The FBI raid of Fair Finance in November 2009 came as no surprise to the accountant Tim Durham had hired several years earlier to conduct an outside audit of the Ohio consumer-loan company.
In fact, Steve Eichenberger was so sure there would be problems at Fair that he kept a copy of a letter he sent to Durham and his partner Jim Cochran on a bookshelf in his office, he said Thursday in U.S. District Court during testimony in the fraud trial of Durham and two co-defendants.
The April 5, 2005, letter informs Durham and Cochran that the accounting firm BGBC Partners would not be able to issue an audit of Fair's 2003 financials because Eichenberger had serious concerns about the accuracy of its numbers and the appropriateness of its practices.
Fair was not setting aside reserves for bad debts, and it was recording interest that had been accrued—but not paid—on related-party loans as realized income. Often, the documented terms on insider loans didn't match actual transactions: Borrowed amounts exceeded agreed-upon limits, and repayment terms were lax. The accounting firm also expressed concern that Fair could be violating securities laws.
"There were no written policies with regards to Fair," Eichenberger, the firm's managing partner in Indianapolis, said in court. Later, he added: "As an audit firm, we could not get comfortable with the numbers in the financial statements."
Eichenberger said he saved the letter (read it here) because he figured "there might be problems with Fair in the future."
When BGBC deferred, Durham and co-defendants Cochran and Rick Snow, who served as Fair's chief financial officer, quickly began looking for a new auditor.
A few weeks later, on April 26, 2005, Snow sent a Durham-written letter to a Fair Finance lender, explaining why the company would not be able to meet an April 30 deadline to share its audited financials.
"After agreeing to our deadline date our original auditor has informed us that they are unable to meet this deadline due to their internal staffing, administrative control functions, and a newly developed conflict of interest," Durham wrote in the letter to a portolio manager at Textron Financial Corp. in Georgia. "We did not anticipate this delay and it's unfortunate we received this information so late in April by our accountants for services we relied upon to meet our due dates."
Eichenberger said his firm had no "internal staffing" or "administrative control" issues that prevented a timely audit of Fair, though he acknowledged under questioning by defense attorneys that he and BGBC Partners continued to work with Durham after sending the letter, handling accounting for Durham's Indianapolis-based buyout firm Obsidian Enterprises.
In its offering circulars distributed to investors, Fair continued to list its investments in several Durham companies including U.S. Rubber Reclaiming and Classic Manufacturing that had received "going concern" notices from auditors raising doubts about their future viability, the government noted. But the circulars did not mention the "going concern" notices.
The prosecution emphasized the early warning from Fair's auditor as a counter to the defense position that the global financial crisis caused Fair's troubles. Defense attorneys say Durham, Cochran and Snow were trying to save Fair and made some bad decisions that fall short of criminal activity.
Also Thursday, prosecutors presented evidence that shows Durham relied on Fair to finance his flashy lifestyle and continued to do so even as the firm headed for trouble.
Lead investigator and FBI Special Agent Dennis Halliden explained forensic accounting studies the government conducted on five wire transfers involving Fair money that Durham wound up spending on cars, gambling and a Playboy party.
The government alleges:
- Durham spent $200,000 from Fair investors toward the $650,000 purchase of a rare 1929 Duesenberg Derham Phaeton on Jan. 20, 2005. (Follow the money)
- He ordered wire transfers from Fair that sent $107,500 for him to use at the casino at the Atlantis Paradise Island Resort in the Bahamas on Jan. 31, 2007. (Follow the money)
- Durham spent $131,235.97 from Fair to lease a Bugatti Veyron on June 19, 2007. The base price to buy one is $1.7 million. (Follow the money)
- Durham ordered a wire transfer of $150,000 from Fair on Jan. 28, 2008, spending the money at the Rio Suites Hotel and Casino in Las Vegas. (Follow the money)
- Durham wired more than $168,000 from Fair to throw a Playboy party in September 2008. The soiree included entertainment from Ludacris' Disturbing tha Peace Records at a cost of $60,000, and appearances by Playboy bunnies and reality TV stars Kendra Wilkinson, Bridget Marquardt and Holly Madison, who were paid fees of $10,000 each. (Follow the money)
(Editor's Note: The PDFs show the first page of government exhibits, which also include several pages of supporting documentation such as bank statements.)
Despite objections from the defense, Judge Jane Magnus-Stinson on Thursday agreed to allow prosecutors to show footage of Durham's car collection from a feature story about him that aired on cable network CNBC.
Defense attorney John Tompkins argued the video would prejudice the jury, added that it doesn't even identify which Durham cars had ties to Fair.
"Nobody held a gun to his head and forced him to go on camera and brag about his car collection," assistant U.S. Attorney Winfield Ong countered.
The trial, originally expected to last three weeks, has been moving at a rapid clip. The prosecution expects to wrap up its case by Monday.
To read all of IBJ's coverage of the trial, Fair Finance and Tim Durham, click here.