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Courts and Crime

Bankruptcy trustee goes after big investors
Saying they knew or should have known what was going on at Fair Finance, the law suits allege that investment bankers who loaned money to the company are liable

Tim Rudell
Robert Kugler is an attorney in Minneapolis/St. Paul. He is chair of Leonard, Street and Deinard’s Business and Commercial Litigation practice and is an adjunct professor of bankruptcy law at Hamline University in St. Paul, MN
Courtesy of R. Kugler
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The Fair Finance trustee has filed lawsuits for tens, even hundreds of thousands of dollars over the two years since the small Akron-based lender collapsed.  But this week, he went after more than a billion dollars from lenders who helped the now-indicted owners acquire the company.  WKSU’s Tim Rudell reports on the pursuit of deep pockets.

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Pursuing those with money
Two big investment houses loaned former Fair Finance owner Tim Durham tens of millions of dollars over the past decade to buy and operate Fair Finance.

When the economic dam burst, even solid companies struggled. And says Robert Kugler -- an author, speaker and lawyer who specializes in bankruptcy – the not-so-solid were exposed.  “Somebody said, when the lake was lowered it revealed a lot of ugly things. And Ponzi schemes were the ugly things. When the economy crashed it forced a day of reckoning in all kinds of situations:  the Madoff situation; and the Fair Finance situation as well.”

FBI agents raided Fair Finance in late 2009 and eventually accused Durham and two associates of a Ponzi scheme -- paying returns to investors with the buyers’ own money or that of later customers.  

Five thousand customers, mostly northeast Ohioans, lost more than $220 million. Fair Finance went into bankruptcy and the court named Brian Bash trustee.

One of his jobs is to recover as much of that money as possible.  And he is pursuing politicians who got contributions from company executives, investors who had a stake in Fair Finance and made money, even Durham’s mother, and Durhams's exotic car collection.

All of that raised some millions of dollars.

Major targets 
This week, Bash went for big money…from two investment banking units that helped Durham buy and hold onto Fair Finance.  They’re Textron Financial and Fortress Credit, and bankruptcy attorney Kugler says the argument is that by the nature of the loans they made, they were really buying into Fair Finance – and thereby supporting the Ponzi scheme. “In his original scheme Charles Ponzi went out and got investors [to give him seed money.]  In the modern era often times that money is loaned…and often it’s short term loans at high interest rates.  And the trustees in those cases will say there is no difference between and an investment with a rate of return.  So it is not uncommon for the trustees of companies that are failed Ponzi schemes to seek to ignore the difference between investment money and money loaned.”

Textron Financial is an investment arm of the conglomerate that includes the defense contractor Textron.  New York-based Fortress Credit is a far-flung investing enterprise that includes financing for media companies.  

The lawsuits Bash filed could total 1.2 billion dollars in actual and punitive damages.  That’s about six times the estimated losses to Fair Finance customers.

Getting serious
Kugler says the big claim is in large part to make a big impression…and to get the targets of the suits to consider a settlement.
“The standard approach by trustees seems to be to pick the largest number that could be recovered.  Where you agree to lend them a thousand dollars on a revolving basis…you lend a thousand, they pay it back…you lend a thousand, they pay it back…you do that forty times, you’re going to get sued for $40-thousand dollars: even though the most you could ever have been involved in at any one time was a thousand dollars.  Now, that sorts itself out in the litigation and the settlement talks pretty quickly.  But it absolutely does get the attention of defendants.” 

Neither Textron Financial nor Fortress Credit has responded yet to the suit, or to requests for comment.  Former Fair Finance executives Tim Durham, James Cochran and Rick Snow are scheduled to stand trial this summer on federal criminal charges for their parts in running Fair Finance.  

Related WKSU Stories

Durham says investigators blew the case
Friday, December 23, 2011

Amish investor accused of mail fraud
Thursday, September 15, 2011

Akron's Fair Finance owner wants back in his mansion
Tuesday, August 16, 2011

Local bankruptcy trustee goes after LA entertainment company
Wednesday, June 15, 2011

Big political name still caught up in the Fair Finance collapse
Tuesday, May 10, 2011

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