National Lampoon Inc., the West Hollywood comedy company, may be sold following a lawsuit over an alleged Ponzi scheme run by its chief executive.
The lawsuit was filed last week by the bankruptcy trustee of Fair Finance Co., a former company in Akron, Ohio, formerly controlled by Timothy Durham, chief executive of National Lampoon.
Creditors forced Fair Finance into bankruptcy last year after the FBI raided its offices. Court documents filed at the time alleged that Durham and a partner ran Fair Finance as a Ponzi scheme and diverted around $200 million from the firm to other businesses they controlled.
Last week, the court-appointed trustee for Fair Finance filed a lawsuit seeking to recover the assets of two investment firms controlled by Durham. The goal is to use the companies’ assets to repay approximately 5,300 people and organizations in Ohio who have loaned money to Fair Finance.
The lawsuit alleges that the Durham businesses perpetrated “a fraud of shocking proportions and consequences”. Durham is personally not a defendant in the lawsuit and has not been charged.
Durham did not return repeated phone calls for comment. In December 2009, he discussed the FBI raid with the Business Journal shortly after it happened and denied any wrongdoing. At the time, he had a house near Beverly Hills.
Although National Lampoon is not mentioned in the lawsuit, he is still part of Durham’s business empire – he is its chief executive and owns around 8% of the shares. As a result, the company could be part of the settlement with creditors, said Kelly Burgan, attorney for Fair Finance’s bankruptcy trustee at Baker & Hostetler LLP in Cleveland.
“Tim Durham has interests in over 70 companies,” Burgan said. “This complaint does not ask for a dollar amount, but we believe we are entitled to everything these companies have – down to the last dollar.”
Burgan alleged that National Lampoon received indirect loans with money from Fair Finance. The money had been lent to other companies or friends of Durham and then lent again to National Lampoon.
Daniel Laikin, former chief executive of National Lampoon and Durham business associate, was the biggest individual loan recipient of the alleged Ponzi scheme. The lawsuit says Laikin owes more than $20 million, including interest, to Fair Finance. He was convicted of securities fraud related to his conduct at National Lampoon and is serving a four-year sentence.
National Lampoon appears to be offering little compensation to creditors. His biggest source of income is paying royalties on decades-old movies like “Animal House.” The company trades on the Pink Sheets, closing Feb. 17 at 5 cents per share. It has a market capitalization of $475,000.
However, Burgan said she has received many phone calls from people in Hollywood interested in buying the National Lampoon name, should the trustee take control of it through the bankruptcy process.
Originally, Fair Finance was a factoring company that borrowed money by issuing certificates to individuals and used the proceeds to buy accounts receivable from companies at a discount. If he could recover the full value of accounts receivable, or something close to it, he would benefit. The certificates were similar to bank certificates of deposit but were uninsured.
The lawsuit alleges that after Durham took control of Fair Finance through a leveraged buyout in 2002, it moved from factoring to making direct loans to its other companies. These loans were never repaid, so Fair Finance began taking money from new investors to pay for maturing certificates.
Durham operated Fair Finance “like a Ponzi scheme, allowing it to plunder every last penny”, the lawsuit states. “Durham admitted to counsel for Fair Finance in 2008 that between 89% and 93% of new funds brought in by investors were ‘used to pay off’ other investors’ debts.”
At the time the court appointed trustee Brian Bash, a partner at Baker & Hostetler in Cleveland, Fair Finance had about a tenth of a cent in liquid assets for every dollar of unsecured debt on its books, according to the suit.
In his December 2009 interview with the Business Journal, Durham acknowledged that Fair Finance had lent money to companies he controlled, but denied any wrongdoing. He said Fair Finance has disclosed to its creditors the nature of the loans and that Ohio regulators have approved each of the company’s investment offers.
Peter Davidson, a partner in the Los Angeles office of law firm Ervin Cohen & Jessup, said the trustee had a strong case for recovering the assets. Davidson is not involved in the case but reviewed the outline for the Business Journal.
“If companies have received money in the form of loans, they must repay them and the administrator of Fair Finance has the right to demand repayment,” he said.
Davidson estimated the bankruptcy court will rule on the lawsuit in 60-90 days, but that won’t be the end of the matter for Durham as the U.S. Attorney’s Office in Ohio has opened an investigation into the criminal charges. surrounding the collapse of Fair Finance.
“The FBI has a longer statute of limitations than the bankruptcy trustee,” Davison explained. “They take their time and make sure they can win a case before they file it.”