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Outlook improves for Fair Finance investors

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A New York firm is contacting Fair Finance Co. investors seeking to purchase their bankruptcy claims—a sign that investors in the defunct business could secure a sizable recovery.

Investors in the Tim Durham-owned company this month began receiving letters from Woodbury, N.Y.-based ASM Capital offering to buy their claims for 5.25 cents on the dollar.

fair-finance-062512-15col.jpg Fair Finance investors faced locked doors on Dec. 7, 2009, at the investment firm’s Akron, Ohio, headquarters. One visitor took time to alter the door sign. (Photo courtesy of Akron Beacon Journal)

While few investors are swayed by that amount, they figure an investment firm wouldn’t have swooped in if its principals didn’t believe the actual payouts would be far greater than the offer.

So-called claims trading isn’t unusual in bankruptcy, especially in cases like Fair, where potential recoveries might take years to collect and many of the holders of claims are elderly.

“The people in that kind of business aren’t running charities,” said Doug Drushal, an attorney in Wooster, Ohio, representing about 200 purchasers of Fair Finance investment certificates. “They aren’t going to make an offer unless they think there is a pot of gold at the end of the rainbow they can grab onto.”

Fair, a consumer-finance company based in Akron, Ohio, halted payments on the notes after FBI agents raided its headquarters and Durham’s offices atop Chase Tower in November 2009.

The raid was part of a federal investigation that culminated June 20 with a jury convicting Durham on all 12 of the felony counts he faced. The jury found Fair co-owner Jim Cochran guilty on eight of 12 counts, and company Chief Financial Officer Rick Snow guilty on five of 12 counts. (Go to myibj.com/tim-durham for complete coverage.)

A grand jury indictment unsealed in March 2011 alleged that, after Durham and Cochran bought the business in 2002, they raided its coffers for personal expenses and to cover losses at failing businesses they owned.

The transfers, recorded as related-party loans, never were repaid, and prosecutors said Fair soon was operating as a Ponzi scheme, relying on the sale of new investment certificates to pay off prior purchasers.

The outlook for the more than 5,000 Ohio investors who hold over $200 million in Fair Finance investment certificates looked dismal until early this year, when bankruptcy Trustee Brian Bash sued two deep-pocketed financial firms he accused of aiding and abetting fraud.

Though by then Bash already had filed dozens of lawsuits seeking to recoup some of the insider loans and other transfers that investigators say gutted the business, many of the defendants had few if any assets. Even Kelly Burgan, an attorney for Bash, said a year ago that investors likely would recovery only a “teeny-tiny fraction” of what they were owed.

Attorneys for the trustee no longer will speculate on potential recoveries. During testimony in the Fair Finance trial June 18, Bash said he’d recovered $5.6 million, with just $518,000 coming from collections on the massive related-party loans prosecutors say brought down the company.

Under cross examination by Durham defense attorney John Tompkins, Bash acknowledged it is his “hope and belief” he’ll be able to recover much more.

Lawyers’ fees

Bash in March asked Ohio bankruptcy court Judge Marilyn Shea-Stonum to switch compensation for his counsel—the Cleveland law firm Baker & Hostetler—from hourly fees to contingency fees, with attorneys collecting one-third of recovered funds.

Investors interpreted the move as a sign the legal team is so optimistic it can haul down large settlements or court judgments that it is willing to give up a sure thing—millions of dollars in hourly fees—for the potential of a much bigger payoff. Experienced attorneys working on Fair litigation have been charging as much as $400 an hour.

After the judge rejected the proposal, the trustee this month proposed lower contingency fees—30 percent of the first $50 million recovered, 15 percent of the next $50 million, and 10 percent of all recoveries exceeding $100 million.

The judge has not ruled on the new request.

So far, expenses, including attorney’s fees, have eaten up the lion’s share of recoveries, and there have been no distributions to investors.

russell-donald-mug.jpg Russell

While the legal fees frustrate investors, they’re hopeful the lawsuit spree won’t be for naught. Buoying their spirits was a suit the trustee filed in February seeking up to $1.2 billion from two of Fair’s lenders—Rhode Island-based Textron Financial Corp. and New York-based Fortress Credit Corp.

The suit charges the companies, which have billions in assets, turned a blind eye to Durham’s fraud because they held first liens on the company’s only assets with real value—finance contracts it bought from health clubs and other firms providing extended-payment plans to their customers. As a result, they were positioned to collect what they were owed regardless of whether Durham looted the company.

The suit cites Textron e-mails sounding alarms about the extent of the withdrawals from Fair. One, sent by a Textron vice president to Durham in November 2003, expresses concern that Durham’s use of proceeds from note sales “as a piggy bank” to fund losses at other businesses was “wrong” and “could come back to haunt us.”

In March, Bash sued former Fair owner Donald Fair, saying he kept quiet about how Durham was running the company to ensure he received the full $20 million due from the purchase.

To collect the final $3.2 million in 2007, Donald Fair threatened to “create a ‘run on the bank’ that would halt the Ponzi scheme if he wasn’t paid in full,” the suit alleges. “In essence, Durham and Cochran ‘bought’ Don Fair’s silence by paying him in full.”

Including punitive damages, that case seeks more than $150 million.

‘Allegedly salacious quotes’

To no surprise, the lenders and Fair deny the allegations and are girding for battle. In a motion to dismiss filed in April, attorneys for Textron scoffed: “The trustee here has engaged in an ill-considered rush to judgment, ignoring the facts on the ground at the time, and cherry-picking documents and allegedly salacious quotes from documents, while ignoring clearly exculpatory information that does not fit the trustee’s theory.”

The trustee’s move to sue lenders with substantial resources “makes everybody a lot more optimistic,” said David Mucklow, an Akron attorney representing about 260 investors.

ASM, which specializes in buying claims in bankruptcy, believes the recovery for Fair investors ultimately will be greater than what it’s offering, but the litigation to collect that money likely won’t wrap up for years, said Jared Muroff, the company’s managing director of research.

“We do think … it is a good opportunity for investors to take money off the table now,” Muroff said. He said the offer is open to all but the smallest investors, those with less than $10,000 in investment certificates.

Firms in ASM’s field sometimes offer far more than pennies on the dollar. Reuters reports, for instance, that claims in the Bernard Madoff bankruptcy case are fetching around 60 cents on the dollar. The trustee in that case, Irving Picard, has recorded $9.1 billion through legal settlements, and his office has said creditors ultimately could get a full recovery on their more than $17 billion in allowed claims.

Mucklow, the attorney for Fair investors, isn’t impressed with ASM’s offer, in part because the contract appears to give it the right to claw back payments from investors under certain circumstances.

“I am cautioning my people to look closely,” he said. “If I were in their shoes, I would wait.”

James Coco, a certified public accountant in Medina, Ohio, who is owed $200,000, isn’t interested.

“Fifty percent would get my attention,” Coco said.

Donald Russell of Doylestown, Ohio—whose family lost $475,000—was more outspoken.

“It’s insulting, totally insulting,” he said of the offer. “My view is we have been patient for 2-1/2 years, and we are finally getting some answers. Now, at this point, we have these bottom feeders who are trying to victimize us some more.”•

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  • Take It!
    If I were you, I'd take the 5.25%. I'm sorry to tell you, but Durham blew your money on parties, Vegas trips, failed businesses. It's not just "sitting out there" waiting to be found. It's gone!! I even think AMS will take a bath on their 5.25%.

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  1. Cramer agrees...says don't buy it and sell it if you own it! Their "pay to play" cost is this issue. As long as they charge customers, they never will attain the critical mass needed to be a successful on company...Jim Cramer quote.

  2. My responses to some of the comments would include the following: 1. Our offer which included the forgiveness of debt (this is an immediate forgiveness and is not "spread over many years")represents debt that due to a reduction of interest rates in the economy arguably represents consideration together with the cash component of our offer that exceeds the $2.1 million apparently offered by another party. 2. The previous $2.1 million cash offer that was turned down by the CRC would have netted the CRC substantially less than $2.1 million. As a result even in hindsight the CRC was wise in turning down that offer. 3. With regard to "concerned Carmelite's" discussion of the previous financing Pedcor gave up $16.5 million in City debt in addition to the conveyance of the garage (appraised at $13 million)in exchange for the $22.5 million cash and debt obligations. The local media never discussed the $16.5 million in debt that we gave up which would show that we gave $29.5 million in value for the $23.5 million. 4.Pedcor would have been much happier if Brian was still operating his Deli and only made this offer as we believe that we can redevelop the building into something that will be better for the City and City Center where both Pedcor the citizens of Carmel have a large investment. Bruce Cordingley, President, Pedcor

  3. I've been looking for news on Corner Bakery, too, but there doesn't seem to be any info out there. I prefer them over Panera and Paradise so can't wait to see where they'll be!

  4. WGN actually is two channels: 1. WGN Chicago, seen only in Chicago (and parts of Canada) - this station is one of the flagship CW affiliates. 2. WGN America - a nationwide cable channel that doesn't carry any CW programming, and doesn't have local affiliates. (In addition, as WGN is owned by Tribune, just like WTTV, WTTK, and WXIN, I can't imagine they would do anything to help WISH.) In Indianapolis, CW programming is already seen on WTTV 4 and WTTK 29, and when CBS takes over those stations' main channels, the CW will move to a sub channel, such as 4.2 or 4.3 and 29.2 or 29.3. TBS is only a cable channel these days and does not affiliate with local stations. WISH could move the MyNetwork affiliation from WNDY 23 to WISH 8, but I am beginning to think they may prefer to put together their own lineup of syndicated programming instead. While much of it would be "reruns" from broadcast or cable, that's pretty much what the MyNetwork does these days anyway. So since WISH has the choice, they may want to customize their lineup by choosing programs that they feel will garner better ratings in this market.

  5. The Pedcor debt is from the CRC paying ~$23M for the Pedcor's parking garage at City Center that is apprased at $13M. Why did we pay over the top money for a private businesses parking? What did we get out of it? Pedcor got free parking for their apartment and business tenants. Pedcor now gets another building for free that taxpayers have ~$3M tied up in. This is NOT a win win for taxpayers. It is just a win for Pedcor who contributes heavily to the Friends of Jim Brainard. The campaign reports are on the Hamilton County website. http://www2.hamiltoncounty.in.gov/publicdocs/Campaign%20Finance%20Images/defaultfiles.asp?ARG1=Campaign Finance Images&ARG2=/Brainard, Jim

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