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Tim Durham, the Madoff of the Midwest


In the summer of 2007, Timothy S. Durham decided to throw himself a party for his 45th birthday. The CEO of a leveraged buyout shop in Indianapolis, Durham claimed to have made millions. He had also developed a penchant for the young, fun, and nubile, partying in Los Angeles and Miami and on his yacht in the Caribbean. In L.A., he owned National Lampoon, or what was left of it, and had been going to parties at the Playboy Mansion.

At the time, Durham told Daniel S. Comiskey, an Indianapolis Monthly reporter, he just wanted to bring “a little of that ‘magic’ to Indianapolis.” That magic meant 30 glamour models, flown in from Los Angeles, picked up at the airport in exotic cars from Durham’s collection, put up in a hotel, and paid standard modeling day rates, according to model Megan Hauserman. “He said it was a Playboy-themed party, so we should wear what we would typically wear to the mansion,” she says. The standard uniform there is lingerie and heels.

More than 1,000 people showed up at his 30,000-square-foot mansion in Fortville, an exurb of Indianapolis. Members of the Indianapolis Colts arrived, as did Kato Kaelin. Durham dressed like Hugh Hefner, in a plush robe. When he went to blow out the candles, his cake was frosted with his likeness in the center of a million-dollar bill.

Later, as reported in the Indianapolis Star, Durham posted photographs of the party to his Myspace page, including one of him getting a lap dance and two of the models kissing, nude. He dubbed it his “Fantasy Pajama and Lingerie Party.”

Durham had long attracted attention in Indianapolis, and not just for his parties. He was also one of the state’s biggest backers of Republican politicians. “Tim Durham was somebody who came out of nowhere in the late ’90s and kind of declared himself a very rich guy,” says Greg Andrews, managing editor of the Indianapolis Business Journal, who has covered Durham extensively. “He established himself as a player by being a tremendously large donor to candidates.” Those included Governor Mitch Daniels. Durham gave $105,000 to his 2004 campaign, making Durham the governor’s second-biggest individual donor that cycle. Over the years, he made some $800,000 in political donations, according to public records. The perceived gap between Durham’s private behavior and his support for conservative candidates led Matthew Tully, a columnist for the Indianapolis Star, to chastise Durham for his conspicuously libertine lifestyle. The column went viral, likely because of its link to those Myspace photos.

Durham was unfazed by the public admonishment. He kept throwing huge parties—though he set his Myspace page to private—and giving generously to the Indiana GOP. “That article ran about my R-rated Myspace page, and somehow I still get a lot of politicians wanting my money,” he told Indianapolis Monthly. “Apparently they didn’t see it. I’m going to give it to them as they come through the door now. ‘Didn’t you see this? I’m not someone you want to be associated with! I’m not a good influence!’ ” And he repeatedly boasted that Obsidian Enterprises, his leveraged buyout firm, had upped its profits massively in the last few years.

The party ended at 2 p.m. on Nov. 24, 2009. Uniformed FBI agents raided the offices of Obsidian, which were in the penthouse of the tallest building in Indianapolis, and the offices of its subsidiary, Fair Finance, in Akron. Agents hauled boxes of records and computer hard drives to idling trucks.

This spring, the U.S. Attorney’s Office for the southern district of Indiana indicted Durham and two of his associates, Rick D. Snow and James F. Cochran, on 12 charges: one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud, and one count of securities fraud. The indictment charges that from 2005 to 2009, Durham masterminded a Ponzi scheme that defrauded 5,000 investors in Fair Finance out of some $207,246,329, of which only a fraction may be reclaimed. If convicted, Durham and his alleged conspirators could each face 45 years in prison and $3 million in fines. The case is due to go to trial next year, and the court has registered not-guilty pleas for the three defendants, all of whom declined or did not respond to interview requests. But from interviews with numerous associates, a profile of Durham, who Indianapolis has taken to calling the “Midwest Madoff,” has emerged. In retrospect, Durham’s alleged fraud is almost as impressive for its size as for how obvious it should have been.

 

Timothy Durham grew up in the 20,000-person town of Seymour, Ind., notable for being the crossing point of the east-west and north-south railroad lines and the birthplace of John Mellencamp. Friends describe Durham as a quiet and nerdy kid, forever wearing a trench coat, and a fantastic whiz at math.

“Tim was a brilliant student and something of an inside kid,” recalls Scott McKain, a former Obsidian vice-chairman who has known Durham since he was 12. “He was the whole cliché—he had a photographic memory and everything. But he was not real strong in terms of social skills. It took until he was married for him to develop that.”

That marriage was to Joan SerVaas, whose father, Beurt SerVaas, is a wealthy entrepreneur who served on the Indianapolis city council for more than 40 years. Durham, who attended Indiana University and its law school, married Joan in 1989. They have one son. After a few years as an attorney at the prominent firm Ice Miller, Durham joined his father-in-law’s investment firm, SerVaas Inc.

In 1990, SerVaas put Durham in charge of Carpenter, an ailing school bus manufacturer. Durham turned it around and they sold their stake in 1998 for a $1 million profit, he told Indianapolis Monthly. At the same time, Durham’s marriage was fraying. When he and Joan divorced in 1998, Durham left her father’s company.

Out on his own, he persuaded a few investors to back him in the takeover of a Michigan auto parts maker, Lake City Forge. In two years he flipped it, making about $5 million for himself, he told the Monthly. He raised more money and sought more acquisitions, joined by James Cochran, whom he knew from the school bus business. Their first purchase was Danzer Industries, a Maryland-based manufacturer of cargo trailers. They then picked up U.S. Rubber Reclaiming, a tire recycler; Pyramid Coach, which leased buses; and United Expressline, which also made trailers. In 2001 they took their company, Obsidian, public.

As he helped Obsidian grow, Durham also traded stocks. In 2002 he formed an investment group to buy shares in Indiana-based cell-phone distributor Brightpoint (CELL). In the midst of accounting problems and under a mountain of debt at the time, the company surprised analysts with strong results in 2003. The share price climbed from a low of 20¢ in July 2002 to nearly $11 by October 2003. Durham netted some $30 million, he told the Monthly.

Success seemed to make him hungrier. Obsidian moved its offices to the penthouse of the Chase Tower on Monument Circle. Durham picked up investments in a rally-car builder, a plastic surgery center, a car magazine, a tour bus operator, a limo rental company, a nightclub, an Italian restaurant, and a cell-phone billing processor. In 2002, Durham joined a team of investors taking a controlling stake in National Lampoon, the holding company for the moribund comedy label. Daniel Laikin—Durham’s friend, a member of Obsidian’s board, and brother of the CEO of Brightpoint—became CEO and tried to revive the company by producing original comedic fare, like the 2009 film Ratko: The Dictator’s Son.

Durham’s home, too, was a monument to acquisition. Constructed in a faux-manor, brick-and-slate style, it included not one but three entrance gates, with a large interior courtyard for showing off vehicles, as well as a tennis court, and elaborate landscaping. On display inside, as he noted when a local television station came to visit, were a Picasso and one of Frank Sinatra’s Grammy Awards.

At one point, Durham owned, co-owned, or leased five dozen cars, he told CNBC when they visited him in 2008 for the documentary Untold Wealth: The Rise of the Super Rich. He said he had so many that he couldn’t always keep track. His collection included a Lamborghini, an Aston Martin, a Bentley, and a 1929 Auburn Speedster. The crown jewel was a 1929 Duesenberg Phaeton, driven by Elvis Presley in the 1966 film Spinout.

“The way he described it, with all these purchases, he was investing,” one former Obsidian employee explains. “Given how much money he made on Brightpoint, we figured he knew what he was doing.”

In many respects, Durham embodied the bounties—and hubris—of the pre-recession age. The money seemed limitless, the parties got bigger, and Durham’s profile rose. He let CNBC film him on his $7 million yacht, the Obsidian. He took the local ABC (DIS) affiliate on a tour of his home, showing off the television screens hidden behind the mirrors in his bathroom.

“They asked me how I justify all this,” he told the magazine. “They asked me if I consider myself a materialist. I said, ‘Without a doubt! Look around.’ Does anyone not consider himself a materialist? Who doesn’t want this stuff? This country is founded on the idea of people wanting stuff.”

Durham was soon one of the most recognizable businessmen in Indianapolis. Local papers started reporting on his every business deal. He became a celebrity on local political blogs. “This is not Las Vegas,” says Gary Welsh, an Indianapolis-based lawyer for 20 years who now runs the popular Advance Indiana blog. “He wanted to stand out, and he stood out.”

“I went to Indianapolis to see Durham,” says Tim Porter, who worked on a car rally with Durham, “and was staying at a Westin. He called me up and said, ‘You have to stay at the Four Seasons!’ I said, ‘Well, my budget really doesn’t allow for that.’ He said, ‘The Four Seasons is my house, and it’s free!’ ”

Another friend remembers visiting Durham in his $3.9 million house in the Hollywood Hills, where he moved in 2008 to run National Lampoon. Durham pointed to one bedroom where he said the rapper Chris “Ludacris” Bridges was staying. In another there were boxes and boxes, stacked waist-high, filled with unworn shoes.

At the same time, Durham cultivated political influence, mostly through his outsize gift-giving. Durham sat on Mitch Daniels’s reelection steering committee in 2004 and headed state fundraising for Rudolph Giuliani’s 2008 Presidential campaign, along with his friend Carl Brizzi. He let the Indiana GOP use Obsidian’s offices for plenary meetings, say former employees.

Spending more time partying, traveling, and juggling projects meant Durham neglected businesses at home. “When he was engaged in the companies, he was very good at that,” says Anthony Schlichte, a former Obsidian vice-president, now running Indianapolis-based Custom Cryogenic Grinding, a rubber and plastic recycler. “Over time, he became a little more—well, he wasn’t as engaged. He started collecting art and automobiles. He stopped coming into the office.”

Three months before the FBI raided Obsidian, Durham and the Lampoon co-hosted the Ludacris Foundation’s West Coast debut, according to local press reports. (The Atlanta-based philanthropy runs music and arts programs for urban youth.) Kiss’s Gene Simmons, Khloe Kardashian, and R&B singer Ciara attended, and Durham helped judge the Miss Malibu 2010 pageant at the party. A month before the FBI raid, Durham threw a massive haunted-mansion-themed Halloween party for National Lampoon. In one photograph he is seen in full-on Mad Hatter makeup, just like Johnny Depp in Alice in Wonderland.

 

Durham could play the rich guy, but he wasn’t very good at making money. According to a civil suit filed in an Ohio court this February by Fair Finance’s bankruptcy trustee, only one Obsidian subsidiary ever turned a profit: United Expressline, the trailer manufacturer, which produced earnings of $400,000 in 2002. The rest of the profits, the trustee says, were mirages. Obsidian, according to these documents, became insolvent just months after it opened its doors. Its auditor admitted to “substantial doubt” that the company could make it for another year as early as 2002.

From 2001 to 2006, when Obsidian was public, its annual reports show a flood of red ink. The company lost money in each of those years—with cumulative losses of $30 million, according to the bankruptcy trustee. As early as 2005, investors in Obsidian struggled to get their money back, starting a spate of lawsuits and countersuits in Marion and Hamilton Counties. National Lampoon, too, was a loser, as was Durham’s other major investment, Texas-based CLST Holdings, formerly Cellstar, which liquidated in 2007. In 2009, Lampoon CEO Laikin pleaded guilty and went to jail for trying to manipulate the price of Lampoon’s penny stock.

It was all made possible, the indictment against Durham alleges, by the purchase, and looting, of Fair Finance. Founded in 1934 and family-owned until Durham bought it for an undisclosed sum in 2002, Fair Finance sold uninsured investment certificates, which offered steady coupon payments and were redeemable after 6 to 24 months. It used those funds to purchase and service consumer receivables contracts, like gym memberships and time share contracts. The company had a solid reputation among working-class Ohioans, including members of the Amish and Mennonite communities, who provided a steady revenue stream.

The government charges that Durham used Fair Finance as a kind of ATM. The indictment alleges that Durham took the money it raised and loaned it to himself, his friends, and his many failing businesses. An Obsidian company, employee, or friend would put up some collateral, often worth far less than claimed, or already mortgaged to another creditor. Fair Finance would then wire the person or company a loan.

When Durham took the company over, he told an associate, “this will be like taking candy from a baby,” according to the bankruptcy trustee. Within two days of the purchase, Durham had Fair Finance extend a $3 million line of credit to Obsidian. According to the indictment, in 2007, Durham had Fair Finance send him $250,000 to remodel his garage. In 2008 he took $150,000 to spend at a casino. The bankruptcy trustee says Obsidian owes Fair Finance $29,861,719, plus interest. It alleges that Laikin, the jailed former National Lampoon CEO, owes more than $20 million as well. Laikin denies the allegations.

Eventually, the government says, the related-party loans bled the Ohio financial company dry. Over time they swelled to more than $200 million. Durham personally benefited to the tune of $54 million, the bankruptcy trustee says.

When Fair Finance had spent the money it had raised, it raised more. To fund all those related-party loans, the indictment says, Durham turned Fair Finance into an enterprise “in the nature of a Ponzi scheme.” The company printed more aggressive investment circulars, which, the prosecution says, became misleading. When recession hit in 2007 Fair Finance struggled to make redemptions and interest payments to existing investors. The scheme started to fall apart.

In an October 2008 e-mail to Fair Finance attorney Ronald Kaffen, since released by the bankruptcy trustee, Durham seemed to confirm that he was essentially running a Ponzi scheme: “90 percent of all new sales retires old certs and interest there on,” he wrote. In another e-mail, Durham said Fair Finance had issued $134 million in new debt and used $124.8 million “to repay expiring certificates.” In other words, for every $20 from new investors, $19 went to old ones.

Kaffen responded to Durham: “While it is true that most of the new funds are now used to replace redeemed certificates, I am not comfortable characterizing the sales as selling certificates to pay off old certificates. Such a characterization would not be much different than a pyramid scheme.”

Recovery has proven difficult. The faulty paperwork behind the thousands of transactions has made the case a forensic nightmare. “It’s the most complicated case I’ve ever worked on,” says Kelly Burgan, legal counsel to the Fair Finance bankruptcy trustee. “My partner, Irving Picard, is working on the Madoff case. That case, dollars-wise, was obviously many times bigger. But we were saying this case is actually more complicated. There, Madoff basically used one centralized account. Here there were many accounts that spewed into dozens of interrelated businesses.”

Often, Durham bought on credit, meaning secured lenders—such as the actual owners of some of those cars—are getting the collateral back. “We are seeking to recover whatever we can,” Burgan says. But “we are not going to find piles of money in accounts, or more assets, as in early in the case. We took care of the low-hanging fruit. Now we are seeking to recover funds from individuals.”

That means the trustee is in the process of requesting that Durham’s associates and beneficiaries return ill-gotten funds.

The person-by-person recovery process has given birth to a secondary scandal: The government wants Indiana’s GOP to give Fair Finance investors their money back, and Democrats have gleefully bashed Republicans for failing to do so. There is no evidence, so far, that politicians treated Durham with special favor. Still, in May, the bankruptcy trustee revealed lawsuits against the Greater Indianapolis Republican Finance Committee (for $52,943), the Marion County Republican Central Committee ($5,000), the Committee to Elect Paul Ricketts ($40,000), and the House Republican Campaign Committee ($58,580). Burgan says there may be more to come. Daniels’s office is negotiating, but has repeatedly said the $195,000 in campaign funding donated by Durham has long since been spent, and did not offer to discuss it further.

“The whole thing is an embarrassment,” says Julia Vaughn, policy director for Common Cause/Indiana, a nonpartisan political watchdog. She suspects that Durham is due to make an appearance in any number of Democratic ads next election cycle. Broader Indiana, if not reeling, is wary. “There’s anger at Tim,” says Schlichte, the former Obsidian executive. “There is a cloud over everybody who worked there. People always kind of wonder: What were you doing? You get thrown into the barrel with the bad apples in terms of public perception.”

But, as Durham himself argued, maybe everyone just should have known better. Andrews says the business community had its suspicions about Durham starting with the “extraordinarily well-timed” Brightpoint trade. The signs seem obvious in retrospect: the poor results of Obsidian, a Durham associate in jail for trying to manipulate stock prices, a stockholder suit at CLST. The bulk of the money at Fair Finance, however, came not from finance professionals but from individual investors in Ohio, who may not have been aware a local institution had changed hands.

Today friends say Durham is nearly wiped out. He had to give up his expensive, Miami-based counsel in exchange for an Indiana-based lawyer, John Tompkins. Tompkins says Durham is eager to defend himself in court and to air his side of the story. The Fortville mansion is for sale for $5.5 million, its extensive grounds still perfectly manicured. After being extradited from Los Angeles and spending court-ordered time in an Indianapolis halfway house, Durham is living with his sister in the nearby neighborhood of Geist Reservoir, a local TV station reported. He has given few interviews since the raid on Fair Finance. “I probably will have lost virtually my entire net worth,” he told Indianapolis’s Eyewitness News in November 2010, looking bleary-eyed.

“If you could recreate your wealth, would you spend [it] the same way?” they asked.

“Probably not. No, probably not,” he said.

Lowrey is a Bloomberg Businessweek contributor.

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