INDIANAPOLIS — Indiana Republicans struggling to re-establish their dominance in 2010 could face a tougher challenge because of a federal investigation into the financial dealings of a wealthy Indianapolis businessman and major party donor.

The scrutiny of Timothy Durham already has forced one Republican candidate for Marion County sheriff to drop out and has turned up the heat on the county's top law enforcement official, who has both personal and financial ties to Durham. Many other Republicans who received donations from Durham are trying to distance themselves amid concerns that the investigation could hurt the GOP's chances of winning back control of the Indiana House next year.

"It's a potential big problem," said Brian Vargus, a political science professor at Indiana University-Purdue University at Indianapolis. "Right now it's a sore that is open, and Republicans are trying to figure out how deep the wound is."

Federal authorities raided the offices of Durham's Indianapolis-based Obsidian Enterprises, a leveraged-buyout firm, and Fair Financial in Akron, Ohio, in late November. They suspect that one of his companies bilked investors in what amounts to a Ponzi scheme.

The Securities and Exchange Commission has subpoenaed the financial records of Dallas-based CLST Holdings Inc., for which Durham serves as a board member. The subpoena requests documents that include transactions between CLST and Fair Finance Co.

A lawsuit filed last week seeks to recover $200 million that people in Ohio loaned to Fair Finance so it could buy contracts from businesses like health clubs and condominiums. It then paid an interest rate back to the investors. The lawsuit alleges in part that Durham and co-owner Jim Cochran have used the company like a personal bank, loaning money meant for investments to themselves. Durham and Cochran bought Fair Finance in 2002.

Durham, whose flashy lifestyle includes a 30,000-square-foot estate, a yacht, private jets and a collection of classic and exotic cars, hasn't been charged with a crime. But state Democratic Chairman Dan Parker says recipients of Durham donations should return the money anyway.

"Clearly this is a very troubling case, and these folks should do the right thing now that they know the source of these funds are questionable," Parker said.

Key beneficiaries of Durham's largesse include Republican Gov. Mitch Daniels, who has received $195,000 from Durham since 2003, and the state Republican Party, which says it received $211,200 from Durham from 2004 to 2008.

Daniels said his contributions from Durham have been spent, "so there is nothing to return." A spokesman for Republican Sen. Richard Lugar, who received at least $3,700 from Durham, gave a similar response.

But other GOP politicians are scrambling to avoid any appearance that the money is tainted.

Republican candidate for Marion County sheriff Tim Motsinger returned all financial contributions and loans that his campaign got from Durham, who served as his campaign finance manager. He said the loss of funds made him unable to compete and withdrew from the race.

State Sen. Mike Delph, R-Carmel, who has received $10,000 from Durham, said his campaign would take action "if it becomes clear that there is a problem with the money." Those actions could include returning the money, donating it to a victim's compensation fund or donating it to charity, he said.

Republican Attorney General Greg Zoeller, who received $11,000 from Durham, has told his campaign treasurer to put that amount in a segregated account pending the investigation's outcome.

Some other top Republican leaders aren't talking, including Indiana House Minority Leader Brian Bosma, who received $10,000 from Durham, and state Republican Party Chairman Murray Clark. Besides donating to the state party, Durham has contributed at least $50,000 to the Indiana House Republican Campaign Committee since 2004.

The Republican most in jeopardy, however, could be Marion County Prosecutor Carl Brizzi.

He and Durham are close friends, and Brizzi has acknowledged that Durham paid for him to attend the 2007 Super Bowl.

Brizzi said he received $140,000 in cash, along with transportation and tickets to events worth about $30,000, in the years leading up to his 2006 re-election campaign. He enlisted Durham as his campaign finance chairman.

He said he has since received $2,500 in cash and another $17,000 in in-kind services. The direct contributions have been set aside, and his campaign will decide whether to return the money when the federal investigation ends, he said.

Brizzi, who has yet to say whether he will seek re-election next year, has said he feels bad for his friend but that no one should jump to conclusions about the investigation. While there are no allegations against him, he acknowledged in a Facebook posting that he should have exercised "greater due diligence" before agreeing to serve on the board of Fair Financial.

Brizzi said he resigned that post after a month upon learning that the Indianapolis Business Journal planned a story raising questions about Durham's dealings.

Durham's attorney, John Tompkins, said Durham believes he has done nothing wrong but declined further comment. Durham has noted previously that people flock to him for donations, even after an article about a MySpace page showing pictures of two naked women kissing during a 2007 pajama party.

"You know, that article ran about my R-rated MySpace page, and somehow I still get a lot of politicians wanting my money," he told Indianapolis Monthly magazine. "Apparently, they didn't see it. I'm going to give it to them as they come through the door now. 'Didn't you see this? I'm not someone you want to be associated with! I'm not a good influence!'"

State Sen. Beverly Gard, R-Greenfield, who received $1,174 in catering costs from Obsidian Enterprises for a 2008 fundraiser, said it's too early to say how Durham's influence will play out in 2010.

But she said there's already at least one area in which the fallout is apparent.

"Obviously, nobody is going to be taking any money from him, so that's a major contributor they won't have anymore," Gard said.

Though Durham's donations have also benefited a handful of Democrats, including U.S. Rep. Baron Hill, Democrats are sure to make the investigation a campaign issue.

"There are some very worried Republicans," Vargus said. "When the public hears about money deals that look strange, they get very angry, because that is exactly the thing they don't like about politics."

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