Related-party loans pile up at Durham-owned finance firm

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Indianapolis businessman Tim Durham has treated Ohio-based Fair Finance Co. almost like a personal bank since buying it seven
years ago, and now Durham, partners and related firms owe it more than $168 million, records show.

Fair, a consumer-loan company, listed no insider loans under prior ownership. The extensive borrowing—which represents
70 percent of Fair’s assets—worries some investment-industry observers at a time parts of Durham’s financial
empire are strained.

They note that if the borrowers fail to pay off the loans, Ohioans who have provided capital to Fair for decades by buying
short-term investment certificates may not get their money back.

Fair continues to raise money from those investors, offering interest rates on 24-month notes as high as 9 percent, more
than triple what banks are offering for certificates of deposit of similar length. Unlike CDs, Fair’s securities carry
no government guarantee. The amount of investment certificates outstanding has swelled to $197 million, five times the amount
on the books when Durham and partner Jim Cochran bought the business.


A securities attorney who reviewed the offering circular for the certificates at IBJ’s request said that—because
of the related-party loans, the lack of audited financials, a confusing presentation of financial information, and other problems—the
Ohio Division of Securities shouldn’t be permitting their sale.

“I am incredulous that Ohio continues to register these securities,” said James Klimek, a former chief counsel
to Indiana’s securities commissioner.

Durham, 47, a leveraged-buyout specialist, declined to answer detailed questions from IBJ, saying in an e-mail that
he believed the newspaper had treated him unfairly in past coverage. He pointed out that Fair provides the Ohio Department
of Commerce’s Division of Securities detailed financial information and that the information also is in the offering
circular provided to prospective investors.

Ohio Securities Commissioner Andrea Seidt said in an e-mail that her office reviews the adequacy of disclosures in proposed
offerings of Fair’s type and whether the securities would be sold “on grossly unfair terms or in a manner tending
to deceive or defraud.”

She said registration of securities does not mean her office has determined it is a “good” offering or one that
will make money for investors.

“The fact that an offering is registered in Ohio does not equate to the state ‘approving’ the ‘merits,’”
she said.

Seidt acknowledged that the Ohio Securities Act says the Division of Securities may deny registration for offerings in cases
where the issuer does not require repayment of related-party loans within six months, but didn’t with this company.

In Fair’s favor, she noted that the circular says a majority of disinterested directors approved the related-party
loans and that they carry an interest rate 1-percentage-point higher than the company pays out on its 24-month certificates.

Related-party loans can be a red flag for investors because of the potential for conflicts of interest. A lender could be
reluctant to press for collection on a loan, for instance, if the borrower is a related party and doing so would put him in
a financial squeeze.

Records show that Fair Finance has funneled money to Durham and his companies by making loans to its parent company, Fair
Holdings Inc., and to DC Investments, the Durham/Cochran firm that owns Fair Holdings.

DC Investments owed Fair Finance more than $44 million under a line of credit as of Dec. 31, 2007, the latest period for
which itemized loan information is available. The offering circular says Durham and Cochran are allowed to tap DC personally
for up to $38 million. Some loans, records show, were used to finance artwork and real estate.

The second-largest borrower was Durham’s leveraged-buyout firm, Obsidian Enterprises Inc., and related firms. They
owed $29 million.

Smaller amounts were owed by Durham’s Car Collector Magazine and Speedster Motorcars, a maker of classic car
replicas, among other firms. Many of the loans specify what serves as collateral, but not what the collateral’s worth.

The offering circular acknowledges that the disclosures about related-party loans do not comply with generally accepted accounting
principles, or GAAP—a shortcoming Klimek said he finds troubling.

Klimek said the 50-page document also has confusing passages that could have a big impact on investors, including one that
would allow Fair to unilaterally restrict the amount it pays out on the certificates under certain circumstances.

Klimek said he wonders, “If this is the kind of deal that gets through your review standards, what would you deny?”

Different business

Fair Finance began operations in 1934 in Akron, a gritty Ohio city south of Cleveland that is home to Goodyear and bills
itself as the rubber capital of the world.

Through the years, it found success purchasing consumer-finance contracts from health-and-fitness clubs, time-share condominium
developers and other firms that offered their customers extended-payment plans.

Fair sells its investment certificates through eight offices scattered around northeast Ohio. Buyers, who must be Ohio residents,
have come from all walks of life, said Donald Fair, who sold the business to Durham and Cochran. Fair said he thinks many
purchasers are retirees or people with modest incomes trying to grow their retirement nest eggs.

“It’s very broad,” Fair said of the investor base. “I think, too, our family has been very active
in the community for decades. A lot of people initially invest in our company based on the knowledge of our family.”

In marketing materials, Fair Finance still plays up that longevity by including the phrase “since 1934” in its
logo. But Donald Fair said it’s a very different business, with the size of the company’s core consumer finance
business shrinking and the amount of related-party loans increasing.

“I don’t like what I see,” said Fair, 83. “It is such a departure. It is not how we operated.”

He noted that it’s difficult to get a handle on the company, because the complexity of the offering circular has increased
as the amount of related-party loans has escalated.

“I find myself wondering, ‘Where are they going?’” he said. “The principal of the company [Durham]
is pretty bright and aggressive. I trust the concerns he invested money in are viable, operating companies, and the investments
are safe, but I have no way of knowing.”

Early successes

Tim Durham, the son of a Seymour dentist, received a mathematics degree from Indiana University before graduating
summa cum laude from its Indianapolis law school.

He served as president of school-bus maker Carpenter Industries in the early and mid-1990s, a span when the business nearly
doubled in revenue. It was then owned by Indianapolis businessman Beurt SerVaas, Durham’s father-in-law until he and
SerVaas’ daughter Joan divorced about a decade ago.

But his first blockbuster successes were in the leveraged buyout game. In 1999, his LBO firm sold a machine shop and forging
business for $14.3 million—a deal that turned a $500,000 equity investment into $3.6 million.

The next year, Durham sold two small manufacturers for $8.3 million. That deal parlayed the original $83,000 equity investment
into $1.8 million.

Around that time, Durham began raising $10 million to launch Obsidian Enterprises, an LBO firm specializing in manufacturing
and transportation companies. Durham’s track record helped him draw in a who’s who of Indianapolis investors,
from Klipsch Group CEO Fred Klipsch and wealth-management executive Robert Kaspar to finance executives Mike Miles and Brian

Durham soon hit pay dirt again, this time through his personal investing. He’d begun scarfing up shares of wireless
phone wholesaler Brightpoint Inc. when it was teetering toward financial collapse. Durham’s bet that Brightpoint was
wildly undervalued paid off when the company rebounded and the stock sprang back. He has said he made about $30 million on
the investment.

Durham began living an outsized lifestyle that reflected his success, complete with lavish parties, collector cars, expensive
artwork and one of central Indiana’s largest homes.

In a January 2008 Indianapolis Monthly story, he estimated his net worth at $75 million. A few months later, the
cable business channel CNBC profiled him in a special called “Untold Wealth: The Rise of the Super Rich.”

He gave the CNBC anchor a tour of his 30,000-square-foot Geist home, which features eight bedrooms, two kitchens, three bars,
20 TVs, wallpapered ceilings and other touches.

“My decorator can do a lot with an unlimited budget,” he said on the show.

Investors lose faith

By then, though, some of the investors who once clambered to invest in Obsidian had grown disenchanted.

Obsidian was a public company from 2001 to 2006, a span in which it piled up tens of millions of dollars in losses and the
stock fell from $12 to $1.85.

In March 2008, Durham sued some of the Obsidian investors, charging they had committed intimidation as they pressured him
to buy back their stakes—something he stressed he had no obligation to do.

The investors fired back with a countersuit charging Durham had ownership interests in a complicated tangle of more than
50 companies but hadn’t provided them a clear accounting of which were part of Obsidian and how those had performed.
They charged some of the businesses “have been or are insolvent.”

Since 2000, according to the countersuit, “Durham … has shifted assets, acquired and disposed of assets, and
hidden assets. All the shifts, acquisitions and concealing have been done to Durham’s financial benefit and the detriment
of the plaintiffs.”

E-mails included in the court file show the two sides sparred for weeks before the dispute spilled into court. In an exchange
with opposing counsel, John Taylor, the attorney for the investors, wrote: “They want out and they want out now. …
From what they have read about his cars, boats, art, planes and the like, they thought this was a good time to get their money

Taylor chastised Durham for treating his clients like “unsophisticated peons and country bumpkins.” For his part,
John Egloff, the attorney for Durham, charged the investors were trying to pressure Durham to pay more than fair value for
their ownership stakes. He said the tactic “smacks of bad faith at best and extortion at worst.”

The parties settled in the summer of 2008, with terms undisclosed. However, in January of this year, some of the investors
filed fresh lawsuits charging Durham hadn’t made certain payments required under the settlement and still owed them
more than $208,000. The sides swiftly reached a new deal, with Durham agreeing to pay the debt in installments through June—a
commitment he fulfilled.

Obsidian’s Web site says the company owns manufacturers that make specialty trailers, as well as a firm that reclaims
rubber. According to a lawsuit, Obsidian last year dissolved Pyramid Coach, a Nashville firm that provided tour buses to the
entertainment industry, after a crash killed singer-songwriter Joyce "Dottie" Rambo.

The suit, filed by a daughter in Nashville, charged the driver was negligent and that Pyramid was liable for the negligence.
The case was settled in June, with terms kept confidential.

Litigation spree

Durham this year has faced a thicket of legal battles on other fronts.

• In May, a federal judge ordered Fair Finance to pay a $1.5 million breakup fee to Brevet Capital Advisors, a New York
firm that in 2007 negotiated a letter of intent to provide $75 million in financing to Fair. The court concluded Fair violated
an exclusivity agreement when it walked away from that deal and instead got financing from a competitor.

Fair is appealing. But while it does, it needs to either pay the judgment or post a large bond and has done neither, said
Steven Crell, an Indianapolis attorney representing Brevet. As a result, Brevet has filed litigation trying to collect what
it is owed by pursuing parties that owe money to Fair, including Durham.

• This month, a judge dismissed a lawsuit that accused Durham and other insiders at Dallas-based CLST Holdings Inc.
of self-dealing, waste of corporate assets, and unjust enrichment.

Durham is a director of CLST, which was a wireless phone distributor before it sold off its operations and adopted a plan
of liquidation two years ago. Investors, including New York-based Red Oak Partners, launched the suit after CLST began purchasing
portfolios of consumer-finance accounts, including one it acquired from Fair for $3.6 million.

CLST executives defended the purchases, saying that staying in business allows the company to use prior losses to reduce
its future tax bill. But investors noted the Fair deal included cash and stock payments to Durham, Cochran and their company,
and gave the business additional liquidity during the depths of the financial crisis. Investors also balked at the overall
strategy, calling it nonsensical.

“In other words, during the worst recession since the Great Depression, the individual defendants caused CLST to convert
over 60% of the company’s most liquid, safe assets (particularly cash) into illiquid, high-risk consumer-based accounts
receivable,” Red Oak said in court papers.

It’s not clear on what grounds the judge dismissed the case Oct. 9. He did not issue a written ruling.

On Oct. 20, CLST revealed that its largest portfolio purchase, a collection of home improvement loans, was suffering higher-than-expected
defaults. The company acknowledged it could lose part or all of the $6 million in cash it put into the purchase, but said
it did not anticipate similar problems with other portfolios.

• Locally based Shiel-Sexton Co. in May sued a partnership of Durham and local restaurateur Henri Najem, charging they
owe more than $433,000 for construction work on a Bella Vita restaurant in Charlotte, N.C. Shiel said it halted construction
late last year because of nonpayment.

Meanwhile, a legal cloud hangs over another business where Durham is a major investor, Los Angeles-based National Lampoon

Lampoon’s shares have traded for less than 50 cents since December, when the U.S. Securities and Exchange Commission
filed civil fraud charges against the company and a grand jury indicted then-CEO Dan Laikin on stock-manipulation charges.

Laikin pleaded guilty to a felony last month and is awaiting sentencing. Durham, who was not implicated in the criminal case
or named in the SEC’s civil lawsuit, is serving as acting CEO.

Fair’s future

Documents provided to prospective Fair Finance investors show the company had an operating loss of $1.8 million
in 2008—red ink the company attributed to a decision to bolster reserves for consumer loan defaults by $2 million.

“Management is of the opinion that the country’s current economic climate creates the potential for a larger
number of defaults in finance receivables,” the company said in January, though it added that it had not yet seen a
“notable increase.”

With the loss, Fair Finance and parent Fair Holdings combined have a net worth—their assets minus their liabilities—of
just $5.5 million. The amount owed purchasers of its investment certificates is a steep 35 times net worth, noted Ken Skarbeck,
an analyst who serves as president of Aldebaran Capital Management in Indianapolis and writes a finance column for IBJ.

“This is risky stuff,” Skarbeck said of the investment certificates. “People are buying yield, but you
have to look at what’s behind it.”

Donald Fair said he is surprised the company is offering such lofty rates. He said that if he were running the company, he
wouldn’t be paying more than 5 percent.

The higher rates ratchet up the amounts the company must pay in interest at a time when the earnings power of its core consumer-finance
business has waned. The company now has less than $32 million in finance receivables, down by half since Durham bought the

If Durham and others pay off related-party loans as scheduled, the balance sheet will become healthier overnight. The offering
circular notes that $85 million in related-party loans are due to be paid off in 2010.

But it’s not unusual for companies to extend the terms of related-party loans, noted Mark Maddox, an Indianapolis securities
attorney who reviewed the Fair circular.

‘We should know in the next year or two whether this is going to be a good investment or a horrible investment for
these investors,” Maddox said.•

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