty, a spokesman for the Division of Securities, noted that the state has not reached a determination on Fair’s pending request to register an additional $250 million in investment certificates. He noted that prior registrations, most recently in July 2008, occurred before his office became aware of concerns about the company’s management.

“Fair Finance has been filing securities offerings with the division since at least 1959, one of the longest series of filings by any Ohio company in division history,” Ginty said in an e-mail.

Durham, 47, did not respond to e-mail or voice-mail questions. Through an attorney, he has denied doing anything wrong.

Tumultuous stretch

The fate of Fair Finance has been murky since Nov. 24, when FBI agents seized records and computer equipment at Fair’s Akron headquarters and at Durham’s office on the top floor of Chase Tower in downtown Indianapolis.

Fair’s previous, 16-month registration expired that same day, and offices have not reopened since. Rather than signing off on a new securities registration, Ohio regulators have responded with a torrent of questions far more detailed than any of their prior correspondence with Fair.

In a seven-page letter sent to the company Dec. 3, the Securities Division’s Mark Heuerman noted that the company often doled out loans to borrowers who provided unaudited financials or no financials at all. Further, he said, Durham, Fair’s CEO, “appears to have unfettered discretion” to change loan terms without anyone else’s approval.

Heuerman asked the company to provide detailed documentation on loans and told it to submit audited financials—something prior ownership included in offering circulars but Durham hasn’t.

The letter also cited language in the Ohio Securities Act stating that the division “may refuse” any registration where the issuer does not require repayment of related-party loans within six months. The division registered prior offerings despite the absence of such a repayment plan.

Heuerman also balked at language in Fair’s proposed offering circular comparing the company’s lending criteria to that of a “standard bank.”

Randy Wilson, a retired banking attorney in Indianapolis, agreed a bank wouldn’t have the leeway to extend so many related-party loans.

“It is very tightly regulated and examined regularly,” Wilson said. “Even if you tried to do that kind of thing at a bank, it would be found out shortly.”

Regardless of government oversight, Wilson said, investors themselves should be diligent. He said investors who see the opportunity for outsized returns often let their guard down and become gripped by greed.

“Generally, whenever you get aggressive interest rates that are inordinately high compared to the rest of the market, you better watch out,” he said.

Sorting things out

Fair investors have stopped receiving their interest payments, and the company’s Web site is down.

Investors don’t know what the future holds. A Dec. 11 press release said “Fair still has not determined when or if it will be able to resume regular business with regard to the sale and redemption of investment certificates.”

Vandals have altered the name on signs at the company’s headquarters, rechristening it “UnFair Finance.”

If Fair can successfully resolve investigations by the U.S. Department of Justice and the U.S. Securities and Exchange Commission—and prove to Ohio securities regulators that it is on solid financial footing—it could resume business as usual.

But if that doesn’t happen, investors may be in for a long wait for whatever money attorneys working on their behalf can scrounge together.

Indianapolis attorney Hugh Baker knows the challenges firsthand. He fought for more than a decade to recover money for the 2,500 investors who purchased unsecured notes in the financial-services firm Firstmark Corp. before it slid into bankruptcy in 1998.

Typically, assets that might be seized and sold have liens against them giving other parties first dibs on cash. Baker ended up recovering one-third of the $57 million due investors, in part by suing professional-services firms that did work for Firstmark.

“There is just no easy way,” Baker said. “The legal system is very long and laborious, and you end up with lots of different proceedings in different venues.”

Coco said he’s beginning to accept he might never see the money. “At first, it was like a body blow,” he said. “I feel I was just hammered. I am getting on with my life, but for a few days there it was hard to digest.”•

 

 

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  • Fraud began years ago
    The fraud began quickly after the acquisition of Fair. Tim was runningnrgative cash flows from his businesses which consisted of a few single digit gross margin companies with erratic sales and high capital intensity. These companies were saddled with unbearable debts and generated negative cash flow. The other businesses were money losing indulgences that just satisfied his ego. Most lost large amounts of money. The cars, the mansions, the jets, the art and the yacht required constant cash infusions from Fair to maintain. Of the $200 million he spent, expect recovery of 20% and all of that to be lost in lengthy and costly litigation.
  • please return our money
    The investors in Ohio trusted Fair Finance with their hard earned money. Physical labor was How I earned mine. It's all I have. Now, I have nothing. NOTHING!! What does Tim Durham have? We all know the answer to that, 70 exotic cars, million dollar mansions, yacht, and on and on...He needs to answer questions like Do you intend to pay these investors as promised? If he does not give an interview, he should be arrested immediately!! Steal from the poor to make yourself richer?! SICK!
  • Seasons Greetings
    did you have a merry christmas? someone told me that a certain cellular vendor is a bit amiss with one of the two of you and is working directly with the SEC.....wouldn't you know the head legal counsel is an ex-SEC branch chief? Whoda thunk, huh?
  • Perhaps Durham can attend
    he likes to fly around and attend auctions, maybe he can go to this?

    http://www.miamiherald.com/business/breaking-news/story/1389033.html
  • Pete Sessions: "I love you, Allen Stanford"--
    Gosh, you could substitute "Carl" and "Tim" for "Pete" and "Allen," couldn't you?

    http://www.miamiherald.com/news/miami-dade/v-fullstory/story/1399470.html
  • Has G-Man Dennis Halliden
    deposed G-Man Michael Schulstadt yet?

    You Hoosiers should find out why Schulstadt got whisked off to Newark a few years ago. Was it to shut him up?
  • 21 y/o
    18 is a much more fun age for ladies!
  • Where's The Vice Squad?
    Is the age of consent 21 in Indiana?

    Okay, I have a question here on Senator Evan Bayh and his STRONG buy on Kapp (US Attorney for the Northern District of Indiana). Where are his, "I want Tim Morrison replaced e-mails to Obama and Holder?" Is he aware of what's going on in Indianapolis? Has he cut a deal with Lugar to look the other way for Lugar's boy, Morrison?

    Not sure if Hoosiers are aware how the US Attorney game is played in all but 10 US Attorney's districts. It's not the most qualified man or woman who gets the job. It's not the most ethical or aggressive. It's "who kisses US Senators' butts the best."

    Baucus almost got his girlfriend appointed. Yeah, that's right. Some US Senators expect taxpayers to pony up for their nookie. She (Baucus' girlfriend) didn't get appointed as a US Attorney but she still has a job at the DOJ.

  • Robert Kaiser
    There are a lot of people out here that knows about that Nazi Kaiser
  • The Philadelphia SEC office
    is the one probing this matter. They do not have primary venue over the CLST issue. The Fort Worth office does. They do not have primary venue over Durham and/or Fair Finance, the Chicago office does. They are the office who brought the case against Dan Laikin and all of the others involved in the penny stock scam sting operation.

    It really doesn't matter who at the SEC is conducting the probe.

    What I don't understand is why Senator Evan Bayh's not all over this situation. Tim Morrison is a Bush administration appointee. Bayh's on the Senate Banking committee. It's obvious now someone dropped the ball in Indiana isn't it?

    Doesn't he read his local newspapers or is he another worthless do nothing politician like Luger?
  • It is obvious
    it will be quiet for awhile, while the Feds get all their ducks in a row, including approaching those being implicated, and making a grand announcement, all worked out prior to being announced. Yes, this is Indiana, but don't forget the SEC is in the game now with CLST. Amazing how stupid some people get, especially with all the paper trails. Remember one player has not been sentenced yet....
  • Where is this going?
    Dr. Evil - As for a "snitch," are you threatening a federal witness?

    ^ where did that come from??? lmao, That is how children try to bully an argument their way. Nobody threatened anyone in this entire thread

    Justice - His business in Indiana took loans and funneled money ( Allegedly) from Fair, thus making it Indiana's business.

    Long story short - it will be just like the Hilbert saga with lots of court dates and money hiding. The result will just be a bunch of paid lawyers and no results for investors. Quit taking it so personally
  • Re
    Dr. Justice,

    You sound a lot like Scott, Tammy, Jackie or perhaps Carl. This is a comprehensive investigation which will take time.

    As for relation to Indiana, keep in mind these "loans" were really taxable income for the last eight years, for which none of these bozos that helped themselves to the money paid taxes on. There are lots of angles that take time.

    As for a "snitch," are you threatening a federal witness? And, how would you know there is a "snitch?" It is my understand more than one person reported Tim Durham for crimes and now that the news is out the skeletons are coming alive and it's like Christmas morning every day for the feds.
  • The FACTS
    The fact of the matter is that there still are no charges. If the FBI really had a case, he would be in custody or on Bond. I bet right now they are deciding whether or not to file charges on the snitch who lied to them. Also, if no charges are ever filed - you can blame the government for Fair's collapse. Really, it all seems irrelevant to me as investments are just another way of GAMBLING! It's like complaining that the dealer sucked out a crazy 21 at the blackjack table, when you had been on such a winning streak. Maybe you should have taken previous Fair earnings and DIVERSIFIED them into something else...or buy and run your own business so you can always know what is going on.

    P.S. - Why does this paper so obsessed with this topic anyway? These are Ohio investors only and it's the Indiana Business Journal. How about talking about OUR investments
  • re
    Dan got his friends in trouble? No, what got all of this opened up formally was Tim using the remaining cash on the CLST balance sheet, that was supposed to be paid to a certain vendor (that's what the shareholders were told, that there was no more money and the company would be closed,) and redirecting that money to Fair Finance. Same reason Carl and other friends of Durham bought more and/or held their CLST, because he was anticipating a distribution of this cash that no one knew was not going to be paid to the vendor.

    Now the whole historical can of worms, from Brightpoint stock purchase to the reasons behind Cellstar (now CLST) stock purchases to the two brokerage groups that pumped the stocks to the pump on Obsidian to houses bought for future girlfriends to yada YADA YADA is opened and the worms are squirming to be released big time.

    If there is any amusement to be had it is that Tim Morrison and Rick Neff (Indiana Securities)will be publicly outted for having ignored multiple requests to stop Tim Durham from committing crimes. Todd Rokita can really make a name for himself and clean up white collar crime in Indianapolis at the same time.
    • You are correct
      No question he turned in some info to drag in a bigger fish than he....and he did...but what is surprising is what this fish will turn up....don't be surprised if it involves another family member.
    • When's Brizzi Going to Come Clean?
      Well if it weren't for the Philadelphia SEC office busting Danny Laikin, I suppose Tim and his pals would have had a nice Christmas.

      Too bad Danny got his friends in so much trouble.
    • Is Christmas over?
      Darn it. When I refinanced the $700,000 house Tim gave me the money to buy was I supposed to give that money to Fair?
      • Sad....very sad!
        There are going to be a lot of innocent victims on this one. There's a lack of the oversite that exists in the banking industry. Not really the Ohio securities regulators responsibility, they don't audit bank operations, which is what it would have taken here. It appears Durham, like many criminals, survived by exploiting a weakness.

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