Federal officials who brought a 12-count indictment Wednesday against local businessman Timothy S. Durham and two other executives tied to bankrupt Fair Finance Co. described the lengthy investigation leading to the arrests as the largest corporate fraud case in Indiana’s history.
Addressing the media at an afternoon news conference, Timothy M. Morrison, first assistant U.S. Attorney for the Southern District of Indiana, said complexities tied to the charges contributed to the roughly 18-month investigation.
“We have to get this right,” he said. “You have to prove it to 12 people without a reasonable doubt. Now we look forward to proving the allegations beyond a reasonable doubt." (Raw video of the first several minutes and highlights of the press conference appear below.)
Authorities said Fair Finance owes 5,200 Ohio investors $230 million.
A 23-page grand jury indictment, unsealed Wednesday, alleges that Durham, 48, and business partner James F. Cochran, 55, worked with former Fair Chief Financial Officer Rick D. Snow, 47, to devise and execute a scheme to defraud investors in the Akron, Ohio-based company.
The three men all were arrested Wednesday at their homes—Durham in Los Angeles and Cochran and Snow in Indianapolis, Morrison said. Durham previously lived in a 10,700-square-foot home on Geist Reservoir.
Cochran and Snow have been released on their own recognizance following a Wednesday initial hearing in Indianapolis before U.S. Magistrate Judge Kennard Foster. The Southern District of Indiana does not require a bond to be posted, Morrison said.
Durham, meanwhile, is awaiting his initial hearing in Los Angeles. All three men are facing felony charges of 10 counts of wire fraud, one count of securities fraud and one count of conspiracy to commit wire fraud and securities fraud.
Each faces a maximum of five years in prison for the conspiracy count, 20 years in prison for each wire fraud count and 20 years in prison for the securities fraud count. In addition, each could be fined $250,000 for each count upon which they are convicted.
The investigation was led by the FBI in Indianapolis with assistance from the fraud section of the U.S. Department of Justice.
The case will be prosecuted by Assistant U.S. Attorneys Winfield D. Ong and Joe Vaughn of the Southern District of Indiana, in addition to Assistant Chief Robertson Park and trial attorney Henry P. Van Dyck of the Department of Justice’s fraud section.
“We’re talking about holding companies and other types of businesses that we had to wade through,” Morrison said while reiterating factors involved in the investigation. “It’s a very complex case.”
The Securities and Exchange Commission also filed separate civil securities charges against the men in federal court.
Between February 2005 and November 2009, Durham and Cochran directed Fair to loan money to themselves and other insiders, the federal indictment says, "which caused a steady and substantial deterioration in Fair's financial condition." The three men then allegedly deceived and defrauded investors through misleading statements about the company's finances.
Durham's Indianapolis-based Obsidian Enterprises and DC Investments—co-owned with Cochran—were the primary beneficiaries of the loans, according to the indictment. Those businesses in turn loaned money to a "variety of struggling businesses and start-up ventures," including a car magazine, restaurants, a surgery center, a race car team and a luxury bus leasing business. Many of those borrowers failed, the indictment says.
Durham and Cochran also "used a significant portion of the proceeds of these loans to maintain their lifestyles and to pay for personal expenses."
According to the indictment, they spent lavishly. Durham, for example, wired $250,000 in Fair money in 2007 to remodel his garage. He wired another $150,000 the following year to use at a casino. In addition, Cochran wired $50,000, also in 2008, to pay country club fees.
In November 2010, FBI agents raided Obsidian's offices in Indianapolis and Fair's Akron headquarters.
The previous month, 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.
The company filed for Chapter 7 bankruptcy protection in early 2010.
In a TV interview last year, Durham suggested Fair failed because it couldn’t withstand the bad publicity caused by a surprise FBI raid of its offices that month.
But e-mails filed in Fair’s Chapter 7 bankruptcy case last month 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 in 2002, using almost entirely borrowed money.
They immediately began doling out related-party loans, adding to the debt load, while 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.
Last month, Fair Finance Co.’s bankruptcy trustee filed a lawsuit alleging that Durham perpetrated fraud of “shocking proportions,” draining huge sums from the firm for years to mask that his business empire had collapsed.
Snow, 47, has been chief financial officer of Fair Finance since 2002, according to the SEC complaint. The Fishers resident was appointed CFO of Obsidian in 2003, and in 2009 was named interim CFO of National Lampoon, which Durham also controlled.