Convicted Ponzi Schemer Challenges Use of Wiretaps

Convicted Ponzi Schemer Challenges Use of Wiretaps

 An Indiana man that received a 50-year prison sentence for masterminding a $200 million Ponzi scheme has appealed his sentence, claiming that authorities should not have been permitted to obtain wiretaps of his phone calls with co-conspirators. Tim Durham, along with his co-defendants Jim Cochran and Rick Snow, have filed an appellate brief with the Seventh Circuit Court of Appeals, arguing in part that a series of wiretapped phone conversations that would later prove to be highly damaging at trial were not properly obtained by authorities. Durham received a 50-year sentence after his trial, while Cochran and Snow received a 25-year and 10-year sentence, respectively.

 The Scheme

Durham served as CEO of Fair Finance Company ("Fair Finance"), with Cochran and Snow serving as Chairman and CFO, respectively. Durham and Cochran purchased Fair Finance for $23 million in 2002, representing to investors that they planned to continue the company's highly-successful practice of purchasing finance contracts between businesses and their customers that carried annual interest rates ranging from 18% to 24%. Durham and Fair Finance raised approximately $230 million from the sale of investment certificates to over 5000 investors.

However, instead of continuing Fair Finance's legitimate 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 scheme collapsed in late 2009 with investors owed more than $200 million.

Durham, Cochran and Snow were indicted in March 2011, and chose to contest the allegations at trial. At trial, prosecutors disclosed that they had obtained a series of incriminating wiretapped phone conversations between the trio in which the men discussed ways to save the business and paint a more optimistic picture of Fair Finance's financial health to investors. At one point, Durham tells Cochran that the current financial uncertainty would make it a "perfect time" to have Fair Finance fail. (Some of the wiretaps are available here.)  Based in part on these wiretaps, the men were convicted and received relatively-high sentences for their crimes.

Wiretaps Meet White-Collar Crime

The crux of the trio's argument on appeal is that authorities did not follow the proper procedures required to obtain permission to collect wiretaps, and that the amassed phone calls are inadmissible as a result. Wiretaps, which are quickly becoming a potent weapon in the arsenal of prosecutors investigating white-collar crimes, were historically intended to be a last resort, rather than a first choice, in the prosecution of drug- and gang-related crimes. When Congress passed the Omnibus Crime Control and Safe Streets Act in 1968, it required that the government must first provide a “full and complete statement as to whether or not other investigative procedures have been tried and failed or why they reasonably appear to be unlikely to succeed if tried or to be too dangerous.”  The consequences of failing to heeding this admonition were severe – evidence resulting from an improperly obtained wiretap could be prohibited from use at trial. For organized crime and drug-trafficking cases, this standard was often easily overcome or satisfied, as there existed few alternatives in building a case that did not present a real risk of danger to both authorities and the public.

However, the ability to satisfy the conditions for obtaining a wiretap are not as clear cut in white-collar investigations, where the possibility of satisfying the “too dangerous” prerequisite is drastically reduced since violent acts are typically the exception rather than the norm. Thus, a showing would likely be required that other investigative procedures have been tried and failed. In white-collar crime investigations, criminal prosecutions are often aided by a parallel civil investigation that has the ability to utilize a variety of fact-finding techniques. Thus, rushing to obtain a wiretap before exhausting or at least exploring these avenues could potentially result in a later motion to suppress. Additionally, there is the chance that the subject could learn of authorities’ suspicions, since while these investigations are usually not made public, a subject’s acquaintance could receive a subpoena or even the subject himself could be requested to submit sworn testimony themselves.

The government has had enormous success in using wiretaps to prosecute insider-trading, with the successful prosecution of Raj Rajaratnam essentially opening the floodgates for use of the technique. Notably, Rajaratnam was unsuccessful in suppressing the use of wiretaps at his trial, with both a district judge and a federal appeals court rejecting claims that prosecutors had circumvented the required procedures.

Durham's attorneys plan to employ a similar strategy, arguing that the wiretaps must be suppressed as a result of the failure of authorities to first exhaust all investigative techniques before applying to use wiretaps. Authorities will now have 30 days to file an answer brief.

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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