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Banking and Finance

Victims of $200 Million Ponzi Scheme Set to Recover 9% of Losses

 Nearly six years after a raid by the Federal Bureau of Investigation uncovered a $200 million Ponzi scheme masterminded by Tim Durham, a bankruptcy trustee tasked with recovering funds for scheme victims has announced his intention to make a first distribution representing 8% - 9% of victim losses. Victims of Fair Finance Company ("Fair Finance") will share a collective $18 million distribution, the bankruptcy trustee recently announced, which would represent just pennies on the dollar compared to the over $200 million in claims submitted by scheme victims. Durham received a 50-year prison term for the scheme, while co-conspirators Jim Cochran and Rick Snow were sentenced to terms of 25 years and 10 years, respectively. It does appear that victims stand in line to receive at least one more distribution based on current funds in the bankruptcy estate.

The Scheme

Durham ran Fair Finance from 2005 through November 2009, with Cochran serving as Chairman and Snow serving as chief financial officer. Durham and Cochran purchased Fair Finance for $23 million in 2002, which had successfully operated for decades as a legitimate finance company that purchased finance contracts between businesses and their customers that carried annual interest rates ranging from 18% to 24%. Fair Finance would then profit off the difference between the purchase price and the money collected from the arrangement. Purporting to continue the historically profitable business, Durham and Fair Finance raised approximately $230 million from the sale of investment certificates to over 5,000 investors.

However, rather than continuing Fair Finance's business, Durham modified the business structure and began using a steadily increasing amount of investor proceeds to make "loans" for a number of unauthorized purposes, including financing Durham and Cochran's unprofitable businesses, paying fictitious interest to investors, and enriching themselves and those close to them. By 2009, these 'loans' totaled more than $200 million and constituted more than 90% of Fair Finance's supposed investments. Essentially looting the company, Durham and Cochran saddled Fair Finance with hundreds of millions of dollars in subordinated debts, while at the same time funneling money out of the company to themselves, to struggling companies they had an ownership interest in, and to pay their daily living expenses and sustain their lavish lifestyles. These living expenses included more than 40 classic and exotic cars worth over $7 million, a $3 million private jet, and a $6 million yacht in Miami. 

The company was eventually forced into involuntary bankruptcy, and a grand jury indicted Durham, Cochran and Snow in March 2011. Maintaining their innocence, the men were later convicted at trial, and prosecutors sought a 225-year sentence for Durham who they labeled the "greediest, most selfish, and remorseless" Ponzi schemer. At sentencing, U.S. District Judge Jane Magnus-Stinson handed down a 50-year sentence to Durham, remarking that she considered the punishment an "effective" life sentence. While Durham achieved a small victory when a federal appeals court threw out two of his wire fraud convictions, he was subsequently resentenced to the same 50-year term this summer.

Claims Process

Scheme victims initially submitted over 5,000 claims with collective losses pegged at nearly $230 million. The trustee, Brian Bash, indicated that over 1,000 of those claims had overstated victim net losses, and last week's court filing puts the total amount of claims at approximately $208 million. According to the filing, there is approximately $43 million currently in the bankruptcy estate. This comes after the court recently approved a $35 million settlement with Fortress Credit, which had provided financing to Fair Finance and which was accused by Bash of ignoring warning signs that Fair Finance was operating a massive fraud. If the proposed settlement is approved, roughly $24.2 million will remain in the bankruptcy estate.

Interestingly, the initial bankruptcy judge presiding over the case invoked what is known in her district as the "White Rule."  That informal rule, named after former bankruptcy judge Harold White, required that at least half of funds recovered in a bankruptcy estate should be returned to the victims. In other words, this served to cap the amount of funds used by the estate to maintain or liquidate the businesses as well as compensate professionals involved in the case. U.S. Bankruptcy Judge Marilyn Shea-Stonum, who is now retired, announced in late 2013 that it was her intention to invoke the "White Rule" with respect to whatever funds the Fair Finance trustee was able to recover. Judge Shea-Stonum retired in late 2013, so it remains to be seen whether the current judge will follow a similar path.

 For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.

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