Attorneys on Friday afternoon filed a class-action lawsuit seeking to rescind $200 million in investor purchases of Fair
Finance Co. securities and to slap Tim Durham and other company insiders with millions of dollars in punitive damages.
The case, filed in Summit County, Ohio, appears to be the first investor lawsuit filed since the U.S. Attorney's Office alleged in court papers late last month that the business was operating as a Ponzi scheme, using the influx of money from new investors to pay off existing ones.
Attorneys with Maddox Hargett & Caruso of Fishers and David P. Meyer & Associates of Columbus, Ohio, allege that Fair Finance offering circulars provided to prospective investors contained material misrepresentations and omissions. They also charge that insiders breached their fiduciary duty to investors, and unjustly enriched themselves.
The suit alleges that Durham and co-owner Jim Cochran have used Fair like a personal bank since buying it in 2002, pulling tens of millions of dollars out in the form of related-party loans. Fair, which was founded in 1934 and historically made money by purchasing customer-finance contracts, obscured the fundamental change in its business in the offering circulars, the suit alleges. Fair Finance used "a tangled web of financial transactions to conceal the withdrawal of the funds ... for their own enrichment.," according to the suit.
"Upon buying the company, the two out-of-state owners promoted the same values and business models to deceive investors into investing tens of millions of dollars of their hard-earned life savings in the company even though the new owners had no intention of continuing to operate the business as the Fair family had for so many years."
Investors, who were required to be Ohio residents, purchased investment certificates, ranging in term from six months to two years, that paid interest rates substantially higher than those for certificates of deposit. But unlike CDs, the securities have no government guarantee if Fair fails to pay.
Fair Finance has not reopened since FBI agents on Nov. 24 executed search warrants and seized records at Durham's Indianapolis office and at Fair's headquarters.
The company has not been able to sell additional investment certificates since that afternoon, when a registration granted in July 2008 expired. The company has sought permission to sell an additional $250 million in investment certificates, but the Ohio Department of Commerce's Division of Securities has balked, saying the company would have to satisfactorily address a long list of questions first.
IBJ reported in an investigative story in late October that Durham and related parties have taken out more than $168 million in related-party loans, with some of the money flowing to Durham-controlled businesses that struggled or failed. Records also show money was used for personal items, including real estate and artwork.
John Tompkins, an attorney for Durham, has said his client does not believe he has done anything wrong.