Monthly Archives: December 2009

Eighty years after Charles Ponzi made the word Ponzi a household name by scamming investors out of more than $10 million, the same schemes continue to thrive today. In 2009, there were nearly four times as many Ponzi schemes uncovered in comparison to 2008. In total, more than 150 Ponzi scams occurred this year, with investors defrauded out of more than $16.5 billion, according to an Associated Press analysis of Ponzi scams in all 50 states. 

The dollar figure for 2009 didn’t include the $50 billion-plus Ponzi scheme orchestrated by Bernard Madoff, who was arrested in 2008 and pled guilty in 2009. 

Among the 2009 Ponzi statistics that the AP cites: 

• The FBI has more than 2,100 corporate and securities fraud investigations pending across the country. Many of the cases involve losses exceeding $100 million and several have losses of more than $1 billion. That is up from 1,750 securities fraud cases in 2008.
• The Securities and Exchange Commission (SEC) saw an 82% increase in the number of restraining orders issued against Ponzi schemes and other securities fraud-related cases in 2009 versus 2008.
• The Commodity Futures Trading Commission filed 31 civil actions in connection to Ponzi cases in 2009 – twice the amount filed in 2008.

The Securities and Exchange Commission (SEC) has charged Harold. H. Jaschke, a former broker with First Allied Securities, with fraud for allegedly churning accounts held by the city of Kissimmee, Florida, and the Tohopekaliga Water Authority and lying to both government bodies about his trading practices.

Churning is a fraudulent practice that occurs when a broker engages in excessive trading as a way to generate commissions and other revenue without regard for a customer’s investment objectives.

The complaint against Jaschke was filed in federal court in Orlando on Dec. 29. According to the documents, Jaschke was associated with First Allied Securities when the alleged violations occurred.

The SEC alleges that Jaschke employed a high-risk, short-term trading strategy involving zero-coupon U.S. Treasury bonds. According to the complaint, the broker sometimes bought and sold the same bond within a matter of days, and occasionally on the same day.  The practices exposed the municipalities to millions of dollars in losses while yielding more than $14 million in commissions for Jaschke, according to the SEC.

The SEC also alleges that Jaschke knew the municipalities’ ordinances prohibited his trading strategy and required that their funds be invested with “the paramount consideration to be safety of capital.”

San Diego-based First Allied Securities fired Jaschke late last year. Jaschke then started his own firm, HHJ Capital Partners G.P. LLC.

In a related enforcement action, the SEC charged Jeffrey C. Young, the former vice president of supervision for First Allied Securities, of failing to reasonably supervise Jaschke during his employment with the firm. Without admitting or denying the findings, Young settled the case and paid a $25,000 penalty. Young also is barred from acting in a supervisory capacity for a period of nine months.

Kevin O’Brien’s flight from the securities industry serves as a reminder to investors that rogue brokers don’t go away, they just find new jobs. O’Brien, a former registered representative with Robert W. Baird & Co., was barred on Sept. 14, 2009, from working in the securities industry. The reason, according to records from the Financial Industry Regulatory Authority (FINRA), had to do with allegations that O’Brien misappropriated for his own use some of the $378,000 he transferred from a client’s account.

On Dec. 17, 2009, O’Brien was sworn in as the trustee of Anderson Township, a suburb of Cincinnati. Among O’Brien’s responsibilities as trustee: helping to manage the township’s $35 million budget.

As reported Dec. 23 by Investment News, O’Brien reportedly still dispenses financial advice via his own financial consulting business, O’Brien Private Wealth Management. The firm, however, is not listed in the Securities and Exchange Commission’s database of financial advisory firms.

Ironically, despite the fact that FINRA permanently revoked his brokerage license, O’Brien touted “Leadership With Integrity” as part of his campaign platform during his bid for the position of Anderson Township Trustee.

Equally ironic is O’Brien’s belief that his financial background will be a benefit to the residents of Anderson Township.

“I have extensive knowledge of municipal financing and budgeting that will greatly assist the township in going forward in difficult economic times,” he said in a Dec. 17 article by Cincinnati.com.

In that same article, O’Brien said he never tried to keep his legal problems with FINRA a secret during his campaign for trustee. Instead, he says the issue “was never brought up.”

Apparently it is now.

Troubled financier Tim Durham can likely look forward to an equally troubled 2010. His reputation as a formidable businessman and leveraged buyout specialist is in obvious disarray. He is the subject of a federal investigation that accuses him of running a Ponzi scheme and defrauding Ohio investors of more than $200 million. And investor lawsuits against Durham and his company, Fair Finance, are growing in numbers. 

Here’s a look back at the 2009 timeline of Durham’s current business and legal issues. 

• January 2009. Investors in Obsidian Enterprises, a leveraged buyout firm owned by Durham in downtown Indianapolis, charge in five lawsuits that Durham defaulted on promissory notes and owes them more than $200,000.

• March 2009. Durham is accused of “self-dealing” after CLST Holdings, where Durham resides as chairman, acquires assets from Fair Finance, an Ohio company owned by Durham.

• October 2009. The Indianapolis Business Journal breaks a story that Durham has treated Fair Finance as his personal bank, using it to fund a range of personal and business-related investments. Investors who purchased investment certificates sold by Fair Finance are now owed more than $200 million.

• November 24, 2009. The FBI executes search warrants on two of Durham’s businesses – Obsidian Enterprises and Fair Finance. Boxes of documents and banking-related materials are collected and taken away by federal agents.

• November 25, 2009. Ohio securities regulators announce that Fair Finance will no longer be able to sell additional investment certificates to investors until it provides sufficient information that the company has the financial ability to pay them back.

• November 26, 2009. Republican candidate for Marion County Sheriff Tim Motsinger withdraws from the campaign amid the FBI investigation into Durham’s businesses. Durham previously served as the campaign finance chairman for Motsinger, as well as a large financial contributor.

• November 2009. Connections between Durham and Marion County Prosecutor Carl Brizzi come to light. Brizzi, a close friend of Durham, had previously agreed to serve on the board of director of Fair Finance and then changed his mind following news that Fair Finance was under investigation.

• November 28, 2009. The federal government files court papers alleging that Durham committed wire fraud and seeks forfeiture of various properties owned by Durham. Among the assets sought: Durham’s 30,000-square-foot mansion and his 2008 Bugatti sports car. The complaint states that Durham and various associates told prospective investors who purchased Fair Finance investment certificates that the money would go toward investments in low-risk consumer loans. Instead, the court papers allege that the money was used to carry out a Ponzi scheme, with money from new investors used to pay prior investors.

• November 30, 2009. The asset-seizure lawsuit is mysteriously rescinded by the federal government.

• November 30, 2009. Fair Finance’s headquarters in Akron and eight satellite offices in Ohio fail to reopen.

• December 1, 2009. CLST Holdings, a Dallas-based firm where Durham serves as chairman, reveals that the Securities and Exchange Commission (SEC) is investigating financial dealings between it and Fair Finance.

• December 4, 2009. Maddox Hargett & Caruso and David P. Meyer & Associates file the first class action lawsuit on behalf of investors against Durham and Fair Finance co-owner James Cochran, alleging that the two men, as well as other executives of Fair Finance, pulled tens of millions of dollars out of the company for their personal use.

• December 10, 2009. Businessman James F. Scott files a lawsuit against Durham, accusing him and other defendants of manipulating a Sept. 3 auction involving one of Durham’s prized automobiles: a 1930 Duesenberg.

• December 11, 2009. A press release from Fair Finance says it plans to resume regular billing and collection efforts with regard to its loan receivables business. It does not say if or when it will be able to do the same concerning sales and redemption of its investment certificates.

• December 16, 2009. The Indianapolis Star and the Akron Beacon Journal file a motion to unseal search warrant documents tied to the federal investigation of Durham and Fair Finance.

• December 22, 2009. A second lawsuit is filed on behalf of 36 Wooster, Ohio, investors against Durham and Fair Finance. According to the lawsuit, the investors are owed amounts ranging from $2,000 to $500,000. 

• December 23, 2009. Reports surface that Durham’s Obsidian Enterprises will vacate its offices on the 48th floor of the Chase Tower in downtown Indianapolis. According to a story in the Indianapolis Business Journal, Obsidian, which subleases the space from JPMorgan Chase, hasn’t paid rent for “a couple of months.”

Tim Durham’s name used to be associated with a lavish lifestyle that entailed a 30,000-square-foot mansion and an eclectic collection of exotic and classic cars. Now, it’s a Ponzi scheme being linked to the flamboyant businessman.

Durham is the subject of a federal investigation for running an alleged Ponzi scheme through his company, Fair Finance, which advertised and sold supposedly safe, but high-yielding, investment certificates to Ohio investors, many of whom were elderly. Money from the investors was then filtered to other companies that Durham owns or controls, according to court documents. 

Last month, the FBI raided Durham’s businesses, Fair Finance and Obsidian Enterprises. On the same day, Nov. 24, that the raids occurred, the U.S. attorney’s office in Indianapolis filed court documents accusing Durham and at least some of his companies of defrauding investors out of hundreds of millions of dollars. 

To date, no criminal charges have been filed against Durham. However, Durham did just recently hire James Voyles, a top Indianapolis criminal defense attorney.

On Dec. 4, Maddox Hargett & Caruso P.C. and David P. Meyer & Associates filed a lawsuit against Durham on behalf of an Akron couple who invested in Fair Finance. The lawsuit, which is seeking class action status, contends that Durham and James Cochran, co-owner of Fair Finance, used the company “as their own personal bank.”

“A lot of people are just scared to death that they have lost their entire life savings,” said David Meyer of David P. Meyer & Associates in a Dec. 21 article in the Wall Street Journal.

A second lawsuit was filed against Durham on Dec. 21 on behalf of 36 Wooster, Ohio, investors who say Durham owes them $2.2 million. Many of the plaintiffs in that lawsuit are believed to be members of the Amish community. 

Following the FBI’s raids of Nov. 24, the nine offices of Fair Finance have remained closed. The company owes approximately $200 million to Ohio investors who purchased the investment certificates, which do not have a government guarantee. 

In an interview with the Wall Street Journal, Durham, 47, said he was “shocked” by the raids on his businesses and that the allegations against him were “untrue.”

Tim Durham’s holiday season is getting filled with presents of lawsuits and investigations over allegations that his company, Fair Finance, was running a Ponzi scheme, using money raised from selling investment certificates to pay off earlier investors. Adding to the growing list of legal actions against Durham is a Dec. 10 fraud lawsuit filed by Virginia businessman James F. Scott, who accuses Durham and other defendants of manipulating a Sept. 3 auction involving one of Durham’s notorious automobiles: a 1930 Duesenberg that was first built for publishing tycoon William Randolph Hearst.

Also named as defendants in the lawsuit: Missouri collector car dealer Mark Hyman; Donald D. Lyons, of Dowagiac, Mich.; Kruse International; and the Auburn Cord Duesenberg Museum.

Specifically, Scott’s lawsuit alleges that Durham and others who had a financial interest in the sale of the Duesenberg drove up the price during the bidding process and then split the profits. Scott eventually won the bid for $2.9 million. The other bidder was Hyman, who attended the auction with Durham.

The vehicle itself was put up for consignment by a group of sellers – Durham, Hyman, Lyons and the Lyons Family Trust.

Scott, who participated in the auction by telephone, contends he had no knowledge that the sellers reserved the right to bid or that they were in fact offering bids on the vehicle. That meant that the price of the car was artificially inflated by those who had a financial interest in getting more money for the car, according to court documents.

After Scott transferred more than $3.1 million to the museum’s bank, the money was divided up and distributed to Hyman, Lyons and the museum, with Durham’s knowledge.

To top it off, Scott has yet to receive the title for the 1930 Duesenberg vehicle, according to lawsuit.

On Dec. 23, there was yet another twist to the Durham saga. An IBJ article reports that another company owned by Durham, Obsidian Enterprises, is planning to vacate its offices on the 48th floor of the Chase Tower in downtown Indianapolis. According to the story, Obsidian leases the space from JPMorgan Chase & Co. and hasn’t paid rent for “a couple of months.”

Like Fair Finance in Akron, Ohio, Obsidian Enterprises has been closed since Nov. 24 when federal agents conducted simultaneous raids on the two businesses.

Meanwhile, investors who are owed some $200 million sit and wait for answers.

For the second time this month, Fair Finance and owner Tim Durham face a lawsuit filed on behalf of disgruntled investors. The most recent legal action involves a group of Wayne County residents, including Amish investors, who are suing Akron-based Fair Finance over allegations the company owes them nearly $2.2 million.

The first lawsuit against Fair Finance, Durham and other executives was filed Dec. 4 by the law firms of Maddox Hargett & Caruso P.C. and David P. Meyer & Associates, LPA. That lawsuit, which accuses Fair Finance’s owners of bilking investors out of millions of dollars by using company assets for their own enrichment, is seeking class action status.

As reported Dec. 22 by the Akron Beacon Journal, the latest lawsuit against Fair Finance was filed yesterday in Wayne County Common Pleas Court. Twenty members of the group behind the lawsuit created a limited liability company named Fair Recovery to protect their privacy. Twenty other plaintiffs, including two trusts, also are named.

Offices of Fair Finance have remained closed following a Nov. 24 FBI raid on the finance company and another business owned by Durham, Obsidian Enterprises.

Previous court records allege that federal investigators suspect Fair Finance of operating as a Ponzi scheme, using money from new purchasers of investment certificates to pay off earlier investors. Today, more than $200 million is outstanding.

Pacific Cornerstone Capital and former CEO Terry Roussel face $750,000 in fines by the Financial Industry Regulatory Authority Industry (FINRA) for making misleading statements and omitting facts in connection with sales of two private placements. FINRA also charged the broker/dealer and Roussel with advertising violations and supervisory failures.

According to a statement by FINRA, Pacific Cornerstone sold private placements in two affiliated companies from January 2004 to May 2009 using offering documents and accompanying sales literature that promised to return an investor’s principal in two to four years, along with generating a return of more than 18%. FINRA says it found no reasonable basis for those statements.

In addition, Pacific Cornerstone offered private placement units of the two affiliated entities, Cornerstone Industrial Properties, LLC and CIP Leveraged Fund Advisors, LLC, to other broker/dealers and investment advisors. They, in turn, sold the units to the investing public. A total of $50 million worth of private placements were sold to nearly 1,000 investors.

During the same period that the private placements were sold, Roussel periodically sent letters to investors to update them on the progress of their investments. According to FINRA, those progress reports painted a positive – albeit unrealistic – future, as well as failed to provide required risk disclosures. FINRA also found that the offering documents neglected to reveal a complete and accurate financial condition of one or both of the companies.

Two newspapers have filed a motion to unseal federal search warrants connected to FBI raids of businesses owned by Timothy S. Durham. The Indianapolis Star and the Akron Beacon Journal filed their motions on Dec. 18, stating that the public has a right to know what federal investigators were seeking in the Nov. 24 raids.

The newspapers’ motion says: “The overriding public interest in recovering millions of dollars in investments for thousands of investors, as well as the overriding public interest in the integrity of the political system in which one influential person may have destroyed thousands of retirement dreams, require that all documents issued in connection with Fair Finance and Timothy S. Durham be public.”

In a previous court filing, federal authorities alleged that Fair Finance, purchased in 2002 by Indianapolis businessman Timothy S. Durham, was being operated as a Ponzi scheme.

Fair Finance has yet to reopen its doors for business. The only signs of life at the company’s Akron headquarters: Several more signs behind the building have been recently marked with the words, UnFair Finance.

Last week, a news release issued by lawyers for Fair Finance said the company hoped to restart its accounts receivables billing and collection business on Dec. 14 but did not know when it would reopen. The company also gave no indication of when or if it would be able to resume selling and redeeming investment certificates for investors.

Federal investigators have suspected that Fair Finance, bought by Indianapolis businessman Timothy S. Durham in 2002, was being operated as a Ponzi scheme. According to court documents, Ohio investors might have as much as $200 million in outstanding investment certificates with Fair Finance.

Meanwhile, the Akron Beacon Journal is reporting that at least one Fair Finance investor has been asked by federal officials to complete a questionnaire as part of an ongoing investigation into the company. According to the paper, the investor’s money with Fair Finance was part of an inheritance. When she went to retrieve a check from the company in late November for her relative’s $17,000, she was greeted by closed offices.

The investor said the money was supposed to go toward helping her bury a relative. Because she couldn’t get her money from Fair Finance, she had to come up with a down payment for her relative’s funeral and still owes $4,000.

On Nov. 24, the FBI raided the Akron, Ohio, headquarters of Fair Finance and another business owned by Tim Durham, Obsidian Enterprises in downtown Indianapolis.