The trial of an Indianapolis businessman accused of orchestrating a Ponzi scheme that bilked victims out of more than $200 million began last week in an Indiana federal court. Tim Durham has been charged with twelve felony counts of securities fraud, wire fraud, and conspiracy to commit wire and securities fraud, and faces decades in prison if convicted of all counts. The case is unique in that prosecutors are expected to use wiretaps as part of their case against Durham, utilizing a form of evidence that is common in drug cases but relatively rare in white-collar crime until its recent use in the high-profile insider-trading convictions of businessmen Raj Rajaratnam and Rajat Gupta. The government's intent to use wiretaps against Durham marks the first time in recent memory that the evidence is being used in a Ponzi scheme case.
From at least 2005 through November 2009, Durham served as chief executive officer of Fair Finance Company ("Fair Finance"), along with James F. Cochran ("Cochran") as Chairman and Rick D. Snow ("Snow") as chief financial officer. Durham and Cochran purchased Fair Finance for $23 million in 2002, which had successfully operated for decades as a successful finance company that purchased finance contracts between businesses and their customers that carried annual interest rates ranging from 18% to 24%. Fair Finance would then profit off the difference between the purchase price and the money collected from the arrangement. Purporting to continue the historically profitable business, Durham and Fair Finance raised approximately $230 million from the sale of investment certificates to over 5000 investors.
According to authorities, instead of continuing Fair Finance's business, Durham modified the business structure and began using a steadily increasing amount of investor proceeds to make "loans" for a number of unauthorized purposes, including financing Durham and Cochran's unprofitable businesses, paying fictitious interest to investors, and enriching themselves and those close to them. By 2009, these 'loans' totaled more than $200 million and constituted more than 90% of Fair Finance's supposed investments. Essentially looting the company, Durham and Cochran saddled Fair Finance with hundreds of millions of dollars in subordinated debts, while at the same time funneling money out of the company to themselves, to struggling companies they had an ownership interest in, and to pay their daily living expenses and sustain their lavish lifestyles. These living expenses included more than 40 classic and exotic cars worth `over $7 million, a $3 million private jet, and a $6 million yacht in Miami.
By October 2009, Fair Finance was on the brink of collapse, having taken in $230 million from investors while extending approximately $200 million in loans to Durham's companies and to the principals. Fair Finance investors were informed of a sixty-day wait on any redemptions, and investors were urged to instead re-invest their principal to conserve cash. After the Ohio Division of Securities failed to renew the company's registration over questions about outstanding loans, Fair Finance was forced into involuntary bankruptcy and the company was raided by the FBI. Durham, Cochran and Snow were indicted in March 2011.
Durham maintains that while he made some bad business decisions, those actions did not constitute fraud. Rather, Durham's attorney alleges that the government had not shown any evidence of actual fraud. However, the wiretaps, recorded in November 2009, demonstrate the men discussing the next steps when Fair Finance would no longer be able to cover distributions.
The men were also charged in a parallel SEC enforcement action in March 2011.
A copy of the SEC Complaint is here.