Tim Durham told Fair Finance Co.’s securities attorney in 2008 that 89 percent to 93 percent of the money the company raised selling investment certificates went toward paying what it owed prior investors.
That was a good thing, Durham suggested in the e-mail, because it meant Akron, Ohio-based Fair deployed more than 80 percent of the proceeds within that state, justifying a continued exemption from oversight by the U.S. Securities and Exchange Commission.
Because of the exemption, Fair had dealt only with Ohio securities regulators, who’d given their OKs to sell more than $1 billion in certificates since 2002, the year Durham and fellow Indianapolis businessman Jim Cochran bought it.
But the attorney, Ronald Kaffen of Akron, wasn’t impressed.
“I am not comfortable characterizing the sales as selling certificates to pay off old certificates,” wrote Kaffen, who’d questioned whether the exemption should still apply because by then Fair had extended tens of millions of dollars in loans to Durham and his Indianapolis-based business holdings. “Such a characterization would not be much different than a pyramid scheme.”
In a TV interview last year, Durham suggested Fair failed in November 2009 because it couldn’t withstand the bad publicity caused by a surprise FBI raid of its offices that month.
But the e-mail is one of many exhibits filed in Fair’s Chapter 7 bankruptcy case this month that strongly suggest company insiders knew years before Fair collapsed that it was in dire straits.
Fair’s bankruptcy trustee, Brian Bash, alleges Durham “utterly looted” the business through related-party loans to himself, business associates and Indianapolis-based Obsidian Enterprises Inc., his holding company for a collection of transportation and manufacturing firms.
Durham and Cochran bought the then-68-year-old business for $23 million, using almost entirely borrowed money. They immediately began doling out related-party loans, adding to the debt load, while simultaneously scaling back what had been Fair’s profit-making business—buying customer-finance contracts from fitness clubs, time-share developers and other firms that offered customers extended-payment plans.
By 2005, if not earlier, Fair was a classic Ponzi scheme—relying on the sale of new investment certificates to pay off prior purchasers, Bash alleges. It now owes more than 5,000 Ohio investors more than $200 million.
Dennis Concilla, an Ohio attorney representing Fair, declined to comment in detail but said: “Suffice it to say, we disagree with the claims being made by the trustee.”
But way back in 2005, Cochran himself said in e-mails that Durham’s borrowing had gotten out of hand and that he needed to make a substantial cash infusion into Fair Holdings Inc., Fair’s parent company.
“We can’t afford to hold our breath every year with the state of Ohio,” he said in an e-mail to Durham.
The firm’s outside auditor, BGBC Partners PC of Indianapolis, was expressing even deeper concerns. It would not sign off on Fair’s financials for fiscal 2002 and was fired in 2005 without having completed 2003 or 2004 audits.
In April 2005, BGBC wrote a letter to Durham and Cochran explaining that it could not issue an unqualified audit report for 2003 or 2004 because Fair’s “conduct indicated it was not being run for its own benefit,” according to a trustee court filing.
The letter said the “loans” to related parties actually were really “distributions to shareholders” because the likelihood of repayment was so low.
During a peer review of BGBC’s audit work on Fair in 2005, the reviewing auditor told BGBC “to get as far away from [Fair and Obsidian] as possible” because they were a train wreck waiting to happen, according to the filing.
In an e-mail late that year, a BGBC staffer expressed surprise that Indianapolis-based Somerset CPAs had recently accepted Fair as a client and subsequently issued a clean opinion for 2004.
“Somerset had no business taking this. … These companies have serious issues,” the e-mail said. “There is no way that should have been clean.”
But Pat Early, Somerset’s president, told IBJ that Somerset gave the clean opinion because Durham provided “additional collateral he had not brought to the table when he was dealing with them.”
He noted that Somerset refused to provide a clean opinion for 2005 because related-party loans had increased significantly but the value of collateral backing them had not.
“They disagreed with our assessment of collateral,” he said. “They said we will go a different direction, and basically dismissed us as being auditors.”
Fair did not undergo full audits from that point on, but was nonetheless granted approval by Ohio securities regulators to continue selling millions of dollars in unsecured notes to investors.
Investor money kept coming in because Fair dangled interest rates as high as 9.5 percent and targeted mom-and-pop Ohioans who were less likely to be financially sophisticated, attorneys for the trustee allege. For example, in 2009 it decided to open an office in Millersburg, in the heart of Amish country, rather than in the nearby population centers of Cleveland or Youngstown.
During that period, anxiety within Obsidian was growing, exhibits filed in Fair’s bankruptcy show. In a February 2009 e-mail, Obsidian President Terry Whitesell told Durham that the “continued drain on … Fair is going to kill Fair—we cannot continue with that direction.”
That October, IBJ ran an investigative story highlighting the related-party loans and questioning whether Ohio regulators had been derelict in repeatedly approving the sale of additional investment certificates.
A week later, Fair asked Ohio securities regulators to approve the sale of another $250 million in certificates. The Division of Securities responded that “the offering is impossible to review without further documentation,” which Durham and associates raced to provide.
On Nov. 17, seven days before Fair’s existing registration was set to expire, Durham expressed alarm that one of Obsidian’s finance executives was leaving on vacation.
“Where are you going?” Durham wrote in an e-mail. “This is the most important week of our lives.”
Durham let the executive go but told him to be “as available as possible. We will submit to the state and see where they go. We may be in panic mode at that point.”
On Nov. 24, the day the existing registration expired, FBI agents raided Durham’s offices atop Chase Tower in downtown Indianapolis and Fair’s Akron headquarters.
Neither office ever reopened. A criminal investigation continues.•