Fair Finance’s past gave investors, regulators false comfort

James Coco would seem to be the last person to fall victim to an alleged investment fraud. The 49-year-old Medina, Ohio,
resident is a certified public accountant, has no debt, and tries to be careful with his money.

He’d scoff
when he saw ads in his local newspaper for investment certificates sold by Fair Finance Co., an Akron firm owned by Indianapolis
businessman Tim Durham. He liked their outsized interest rates, but not that the certificates lacked the government guarantee
that comes with certificates of deposit.

“I saw their ads a number of years before I invested,” Coco
said. “I would think, ‘What’s this scam? Who would put their money in there totally on faith?’”

Durham

Coco would, it turns out. He made his first investment in 2004 and when that worked out well, he kept adding
more. He now holds certificates valued at $200,000—much of which he fears he will never get back.

Similar
anxiety is playing out across Ohio, now that company offices sit dark and federal prosecutors are calling the business a Ponzi
scheme. Some investors initially thought the rates—as high as 9 percent for two-year certificates—seemed too good
to be true. But reassured by the company’s longevity, they cast aside those reservations.

Fair Finance, founded in 1934, had been meeting its obligations
for decades, building legions of loyal investors along the way. Many of Ohio’s Amish families grew so comfortable with
Fair that they bought the certificates as their sole investment, said Beverly Keller, the local-edition editor of The
Budget, a weekly Amish newspaper based in Sugarcreek, Ohio.

“It’s a generational thing,”
she said. “They have been investing with Fair for years, and things have just now gone sour. It’s something their
parents did, and their grandparents did.”

But what Coco and other investors in Ohio—the only state
where Fair was authorized to sell—failed to fully grasp was how drastically Durham and partner Jim Cochran changed the
business after buying it from Donald Fair seven years ago, business observers said.

As IBJ reported
in an investigative story in October, the pair and related parties have tapped the business for more than $168 million in
loans, with much of the money going to fund Durham-controlled businesses that struggled. Failure to repay the loans would
imperil Fair’s ability to repay the purchasers of investment certificates, who are owed more than $200 million.

The story noted that what had been Fair’s core business—buying and collecting on consumer-finance loans—has
been in steady decline since the company changed hands. Interest rates offered to purchasers of the company’s investment
certificates, meanwhile, have risen sharply.

In a Nov. 24 federal court filing, the U.S. Attorney’s Office
in Indianapolis alleged that, instead of using investors’ money for the core business, “it was used to make interest
and redemption payments to earlier victims of the scheme, thereby lulling the earlier victims into believing the money was
being [handled] responsibly.”

Offering circulars reviewed by securities regulators and provided to prospective
investors documented the ballooning related-parties debt. But investors said they didn’t spend much time scrutinizing
the documents after their early investments paid off as expected.

Securities regulators may have fallen into
a similar trap, said James Klimek, an Indianapolis attorney critical of the Ohio Department of Commerce’s Division of
Securities for giving the company clearance in recent years to sell additional certificates.

“Maybe the
Securities Division got lulled into this, too,” said Klimek, a former chief counsel to Indiana’s securities commissioner.
What might have started as plain vanilla investments “began changing a little bit, then a little bit more and a little
bit more, and pretty soon half the assets were in related-party loans.”

Dennis Ginty, a spokesman for the
Division of Securities, noted that the state has not reached a determination on Fair’s pending request to register an
additional $250 million in investment certificates. He noted that prior registrations, most recently in July 2008, occurred
before his office became aware of concerns about the company’s management.

“Fair Finance has been
filing securities offerings with the division since at least 1959, one of the longest series of filings by any Ohio company
in division history,” Ginty said in an e-mail.

Durham, 47, did not respond to e-mail or voice-mail questions.
Through an attorney, he has denied doing anything wrong.

Tumultuous stretch

The
fate of Fair Finance has been murky since Nov. 24, when FBI agents seized records and computer equipment at Fair’s Akron
headquarters and at Durham’s office on the top floor of Chase Tower in downtown Indianapolis.

Fair’s
previous, 16-month registration expired that same day, and offices have not reopened since. Rather than signing off on a new
securities registration, Ohio regulators have responded with a torrent of questions far more detailed than any of their prior
correspondence with Fair.

In a seven-page letter sent to the company Dec. 3, the Securities Division’s
Mark Heuerman noted that the company often doled out loans to borrowers who provided unaudited financials or no financials
at all. Further, he said, Durham, Fair’s CEO, “appears to have unfettered discretion” to change loan terms
without anyone else’s approval.

Heuerman asked the company to provide detailed documentation on loans and
told it to submit audited financials—something prior ownership included in offering circulars but Durham hasn’t.

The letter also cited language in the Ohio Securities Act stating that the division “may refuse” any
registration where the issuer does not require repayment of related-party loans within six months. The division registered
prior offerings despite the absence of such a repayment plan.

Heuerman also balked at language in Fair’s
proposed offering circular comparing the company’s lending criteria to that of a “standard bank.”

Randy Wilson, a retired banking attorney in Indianapolis, agreed a bank wouldn’t have the leeway to extend so
many related-party loans.

“It is very tightly regulated and examined regularly,” Wilson said. “Even
if you tried to do that kind of thing at a bank, it would be found out shortly.”

Regardless of government
oversight, Wilson said, investors themselves should be diligent. He said investors who see the opportunity for outsized returns
often let their guard down and become gripped by greed.

“Generally, whenever you get aggressive interest
rates that are inordinately high compared to the rest of the market, you better watch out,” he said.

Sorting
things out

Fair investors have stopped receiving their interest payments, and the company’s Web
site is down.

Investors don’t know what the future holds. A Dec. 11 press release said “Fair still
has not determined when or if it will be able to resume regular business with regard to the sale and redemption of investment
certificates.”

Vandals have altered the name on signs at the company’s headquarters, rechristening
it “UnFair Finance.”

If Fair can successfully resolve investigations by the U.S. Department of Justice
and the U.S. Securities and Exchange Commission—and prove to Ohio securities regulators that it is on solid financial
footing—it could resume business as usual.

But if that doesn’t happen, investors may be in for a
long wait for whatever money attorneys working on their behalf can scrounge together.

Indianapolis attorney Hugh
Baker knows the challenges firsthand. He fought for more than a decade to recover money for the 2,500 investors who purchased
unsecured notes in the financial-services firm Firstmark Corp. before it slid into bankruptcy in 1998.

Typically,
assets that might be seized and sold have liens against them giving other parties first dibs on cash. Baker ended up recovering
one-third of the $57 million due investors, in part by suing professional-services firms that did work for Firstmark.

“There is just no easy way,” Baker said. “The legal system is very long and laborious, and you end
up with lots of different proceedings in different venues.”

Coco said he’s beginning to accept he
might never see the money. “At first, it was like a body blow,” he said. “I feel I was just hammered. I
am getting on with my life, but for a few days there it was hard to digest.”•