For the past few years, Tim Durham was a well-known fixture at collector car auctions. Arriving on his private jet—and spending freely—he rapidly amassed a significant collection that included Duesenbergs, Ferraris and a Bugatti Veyron.
Durham looked like a real rags-to-riches story. He was the product of small-town Indiana beginnings, but he had big designs to become wealthy. He was quoted as wanting to be as wealthy as Warren Buffett and become the richest man in the world. Durham reportedly made millions through leveraged buyouts, and he was widely regarded as one of the best-known young millionaires in the United States.
But all this came crashing down in a period of just over a year, starting with investor lawsuits and ending with a federal indictment. Durham now stands accused of using his Fair Financial Services company—and over $200 million of its investor’s funds—as his personal piggy bank to support a lavish lifestyle that included a 30,000-square-foot Indiana mansion with a two-story, 30-car garage, a second major home in Los Angeles, a 70-plus car collection, big parties with lots of celebrities, and large donations to local and national politicians.
In addition to his cars, Durham owned 75% of Car Collector magazine, and his financial problems were certainly one of the reasons that Car Collector folded.
Durham has maintained his innocence and claimed that he will be absolved of wrongdoing when the truth came out. But the Feds didn’t agree, and photos of him being led from his house in California—and his cars being seized from his Indiana home—were all over the Internet.
The legal allegations
In a nutshell, here is what is alleged to have happened:
Durham’s main holdings were his leveraged buyout firm Obsidian Enterprises, Inc., and Fair Financial Services, both headquartered in Indianapolis, IN. When Durham acquired Fair in a 2002 leveraged buyout, it was a factoring company that purchased accounts receivable from businesses at a discount, profiting when the accounts were paid in full. It financed its operations by selling “investment certificates” to individual investors.
According to the indictment, Durham and his cohorts immediately changed Fair’s business. Rather than using the $200 million they raised from investors to purchase receivables, they instead loaned the funds to themselves and their various business entities. When the loans went unpaid, Fair turned into a Ponzi scheme—taking money from new investors to pay certificates that came due. Now that the merry-go-round has stopped, it is estimated that over 5,400 parties—many of them small mom-and-pop investors—have lost over $200 million.
The legal battles began with claims from disgruntled investors. In November 2009, the FBI raided the Obsidian offices in Indianapolis and seized its records. On February 8, 2010, the unpaid investors forced Fair into an involuntary bankruptcy proceeding. Shortly after his appointment, the bankruptcy trustee filed suit seeking to recover the money that had been improperly diverted from Fair.
The lawsuit language promises to prove a “fraud of shocking proportions and consequences.” According to the lawsuit, Durham looted Fair at “a stupendous pace.” By 2008 about 90% of the new money coming in was used to repay debts to existing investors. “Insider and related-party loans as a whole grew to $30 million within 15 months and $40 million within two years,” the lawsuit claims.
On March 15, 2011, after more than a year of investigation, the Federal government indicted and arrested Durham and two business associates. Charges include wire fraud and securities fraud, and the government is seeking forfeiture of all their gains.
Liquidating the collection
Most, if not all, of Durham’s car collection has been turned over to the bankruptcy trustee, which indicates that the cars were owned by one or more of his companies, and not by Durham. Over 20 of Durham’s cars were sold by RM Auctions at the Arizona Biltmore Resort & Spa in Phoenix in January 2011. High sale at $1.23 million was the 1929 Duesenberg Model J Dual Cowl Phaeton that was driven by Elvis Presley in the 1966 movie “Spinout.” Others included a 1929 Auburn 8-90 Speedster, a 2002 Lamborghini Murcielago, a 2006 Bentley Continental Flying Spur and a 2003 Aston Martin Vanquish. The proceeds will be used to finance the bankruptcy proceedings—and perhaps return some money to the investors.
Defending the charges against Durham is not going to be an easy task. The government spent over a year investigating Durham before seeking an indictment. This lengthy period is commonplace in the case of financial fraud cases, for two very good reasons:
First, criminal defendants have a constitutional right to a speedy trial. Since financial fraud cases always have very complex facts—which the defendant always has ready access to—the short time between indictment and trial could put the government at a proof disadvantage. Taking the time to conduct a thorough investigation and to line up all the proof they need before the indictment solves that problem.
Second, once indicted, defendants get access to all the evidence against them. The bigger the mountain of evidence, the more daunting the defense becomes, leading to more guilty pleas and a lighter workload.
This has been a very good strategy for the government. According to the U.S. Department of Justice, their conviction rate in these cases is now over 90%. More strikingly, over 90% of their convictions come from guilty pleas. Durham is innocent until he is proven guilty, but the odds don’t look very good for him.
Where is the defense money coming from?
Durham recently hired high-end criminal defense attorney Roy Black of Miami, FL, to represent him. You might remember Black from a while back as the legal commentator on the “Today” show. His high-profile wins include the acquittal of William Kennedy Smith on rape charges, the dismissal of prescription drug charges brought against Rush Limbaugh, and the acquittal of three-time Indy 500 champion Helio Castroneves on tax evasion charges.
The speculation is that Black’s fees will run into seven figures, and many have asked aloud where the defense money is coming from—if not from investors’ money. The norm in the criminal defense world is “cash up front.” Durham had to know this was coming, and he must have taken advantage of the year that the government investigated to stuff all the cash he could into lawyers’ client trust accounts to finance his defense.
If the prosecutors choose to be aggressive, they could actually try to grab the funds held in Black’s trust account. If they can show that the funds are the product of illegal activity, they can be seized, leaving Durham to find his own funds to finance his legal talent. But the proof issues here are always difficult, and prosecutors don’t often go down this path.
How do you defend this?
The first defense strategy will probably be quite technical. Close analysis of government files could raise questions about such technical matters as probable cause for searches and seizures, reliability of witnesses and informants, and so on. Even if the charges can’t be eliminated, they can sometimes be whittled down to a more manageable scope.
Once the charges are finalized, the defense will probably focus on intent. Here, the charges center on allegations that Durham used Fair’s funds for his own purposes, loaning the funds to related entities with wild abandon. Central to these charges is that Durham and his companies had no reasonable expectation that the loans would ever be repaid. The defense can be expected to try to counter that allegation by establishing that the intercompany loans were all bona fide business transactions with full expectation of repayment with interest.
Durham’s case follows those of Bernard Madoff and several others having similar fact patterns. Many observers ask the same question—how could these guys keep on doing this stuff when they had to know they would get caught someday?
“Legal Files” posed that question to Alan Garten, the Assistant U.S. Attorney for Oregon who handles white-collar crime. Garten is not familiar with the Durham case and cannot comment on it, but he has successfully prosecuted a number of financial fraud cases. Garten speculates that such culprits often “operate on the premises of self delusion, self deception and delusions of grandeur. They typically either think they are smarter than everyone else, or they believe that they really don’t intend to permanently rip people off. They usually think that they will eventually make good on the losses, and they don’t see themselves as crooks.”
That’s an amazing concept—against all odds, and ignoring every objective fact and shred of reality—these people still see themselves as good guys. But, that may actually make some sense as a specialized form of mental illness. Otherwise, how could they keep doing this stuff?
If Garten’s observations apply to Durham, the likely result could be a guilty plea with Durham forever insisting that he was an innocent victim of jealous prosecutors out to get him. Of course, no matter how it plays out, the real victims here are those who invested their money, often as retirement accounts, with Fair Finance, and chances are that money is now gone forever.