First Indiana Bank’s Alleged Connection To Accused Indiana Ponzi Schemer Timothy Durham

As I’ve said before, it’s nearly impossible to pull off a Ponzi scheme of any magnitude without the complicity of a seemingly respectable financial services firm.  Bank of America, VISA, Fiserv and MF Global all figure prominently into Ponzi schemes my office is investigating or pursing litigation against.  The former First National Bank of Indiana (FNBI) is yet another firm that appears worthy of some investigation.

According to a federal complaint of forfeiture alleging misdeeds by Timothy Durham, the Indiana businessman and his associates operated at least two holding companies and 19 operating subsidiaries, with approximately 77 individual bank accounts for these entities.  Most of these bank accounts were at JP Morgan Chase and Key Bank and the complaint alleges more than 6,400 FEDWIRE transactions were made between the companies under Durham’s control.

One of these companies was “Fair Financial,” an Akron-based company that apparently was ground zero for Durham’s Ponzi scheme.  “Fair Financial” peddled so-called “investment certificates” supposedly backed by low-risk, high yield, short-term consumer debts ;  in fact, the complaint says money provided by Durham’s victims was used to make interest and redemption payments to earlier investors.  The complaint alleges that unaudited financial statements for “Fair Financial” showed total assets of approximately $241 million, with loans to Durham and his various businesses totaling approximately $192 million.  The unaudited financial statements show a net operating loss for 2008 of approximately $1.7 million and net income of $129,845 for the first six months of 2009.

According to the complaint, “Fair Financial” is owned by “Fair Holdings.” The complaint alleges that between May 2004 and May 2009, FEDWIRE transactions detail more than 900 separate transfers totaling approximately $84.2 to a First Indiana Bank account of “Fair Holdings,” which in turn wired the money to nearly 50 individuals and businesses with connections to Durham.

Current and former subsidiaries of Obsidian Enterprises were among the 50 companies that received the transfers.   According to its website, Obsidian is “a private holding company that invests in small and mid cap companies in basic industries such as manufacturing and transportation.”  The site lists Anthony P. Schlichte as the company’s executive vice president, corporate finance; according to Schlichte’s bio, he previously held “senior lending officer positions at First Indiana Bank” and other banks.

While it’s certainly possible that FNBI was an unwitting participant in the scheme, further investigation of what the bank knew and when it knew is warranted.

FNBI was acquired by Marshall & IIsley in 2007.

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Congress’ Task: An Honest Debate over ‘Stoneridge’

When a murder for hire crime is committed, two trials usually proceed.  The prosecutor’s office brings a criminal case and the victim’s family usually sues the defendant’s in civil court for monetary damages.  Unfortunately, it doesn’t work like that in the corporate world due to a Supreme Court ruling labeled, “The Stoneridge Decision,” which declared that “third-party liability” is limited to those that directly influenced investment decisions.  In other words, even though lawyers, investment bankers and auditors may have aided a corporate fraud, because a corporation interacts directly with shareholders, service providers don’t have any liability. I think there is something fundamentally wrong with this picture.

Lest anyone say the comparison I’ve just described is overly dramatic, I’ve excerpted below Federal Judge Gerald Lynch’s opinion regarding a fraud case he was forced to dismiss because of the crippling Supreme Court Stoneridge snub:

There are accomplices and there are accomplices: after all, in the criminal context when the Godfather orders a hit, he is only an accomplice to murder - one who ‘counsels, commands, induces or procures’  but he is nonetheless liable as a principal for the commission of crime. Likewise, some civil accomplices are deeply and indispensably implicated in the wrongful conduct.

 The fraud case Judge Lynch is referring to involves Mayer Brown, a large law firm, which was one of the law firms that has been alleged to have helped Refco, a now defunct brokerage giant, hide over $1 billion in losses from shareholders.

In addition to shareholders, the Stoneridge Decision has a huge impact for investors that have fallen victim to Ponzi Schemes and fraudulent hedge funds.  In almost all these cases there is nothing left of the funds leaving penniless victims without any recourse, even if the individuals responsible for ripping them off had help from outside sources?

Unfortunately a law on the books as influential as the Stonebridge Decision doesn’t gain the attention it deserves compared with the A.I.G. bonuses, for instance, but this law’s implications are greatly felt on Main Street U.S.A.

In related news, Bernard Madoff’s accountant was arrested earlier this week and charged with aiding and abetting investment adviser fraud and four counts of filing false audit reports. He faces up to 105 years in prison if convicted.  Reportedly, the accountant received $186,000 a year in fees for audit work, bookkeeping and tax services.

These fees and other assets owned by the allegedly crooked accountant are likely out of the reach for investors who took his audits at face value.  Indeed, while the accountant is likely to be sitting in a warm jail cell, the victims are left out in the cold.

The next session of Congress is likely going to be focused on reforming regulation of the financial services industry.  An honest discussion over the consequence of the Stoneridge Decision needs to be at the forefront of the agenda. I urge Congress to take meaningful steps to addressing this immensely important issue.

Meredith Whitney’s “Independent” Firm Open for Business

Having left a large law firm to strike out on my own to launch Zamansky & Associates, I know about the challenges of starting a business and empathize with entrepreneurs.  So on that level, I heartily congratulate Meredith Whitney, Oppenhiemer’s star banking analyst that was so critical of Wall Street CEOs over the past 18 months, as she launches Meredith Whitney Advisors, LLC. 

Ms. Whitney’s voice and research reports shook the industry and moved markets on a daily basis.  She literally showed that the emperor indeed had no clothes, especially with respect to Citigroup.  Her musings are/were spot on, though according to some reports, her stock picks weren’t so prescient.

But that’s not the issue of this post.  The issue I’d like the industry and regulators to examine is that the more things change, the more they stay the same.

Specifically, while the media has fawned over Ms. Whitney’s entrepreneurial spirit, they’ve ignored a problem that’s plagued Wall Street and its customers since the Dot-Com era: conflicts of interest.  I would imagine that Ms. Whitney’s new venture will eventually provide investment banking and capital market services. 

In other words, many of the companies that will seek her firm’s advice will be in the financial services industry.  In fact, in all likelihood, a substantial portion of her firm’s research coverage would concentrate on the financial markets.

Although this is entirely legal, it is a classic conflict of interest.  I’m quite sure Ms. Whitney’s firm will erect the prerequisite “Chinese Wall” to ensure one hand doesn’t wash the other. But for a boutique of that size with maybe 1,000 square feet of office space, it’s more like a cubicle divider.  Speaking of which, those Chinese Walls haven’t exactly improved things even at the largest Wall Street firms.  Just ask the legions of investors who listened to all the buy ratings throughout 2007 and 2008 or read the story in today’s New York Times about the Lehman Brother’s employees who allegedly leaked research reports to prized clients ahead of publication, which is code for insider trading.

Frankly, what’s the point of even going through the trouble?  I don’t know what the going rate for Chinese Walls is these days, but you can bet it’s more expensive than the regulatory fines levied when conflicts inevitably turn into rule violations.  My post last week concentrated on this issue and recalled that when the SEC found several large broker/dealers failed to disclose payment relationships they had with companies their research departments covered, the result was that seven firms split a fine of $3.65 million. 

To be sure, Meredith Whitney Advisors may find a way to cover sectors and service others, but in my estimation, this is only a more palatable conflict.

The unfortunate reality is that she doesn’t have much of a choice.  Turns out, it’s impossible to turn a decent profit on truly independent research so long as firms use it as a loss-leader to market more lucrative services…say investment banking and capital markets. 

Many so-called “indy research” firms cropped up after Eliot Spitzer’s Global Settlement with Wall Street.  Their reasoning was that institutional investors would stop trusting Wall Street research and would look elsewhere for market research.  It didn’t turn out that way.  Wall Street returned to business as usual and most of those independent research firms are either out of business, have been bought or are barely staying afloat. 

Meredith Whitney no doubt deserves her recent fame and is a talented analyst, but Meredith Whitney Advisors, LLC shouldn’t be celebrated as a gritty upstart ready to fight against the tides of the establishment.  If anything, it shows that its easier to join ‘em, then beat ‘em, and that there’s a lot of work ahead if we want meaningful  reform on Wall Street.

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