Fallout continues in the Tom Petters Ponzi scheme two years after its collapse.
On Thursday the Securities and Exchange Commission (SEC) charged two Florida-based hedge fund managers and their funds with defrauding investors out of $1 billion, or nearly one-third of the total losses in the $3.65 billion Petters fraud.
Palm Beach Capital Management and fund managers Bruce Prevost and David Harrold were accused by the SEC in a civil action of violating federal securities laws by misleading investors about the quality and status of their funds invested with Petters.
The SEC complaint said that the fund managers "pocketed" $58 million in fees between 2004 and 2008 when they were making the Petters investments.
Investors with Palm Beach Capital Management and an affiliate fund were characterized by the SEC as individuals, foundations, family trusts and other hedge funds from across the United States.
"Prevost and Harrold portrayed themselves as guardians of their hedge fund investors while in fact they facilitated Tom Petters' fraudulent scheme through lies and deceit," said Robert Khuzami, director of the SEC's Division of Enforcement.
The SEC said investors with the Palm Beach fund thought they were financing consumer electronic goods that were being sold to big-box retailers and that the retailers, in turn, would pay the funds directly. In reality, the funds came from Petters, who raised the money from newer investors.
"Prevost and Harrold did not disclose this material fact to investors in the funds and instead continued to lie about the operation," the SEC said in a statement.
By 2008, as the Ponzi scheme began to collapse, Prevost and Harrold began exchanging old loan documents from Petters with new ones to make it look as if business was still profitable, the SEC said, while telling investors that the funds were generating "the same steady profits" as before.
The SEC is seeking a permanent injunction against the two fund managers, disgorgement of profits and an unspecified financial penalty.
Harrold and Prevost could not be reached for comment.
Petters was sentenced to 50 years in prison in April after being found guilty on 20 counts of wire and mail fraud.
David Phelps • 612-673-7269
