An Indianapolis man currently serving a 50-year prison sentence for masterminding a massive Ponzi scheme that caused more than $200 million in losses will be resentenced after a federal appeals court reversed two of his wire fraud convictions based on prosecutor "oversight." Timothy Durham, 51, was convicted last year of ten counts of wire fraud, one count of securities fraud, and one count of wire fraud conspiracy, and was subsequently sentenced to a 50-year term. His co-conspirators, Jim Cochran and Rick Snow, received sentences of 25 years and 10 years, respectively. After all three men appealed their sentences, the U.S. Court of Appeals for the Seventh Circuit affirmed Cochran and Snow's sentences, but found that two of Durham's wire fraud convictions were based on insufficient documentation and thus due to be reversed.
From at least 2005 through November 2009, Durham served as chief executive officer of Fair Finance Company ("Fair Finance"), with Cochran serving as Chairman and Snow serving as chief financial officer. Durham and Cochran purchased Fair Finance for $23 million in 2002, which had successfully operated for decades as a legitimate 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 5,000 investors.
However, rather than 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. While investors would later file $215 million in claims, a bankruptcy trustee would recover less than $6 million.
The company was eventually forced into involuntary bankruptcy, and a grand jury indicted Durham, Cochran and Snow in March 2011. Maintaining their innocence, the men were later convicted at trial, and prosecutors sought a 225-year sentence for Durham who they labeled the "greediest, most selfish, and remorseless" Ponzi schemer. At sentencing, U.S. District Judge Jane Magnus-Stinson handed down a 50-year sentence to Durham, remarking that she considered the punishment an "effective" life sentence.
The men raised several issues on appeal, including the sufficiency of the evidence on two counts of wire fraud against Durham, the sufficiency of the wiretap application, jury instruction issues, and that prosecutorial misconduct during closing arguments. Rejecting all of the issues except Durham's two wire fraud convictions, the Seventh Circuit found that the evidence presented by the government was insufficient to show that the transfers were made in furtherance of the fraudulent scheme. The transfers, both involving transfers from Fair Finance to a holding company owned by Durham, were supported in the record only by single-page printouts reflecting each transfer and a single email asking an employee to make one of the transfers.
Noting that the government apparently intended to introduce additional evidence but neglected to do so, the Seventh Circuit rejected the government's "hail mary" reasoning that the jury could infer that the two transfers were used to originate fraudulent loans without the resulting documentary evidence. Adopting such reasoning, the Court noted, would "essentially transform every wire transfer from Fair to Fair Holdings into a criminal act." Further, the argument was not raised at trial.
While the reversal of the two wire fraud convictions will likely result in a reduced sentence for Durham, the Seventh Circuit handed the government a key victory in affirming the propriety of the use of wiretaps - techniques that were once reserved for investigating narcotics and organized crime. The federal statute governing the issuance of wiretaps requires that the government must make:
a full and complete statement as to whether or not other investigative procedures have been tried and failed or why they reasonably appear to be unlikely to succeed if tried or to be too dangerous.
Durham's lawyers argued that the government failed to demonstrate the necessity of obtaining wiretaps; courts have construed the wiretap statute as requiring that wiretaps are not used routinely as the first step of an investigation. United States v. Thompson, 944 F.2d 1331, 1340 (7th Cir. 1991). However, the Seventh Circuit concluded that the 45-page affidavit submitted by the government in support of the wiretap "easily established the necessary foundation for the wiretap" and disclosed that the government "first used a variety of other techniques to gather information." In conclusion, the Court observed that:
What matters is that other available investigative procedures had been tried, or were inadvisable or unlikely to succeed under the circumstances.
With two of the twelve convictions now reversed, the Seventh Circuit ordered that Durham be resentenced for the remaining ten fraud counts. The case will be sent back to the district court, where Judge Magnus-Stinson will decide whether a lower sentence is warranted for Durham. While each of the wire fraud counts carry a maximum twenty-year prison term, a calculation under federal sentencing guidelines will result in a lower range.
If Judge Magnus-Stinson does hand down a reduced sentence, Durham will lose his infamous position in the Wall Street Journal's recent ranking of the top 10 White Collar Crime prison sentences, where his 50-year sentence had placed him in a tie for 10th along with convicted Ponzi schemers Thomas Petters and Scott Rothstein.
A copy of the Seventh Circuit's opinion is below: