Timothy S. Durham, the one-time president and chief executive officer of National Lampoon Inc., asked a federal judge to throw out a U.S. securities fraud case, claiming prosecutors violated federal wiretap laws and rules.
Durham was indicted last year for allegedly cheating 5,000 investors in a $200 million scheme involving the sale of interest-bearing notes by Akron, Ohio-based Fair Finance Co.
His lawyers said prosecutors began wiretapping Durham’s phones before getting permission to do so and asked the grand jury to consider a charge different from those for which the surveillance was authorized.
“The government misconduct in this case shows a complete lack of respect for the rights and the privacy of not only Mr. Durham, but for every one of the dozens of people who were unknowingly overheard and recorded,” his attorneys said.
U.S. District Judge Jane Magnus-Stinson in Indianapolis heard arguments on the dismissal requests today. Durham’s lawyer, John Tompkins of Indianapolis, asked the judge to throw out the indictment or at least suppress the wiretap evidence he said was illegally gathered.
Durham is CEO of the Indianapolis-based leveraged buyout firm Obsidian Enterprises Inc. and a Republican Party fundraiser.
Resigned From Lampoon
He resigned his National Lampoon posts last month, said Cora Victoriano, a spokeswoman for that company, in an e-mailed statement. National Lampoon isn’t mentioned in the indictment.
Also charged are former Fair Finance Chairman James F. Cochran and ex-Chief Financial Officer Rick D. Snow. The three men face 10 counts of wire fraud and one count of securities fraud, all punishable by as long as 20 years in prison, and one count of conspiring to commit those crimes. The court last year entered automatic not-guilty pleas for each defendant.
Durham and Cochran acquired Fair Finance through a holding company in 2002. Operating in Ohio since 1934, Fair Finance provided liquidity to businesses by purchasing their accounts receivable at a discount, according to the March 15 indictment. It raised money by selling interest-bearing certificates to investors.
By February 2005, as Fair Finance continued selling the certificates, it had shifted from providing commercial financing to making loans to its principals, their associates and Obsidian and other entities they controlled, according to the indictment.
“Durham, Cochran and Snow then deceived investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money,” the charging document said.
Durham allegedly spent $250,000 in Fair Finance capital to remodel his garage and another $150,000 at a casino, according to the indictment, while Cochran spent $50,000 on country club fees.
Fair Finance closed after a November 2009 raid by U.S. Federal Bureau of Investigation agents. In February 2010, its creditors forced it into involuntary bankruptcy in Akron.
In a court filing, those creditors accused Durham, Cochran and companies they controlled of taking $176 million in loans from Fair Finance.
‘Lo and Behold’
Tompkins, the defense lawyer, said that after challenging alleged discrepancies in the timing of the warrant and collection of recorded calls detailed in one government log, “lo and behold I was given another surveillance log” ostensibly covering the same dates and showing a different sequence of events.
“I hope my somewhat calm demeanor does not fail to express my outrage at the government’s behavior,” Tompkins told Magnus-Stinson. The government’s “shifting explanations were a clear attempt to capture communications” that were not authorized, he said.
Prosecutors in court papers have called Durham’s misconduct claims frivolous and said the dismissal request should be denied. The U.S. attorneys said they had briefed Durham’s lawyers on how the wiretap operated in this case and that the defense has offered no proof those explanations were inaccurate.
Henry Van Dyck, a U.S. Justice Department lawyer, today called the defense arguments “just ridiculous.”
‘Flip a Switch’
“The government does not have the capability to just flip a switch and listen to a conversation,” Van Dyck said. The phone carrier must relay the call to the FBI for its agents to be able hear and record it, he said.
Magnus-Stinson didn’t rule on Durham’s requests and delayed hearing arguments on other dismissal requests.
Defense lawyers had also argued in court filings that while the court granted prosecutors permission to listen for evidence of bank fraud, wire fraud and money laundering, the government then asked to consider it as proof of the “distinctly separate crime” of securities fraud.
Prosecutors told the court the securities fraud charge is based on the same set of facts as the wire fraud charges.
Durham, Cochran and Snow have also been sued in a parallel civil case by the U.S. Securities and Exchange Commission.
The criminal case is U.S. v. Durham, 11-cr-00042; the civil case is Securities and Exchange Commission v. Durham, 11-cv-00370, U.S. District Court, Southern District of Indiana (Indianapolis).