Investors in Fair Finance Co. are counting on Brian Bash, the newly appointed trustee in the company’s bankruptcy case, to reach deep into Tim Durham’s business empire to scrape together assets.
But to successfully carry out his job, he’ll need to be more than aggressive. He’ll need to untangle a web of related-party transactions involving Durham, his business partners and firms they own that have befuddled nearly everyone who has tried to make sense of them.
“It is just mind-bogglingly confusing,” said Erich Riesenberg, an Iowa investment adviser who has spent dozens of hours poring through Fair’s filings with securities regulators. Riesenberg has posted his findings at the free Web site www.fairfinanceinvestors.com.
A group of investors in Akron, Ohio-based Fair filed an involuntary Chapter 7 bankruptcy case for the company in early February. After hearing evidence, a judge on Feb. 19 took the next step, ordering the appointment of a receiver to take control of assets.
Bash, 60, will have the title interim trustee until the judge makes a final determination on granting the Chapter 7 petition in the next month or so. For now, he said, “My goal is to preserve and protect the assets pending final decisions by the court.”
Investors in Fair, all of them Ohio residents, have been in a panic about the fate of their investments since Nov. 24, when the FBI seized company records. The raid occurred one month after IBJ reported that Fair’s co-owners, Durham and fellow Indianapolis businessman Jim Cochran, had drained so much from the business that it might not have the wherewithal to repay investors.
The money, taken out in the form of related-party loans, went to Durham and Cochran personally as well as to restaurant, manufacturing and publishing businesses they owned. The loans ultimately ballooned to $168 million and now represent the bulk of the company’s assets, according to financial statements. Meanwhile, investors—who purchased unsecured, short-term certificates—are owed more than $200 million.
At least that’s one way of looking at the numbers. In November, in a last-ditch (but unsuccessful) effort to win permission from Ohio regulators to sell additional investment certificates, the company drastically recast its balance sheet to provide “greater clarity.”
But what the changes really did was fan investor suspicions that Fair was making it up as it went along. Riesenberg and others who have tried to grasp the figures have found contradictions in lending documents and major omissions, such as $22 million in loans that appear to have been written off without explanation.
Much of the confusion stems from the fact Fair Finance made loans to its parent company, Fair Holdings Inc., which in turn made loans to its parent, Durham and Cochran’s DC Investments.
The company recast its balance sheet by buying loans from Fair Holdings that it bought from DC Investments. Documentation on the terms of the purchases of the related-party loans by the related parties was nonexistent.
An Oct. 30 letter to the company from an Ohio securities regulator underscored the lending confusion: “Please include sequential transactions on multiple levels where related parties engage in further transactions with related parties,” the official wrote.
Now, the burden of making sense of it all shifts to Bash, a partner in the bankruptcy practice of Baker Hostetler in Cleveland.
Bash believes he’ll have legal authority to investigate transactions dating back at least four years. He said he may be able to go as far as 10 years back for transactions potentially involving fraud or self-dealing.
Meanwhile, the U.S. Attorney’s Office in Indianapolis is spearheading a separate criminal inquiry. The office filed court papers in November alleging Fair operated as a Ponzi scheme, using money from new investors to pay off prior purchasers of investment certificates.
The filing suggests Bash will have to cast a wide net.
“During the course of the fraud perpetrated by Tim Durham and his associates, Durham operated at least two holding companies and 19 operating subsidiaries, with approximately 77 individual bank accounts for these entities,” the document says.
Durham, who has not been charged with a crime, contends there’s nothing untoward to find. Through an attorney, he has denied wrongdoing.
But few purchasers of investment certificates expect a happy ending. Fair has been closed to the public since the FBI raid. Investors haven’t been receiving their interest payments and haven’t been able to cash in certificates that matured.
“You don’t hear anything out of them,” Brady Cassidy, a 66-year-old Wooster resident who purchased $90,000 in certificates, said recently. “It’s like they are in hiding.”•