Last week’s indictment of two top officers at National Lampoon Inc. complicates the outlook for the comedy company that has done business under a cloud for years.
The U.S. Justice Department on March 15 charged Chief Executive Timothy Durham and Chief Financial Officer Rick Snow with 12 counts of wire and securities fraud. The alleged misconduct involved an Akron, Ohio-based finance company that apparently made loans to prop up National Lampoon, a West Hollywood-based film production company, and other Durham-controlled businesses as well as supporting his lavish lifestyle.
The company’s previous chief executive, Daniel Laikin, is serving time on conviction in a securities fraud case. Laikin and Durham were business associates.
Matthew Rosengart, a partner in the West L.A. office of law firm Manatt Phelps & Phillips LLP and who is not affiliated with National Lampoon or the case, said that if Durham acted criminally to benefit National Lampoon, and those actions were within the scope of his job, the company could be found liable. So far, the company has not been charged or named in a legal action.
National Lampoon could be sold even before the legal proceedings end as part of a separate bankruptcy case regarding the finance company. But Rosengart said that the evolving legal situation will complicate any negotiations for a sale.
“Obviously the company is less attractive than it would be otherwise,” he said. “The buyer would have to take into account possible civil liability down the road.”
On the same day as the indictments, the Securities Exchange Commission filed a civil suit seeking $207 million in restitution to defrauded investors against Durham, Snow and another partner. Both Snow and Durham were taken into custody March 16. Snow was released the same day but Durham remained in jail pending a hearing Monday.
Durham and Snow’s legal troubles center on Fair Finance Co., a defunct factoring company formerly controlled by Durham, Snow and another partner.
“These defendants used a company with a decades-long track record in consumer finance to raise money to finance their personal businesses, lavish lifestyles and repay other investors with the promised return in the nature of a Ponzi scheme,” Daniel Hawke, regional director of the SEC in Philadelphia, told the Business Journal. The Philadelphia office has jurisdiction of the case because the alleged crimes took place in its region.
Messages left at National Lampoon offices were not returned.
Roy Black, Durham’s attorney in Miami, did not respond to an e-mail.
Lou Volpano, managing partner at Ascertain-ment Advisory Group, an entertainment consulting firm in Newport Beach, said that many producers and comedians in Hollywood still like the National Lampoon name. In the Laikin and Durham years, a stream of producers and studio executives wanted to help revitalize the company, but soon realized that the top people at National Lampoon didn’t know how to produce movies and even shunned help when offered.
“They never really had anyone working for them who had experience in film production,” Volpano said. “Everyone in Hollywood wondered what those guys were doing running that company.”
National Lampoon enjoyed its biggest successes in the 1970s and 1980s, when it produced films such as “Animal House” and the “Vacation” series.
Accounts receivable
Before Durham’s arrival in 2002, Fair Finance borrowed money by selling certificates to individuals and used the proceeds to purchase accounts receivable from businesses at a discount. It would then collect the receivables, and so long as the collections exceeded the purchase price and expenses, the company made a profit.
After Durham gained control of Fair Finance through a leveraged buyout, he switched from factoring to making direct loans to himself, partners and companies they controlled. The loans were never repaid, so Fair Finance allegedly started taking money from new investors to pay certificates that came due.
Laikin, who was the main recipient of loans, was convicted of manipulating the price of National Lampoon’s stock and is serving a four-year-sentence.
Although National Lampoon isn’t named in either the Justice Department indictment or the SEC suit, the company may have benefited from the Fair Finance scam through loans Durham made personally to the company. Most of the $230 million in allegedly fraudulent loans made by Fair Finance went to Durham, his associates or two investment companies he owned, and then reloaned to companies Durham controlled.
In addition to National Lampoon, Fair Finance loans were made to Durham’s car magazine, restaurants, Internet companies, rubber reclaiming company and bus leasing firm.
Meanwhile, Durham was living a lavish lifestyle. He took out a $250,000 loan to remodel his garage and a $150,000 loan to spend at a casino. Together, the partners purchased a $3 million private jet, a $6 million yacht and collectible cars worth $7 million.
“After receiving loans from Fair, many of these businesses failed and were never able to repay the money they borrowed, while others, with the benefit of continued loans from Fair, struggled as unprofitable entities for years,” the Justice Department indictment states.
Currently, National Lampoon’s shares trade on the Pink Sheet at a price of 3 cents a share.
