Argued January 21, 2014
[Copyrighted Material Omitted]
Appeals from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:11CR00042 -- Jane Magnus-Stinson, Judge.
For United States of America, Plaintiff - Appellee (12-3819): Winfield D. Ong, Attorney, Nicholas E. Surmacz, Attorney, Office of The United States Attorney, Indianapolis, IN; John Alexander Romano, Attorney, Department of Justice, Criminal Division, Washington, DC.
For Timothy S. Durham, Defendant - Appellant (12-3819): Leonid Feller, Attorney, James H. Mutchnik, Attorney, Kirkland & Ellis Llp, Chicago, IL.
For United States of America, Plaintiff - Appellee (12-3833): Winfield D. Ong, Attorney, Nicholas E. Surmacz, Attorney, Office of The United States Attorney, Indianapolis, IN; John Alexander Romano, Attorney, Department of Justice, Criminal Division, Washington, DC; Henry Van Dyck, Attorney, Department of Justice, Criminal Division, Fraud Section, Washington, DC.
For James F. Cochran, Defendant - Appellant (12-3833): Michelle L. Jacobs, Attorney, Biskupic & Jacobs, S.C., Mequon, WI.
For United States of America, Plaintiff - Appellee (12-3867): Winfield D. Ong, Attorney, Nicholas E. Surmacz, Attorney, Office of The United States Attorney, Indianapolis, IN; John Alexander Romano, Attorney, Department of Justice, Criminal Division, Washington, DC.
For Rick D. Snow, Defendant - Appellant (12-3867): Jeffrey A. Baldwin, Attorney, Voyles, Zann, Paul, Hogan & Merriman, Indianapolis, IN.
Before KANNE and SYKES, Circuit Judges, and GILBERT, District Judge.[*]
Sykes, Circuit Judge.
Timothy Durham, James Cochran, and Rick Snow were convicted of perpetrating a widespread financial fraud that caused more than $200 million in losses to thousands of victims, many of them elderly or living on modest incomes. After taking control of Fair Finance Company, a previously well-established and respected business, the trio quickly turned it into their personal piggy bank. They used money invested in Fair to support their lavish lifestyles and to fund loans to related parties that would never be repaid. When the
company's auditors raised red flags about its financial status, the auditors were fired. When Fair experienced cash-flow problems, it misled investors and regulators so it could keep raising capital.
Eventually the scheme began to unravel. One of the company's directors, himself under investigation in a separate matter, alerted the FBI that Fair was being operated as a Ponzi scheme. After an investigation, the FBI seized Fair's computer servers and arrested Durham, Cochran, and Snow. A jury convicted them on various counts of conspiracy, securities fraud, and wire fraud.
They now appeal their convictions and sentences on several grounds. We reject all of their challenges save one. The government failed to enter into the trial record key documentary evidence supporting two counts of wire fraud against Durham. It was clearly an oversight, but the mistake leaves a crucial gap in the evidence on those counts. Accordingly, we reverse Durham's convictions on Counts 2 and 5 of the indictment and remand for resentencing without those counts in the mix. In all other respects, we affirm the defendants' convictions and sentences.
Before the events in this case transpired, Fair Finance was a respectable company and had been in the business of providing financial services since the Great Depression. By the early 2000s, the company primarily focused on purchasing consumer receivables. Fair would purchase installment contracts from businesses with a single, up-front payment at a discounted rate. This arrangement provided working capital for the business and a profit for Fair--the difference between what it paid for the contract and what it ultimately collected on it.
Fair raised money to purchase these receivables by selling what it called " investment certificates" --a form of subordinate debenture that essentially functioned as a certificate of deposit without FDIC insurance. Certificate holders were paid interest at regular intervals. When a certificate came due, Fair sent a check to the holder for the interest earned before maturity. At that point the holder could redeem the original face value of the certificate or renew it, which involved redeeming an old certificate and purchasing a new one. If a holder took no action at expiration, the certificate would continue earning interest at a set rate. Before 2002 most certificates were offered for a six-month term and were no larger than $50,000 in value. The latter limitation was meant to ensure that the company could redeem the certificates without encountering liquidity problems.
Certificates were sold exclusively to consumers in Ohio, and authorization by the Ohio Department of Securities was required. With each request for authorization, Fair needed to submit an offering circular disclosing its financial status and the investment's risks. The circular would then be distributed to potential investors once the new issuance received regulatory approval. According to data gathered by Fair, a majority of its investors were elderly and many lived on modest incomes. By all accounts, Fair was a trusted Ohio financial institution.
Timothy Durham and James Cochran bought the business in 2001 through a holding company formed for that purpose and named Fair Holdings, Inc. Durham was its CEO, Cochran was its COO and chairman of the board, and Rick Snow was its CFO. Snow already had been working at Fair and soon became CFO for another Durham-owned company, a private equity fund called Obsidian Enterprises. At the
time of the acquisition, Fair had assets of $50 million in receivables and liabilities of $38 million in certificates.
Fair soon dramatically increased its sale of certificates and offered them for longer terms (up to 5 years), higher amounts (up to $200,000), and at higher interest rates. Within a year and a half, its certificate liabilities doubled. The increased capital, however, was not used to expand its receivables business, which grew slightly after the purchase but soon started to taper off. Instead, the money raised was used to fund millions of dollars in loans, often made through Fair Holdings, to Durham and Cochran, their relatives, and related companies (particularly Obsidian and another Durham-owned holding company named DC Investments).
Much of this money funded Durham's and Cochran's extravagant lifestyles. Loan proceeds paid for their homes, cars, and parties. For example, Durham hosted a Playboy-themed party using $110,000 of Fair money. Likewise, Cochran used $783,867 to fund a real-estate purchase. Even loans to other companies served to support Durham and Cochran's spending habits; for example, a Fair circular reflected a loan of more than $9 million to the company that held Durham's personal car collection. Fair rarely received any payments on these loans, most of which were not made on commercially available terms, were poorly documented, and were amended as time went on to increase the debtor's borrowing limit. Yet Fair's circulars continued to list these loans as assets supporting the sale of certificates.
Fair Holdings's accountants soon began questioning its financial statements, raising numerous concerns about the third-party loans and noting that they lacked sufficient collateral. The auditors also had doubts about the holding company's viability as a going concern. The defendants terminated the services of two different accounting firms that refused to issue unqualified audit reports. After that the holding company's financial statements were unaudited and replete with misrepresentations.
Things began to fall apart after the financial crisis in the fall of 2008. In Durham's words, " every company" in his organization was " running on vapor." Facing cash shortfalls, Fair delayed payments of interest and principal to investors, blaming computer and banking issues. It fell behind on payments to dealers and vendors as well. Investors began to worry; Fair had historically made interest payments on time, and the financial press started criticizing Durham's management. In February 2009 the Ohio Department of Securities opened an investigation. By this time Fair's 2008 authorization to issue $250 million in certificates was almost used up. Without the ability to sell more certificates, Fair was unable to generate new income. Desperate for cash, Fair sought regulatory authorization to issue another $250 million in certificates in October 2009. It would never be granted.
As problems mounted, the FBI began a criminal investigation into Fair's activities after receiving a proffer from a Fair board member who was targeted in a separate investigation. The board member disclosed that Fair was being operated as a Ponzi scheme. The FBI investigated for approximately eight months, then sought and obtained authorization to tap Durham's phone. Recorded phone calls revealed many discussions about how to hide Fair's true financial status from regulators and investors. In one conversation Cochran advised against letting any employees go because they " know a little bit too much" that could be used to " bust" them. The three executives discussed plans to
" vanish," " disappear," " vaporize," and " wipe off" bad debts from the company's regulatory disclosures. The FBI used this evidence to obtain a warrant to search Fair's office and seize its computer servers, effectively shutting the company down. The warrant was executed on November 24, 2009. Fair's operations ceased, and it soon went into bankruptcy. More than 5,000 investors filed claims totaling approximately $215 million. The trustee recovered only $5.6 million in assets.
Durham, Cochran, and Snow were charged with conspiracy to commit wire fraud and securities fraud, 18 U.S.C. § 371 (Count 1); wire fraud, 18 U.S.C. § 1343 (Counts 2-11); and securities fraud, 15 U.S.C. § § 78j(b), 78ff; 17 C.F.R. § 240.10b-5 (Count 12). All three were convicted of conspiracy and securities fraud. Durham was found guilty on all ten counts of wire fraud, Cochran on six wire-fraud counts (4, 6, and 8-11), and Snow on three wire-fraud counts (4, 6, and 7). Durham and Cochran received within-guidelines sentences of 50 years and 25 years, respectively. Snow was sentenced to a below-guidelines term of 10 years. The court also ordered the defendants to pay $208,830,082.27 in restitution, for which they are jointly and severally liable.
The defendants attack their convictions and sentences on multiple grounds. Durham challenges the sufficiency of the evidence on two counts of wire fraud. All three defendants challenge the sufficiency of the wiretap application. They also argue that the district court erroneously refused to give their proposed theory-of-defense jury instruction on the securities-fraud count. They claim that the prosecutor ...