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Trial evidence shows desperation in Fair Finance's final days

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The men who presided over Fair Finance were at their wits end by late 2009.

In government-recorded phone calls and intercepted emails introduced as evidence in U.S. District Court in Indianapolis this week, they come across as exhausted, angry and determined.

Defense attorneys will argue that's because Tim Durham and co-defendants Jim Cochran and Rick Snow were working around the clock to save Fair from the recession, bad press and inquiries by skeptical regulators in Ohio, where the company was based.

But the prosecution's evidence suggests the defendants were desperate for another reason: They wanted to preserve their outsize lifestyles and prevent authorities from discovering how they had used cash from Fair investors to pay for cars, homes, parties and country club memberships.

By 2009, Fair co-owners Durham and Cochran had fallen behind on mortgages for their mansions, overdrawn their bank accounts, and missed payments on income and property taxes, their own emails show.

Credit card companies including American Express slashed their available credit lines, prompting Cochran to complain in one email he couldn't even afford a hotel when he visited Fair Finance headquarters in Akron, Ohio. His credit score had fallen to 510, he wrote.

Durham responded that his was probably lower. "I don't even want to look," he wrote on Sept. 8, 2009.

In another message, Cochran complained about having to sell his Corvette and live on only $10,000 for a period of 25 days.

"I don't have cash to go to McDonald's for my kids," he wrote.

The prosecution opened their fraud case this week with testimony from Fair employees and investors who lost a total of more than $200 million in what the government describes as a Ponzi scheme. Now prosecutors are trying to hang the defendants with their own words, introducing emails and playing wiretap recordings that detail the final days at Fair before an FBI raid on Nov. 24, 2009.

(MORE FROM IBJ - Durham prosecutors seek to admit '09 IBJ story as evidence)

Fair's leaders were trying desperately to win authorization from the state of Ohio to sell another $250 million in investment certificates and persuade concerned investors to stay the course. Some sought to cash out after Fair fell behind on interest payments and the investors learned most of the company's assets were tied up in related-party loans.

As its existing authorization to sell certificates wound down, Fair began taking cash deposits from investors while promising to issue investment certificates later, against the advice of its own counsel, the prosecution alleges. Fair employees were told to blame computer errors or state regulators for delayed payments. Fair's owners also allegedly discussed ways to dress up the firm's financials, including showing loans for businesses that already had closed to appease regulators.

Still, the executives felt confident the state of Ohio had no choice but to allow Fair to continue.

"If their [sic] gonna blow us up, we're gonna blow them up," Cochran vowed in a phone call with Durham on Nov. 13, 2009, according to a transcript provided by the prosecution. "I mean nobody wins and everybody loses, but we lose the worst. But at the end of the day, I mean, they gotta [expletive] put this thing on the street without a doubt. Fifty-four hundred investors aren't gonna ... [expletive] ... I mean it would be a catastrophic event in the State of Ohio. And I'm sure they don't want that kinda headline."

Durham and Cochran had relied on Fair for capitalization of both their businesses and lifestyles, FBI Special Agent Dennis Halliden said in testimony Wednesday. But the homes, cars and other fancy accoutrements did not provide nearly enough collateral to offset the loans they had taken from Fair.

Cutting back

During a brief respite in Fair's ongoing cash-flow crisis, Cochran confronted Durham about his lavish spending and failure to heed the "signs of a poor economy."

In a July 14, 2009, email, he questioned Durham's decisions to spend $12,000 for two nights in a condo for New Year's Eve and for throwing lavish parties in Las Vegas and on a rented yacht.

"These costs are ultimately paid by Fair upstream of funds .. .assigned to Obsidian [Enterprises, Durham's buyout fund] and never paid back," Cochran wrote. "With the reprieve of funds this week, you should work on clearing the garage of cars, because these funds won't last and we'll be back to the strugglin position."

Cochran suggested the companies start a round of layoffs and asked Durham to consult him on every bill that got paid. He also asked for $104,000 to pay property taxes, $71,000 for unpaid income taxes and $193,000 for hurricane windows for a home in Naples, Fla.

Durham agreed they needed to cut back, and said he had "flushed in" about $5 million over the previous 18 months by selling two antique Duesenberg cars and other assets he had bought with his own cash but later "secured to defaulted Fair money."

"So if I spent 4K on a weekend boat trip or got comped on a vegas trip, then I don't feel bad about it," Durham wrote. (You can read this entire exchange here. Warning: There's some profanity.)

The partners agreed to put aside their differences in an attempt to keep Fair in business; Cochran's mission was to "save" investors who had requested to withdraw their funds from Fair.

"Go baby go," Durham cheered Cochran in an email after Cochran persuaded an investor with $98,000 in Fair to cancel a cash-out request.

Getting creative

In a phone call on Nov. 9, 2009, Cochran and Durham complained that Fair's employees weren't smart enough to say the right things to hold onto investors concerned about late interest payments.

"It's like [expletive] Larry, Curley and Moe over there," Cochran said, according to a transcript.

But the partners decided they couldn't "address" the situation by firing or reassigning anyone.

"These guys know a little bit too much," Cochran said. "They can take it ... bust us."

"No. We can't," Durham agreed. "We've got to get through this."

A few days later, on Nov. 13, 2009, Durham called with an idea to make some of Fair's bad debt disappear by distributing the debts to the partners.

"This is the answer," Durham said. "I mean, it's just basically we make twenty-five, twenty-eight million dollars in loans just vanish."

"Halle-[expletive]-lujah," Cochran said.

"Yep. Yep," Durham answered.

"[Expletive] brilliant," finished Cochran.

In another call, between Durham and Chief Financial Officer Snow, Durham suggested he could resign as chairman of a subsidiary company to which Fair had loaned millions. At that point, Durham said, the loan balance would no longer have to be classified as "related-party," allaying some concern among investors.

"I don't know what the related party rules are but that makes sense," Snow answered.

Setting priorities

Durham and Cochran were feuding as early as 2005 over how to use Fair to restructure their struggling business empire, emails show. Cash flows from Fair would rise and fall depending on how willing Ohioans were willing to invest at a given time.

In a March 2005 note, Cochran complained that millions of dollars in loans to Durham-led firms Obsidian and DC Investments put Fair in a "poor position." But his primary concern was not Fair investors.

"Through the years, you have to agree, there has been no benefit in it for me. I am in all this debt that has no benefit to me," he wrote, before ending with: "Tim, it's time for me to look out for me ... because no one else will."

Cochran wrote in a September 2008 email exchange with Durham that his assets including homes weren't enough to offset the loans he had received from Fair (about $8 million), which would pose trouble in a potential audit.

He said Obsidian couldn't afford to pay its employees without money from Fair. He also noted loans of $14 million "we'll never recover" from Fair investors to Obsidian subsidiaries including Danzer Industries, Speedster Motor Cars and Champion Trailer.

But he wasn't writing Durham to discuss how to handle the loans or account for them with Fair. He was asking for a raise.

"It is really time for me to bring in $1 million per year," Cochran wrote. "In retrospect, it is time for this type compensation ... as strange as that seems from me. With the new fundings, it will easily support this comp. package."

At the time, his pay was $8,365 per week, or about $435,000 per year.

One month later, Cochran asked for another $22,000 from Fair to pay his taxes to the IRS, and $43,000 to pay the fourth installment of his $175,000 initiation fee at Grey Oaks Country Club in Naples. Fair had paid the other installments, too.

"This is full equity and I am assigning the full equity amount to (Fair)," he wrote.

Boom and bust

By December 2008, Durham and Cochran were trying to sell homes and cars to raise cash, sublease Obsidian's office space on the 48th floor of Chase Tower, and sell off National Lampoon Inc. They also discussed ways to collect on loans to friends and family members (most of whom had never made a single payment). In early 2009, Durham suggested they take themselves off the payroll, taking loans from Fair instead, to minimize payroll taxes.

"My credit report will go real bad ... altho, saving a company is more important," Cochran wrote on Dec. 31, 2008, after discovering he had not received money from Fair to pay a mortage payment on his home in Naples.

The finances had turned around a bit by early 2009, in part because Fair instituted a 60-day hold for investors wanting to cash out their certificates. The move "generated" $1 million in "additional cash," Durham wrote.

On the afternoon of May 4, 2009, with a subject of "$$$$$$$$," Cochran told Durham in an email he was "running on fumes" and needed some "moolah."

About an hour later, Durham authorized a transfer of $10,000 from Fair to Cochran.

Cochran responded that he still had his mortgages to pay.

The following month, Cochran asked for $16,000 for "May mortgages," $20,000 for "Corvette payment to Susan's sister," $5,475 for "cement coping of pool," $2,200 for "landscapers (3) of the homes," and $10,000 for "normal bills."

This story originally ran in the June 14, 2012, IBJ Daily. The Indianapolis Business Journal is a sister publication of Indiana Lawyer.

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  1. I have been on this program while on parole from 2011-2013. No person should be forced mentally to share private details of their personal life with total strangers. Also giving permission for a mental therapist to report to your parole agent that your not participating in group therapy because you don't have the financial mean to be in the group therapy. I was personally singled out and sent back three times for not having money and also sent back within the six month when you aren't to be sent according to state law. I will work to het this INSOMM's removed from this state. I also had twelve or thirteen parole agents with a fifteen month period. Thanks for your time.

  2. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  3. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  4. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  5. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

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