Those who "knew or should have known'' that Petters' payments were fraudulent could get mauled.
The preliminary toll is in. And the numbers are huge. But it likely will be years before results are known.
In consolidated bankruptcy proceedings for the corporate estate of Tom Petters, there are now 201 lawsuits seeking upward of $17 billion from people who invested with the jailed former Wayzata businessman.
Objects of the suits include investors in the $3.65 billion Ponzi scheme orchestrated by Petters for more than a decade, employees who worked for such enterprises as Petters Group Worldwide, Sun Country Airlines and Polaroid, and nonprofits that were the recipients of Petters' purported philanthropic largesse.
Claims include a $25,000 donation to the Trent Tucker Non-Profit Organization; $3.2 million in bonuses and compensation from former Petters Group Worldwide President and onetime Polaroid CEO Mary Jeffries, and $2.7 billion from Frank Vennes, the former Shorewood businessman and convicted felon who helped steer smaller investors into the Petters operation.
Blue-chip lending institutions such as J.P. Morgan Chase and General Electric Capital Corp. are also on the clawback list. The claim against J.P. Morgan totals more than $241 million and the claim against GE tops $293 million.
The next wave of lawsuits will include the professional groups that did business with Petters -- lawyers, bankers and accountants -- that collected fees and retainers.
The first wave of suits were filed in whirlwind fashion as attorneys for the bankruptcy estate faced the end of a two-year window for filing the suits on Oct. 10.
The Petters clawback effort, while ambitious, involves about one-fifth the number of expected clawback suits to be generated in the Bernard Madoff Ponzi scheme, where losses exceeded $65 billion.
The term "clawback'' is bandied about more these days because of the preponderance of Ponzi schemes that have collapsed in recent years. For years, the term has been found in the "fraudulent transfer" section of the U.S. bankruptcy code, which allows trustees to go after transactions in which fraud occurred. More recently, it is also used in reference to executive compensation contracts. Under the federal Sarbanes-Oxley Act, companies can recover payments made to CEOs and others if executive misconduct is later discovered.
Bankruptcy trustee Doug Kelley says it will take more than a year to resolve the claims that these individuals, hedge funds and organizations earned profits from the investments of others, not from a legitimate business enterprise as outwardly advertised.
So-called phantom profits -- the amount earned above the original investment -- total about $1 billion, but Kelley's 20-lawyer bankruptcy team is working on the legal theory that all funds transferred between investors and Petters -- profits and principal -- were tainted if the investor knew or should have known that the operation was a fraud. That's how Kelley reaches $17 billion.
None of the defendants in the 201 cases filed to date has responded to the allegations yet. U.S. bankruptcy Judge Gregory Kishel has given attorneys for those parties until the end of January to file their answers to the trustee's lawsuits.
Whether the profits, bonuses and donations still exist is doubtful, however.
Minneapolis attorney Mark Thieroff represents the nonprofit of former basketball great Trent Tucker. Thieroff said groups like Tucker's will be hard-pressed to come up with money that they accepted in good faith.
"They never knew when they got the money that there was a problem with the money," Thieroff said.
'Really, really aggressive'
Similarly, Petters employees who received bonuses are also confused about why they might have to pay them back, said Tom Heffelfinger, the former U.S. attorney for Minnesota, who now represents three former Petters executives who are being asked to return $10.6 million collectively.
"This is an unprecedented move and it is really, really aggressive," he said. "These are the people who went to work every day. All of a sudden they [the trustee] want it back. Most don't have the means to pay it back without selling their home. It's a huge hardship."
Heffelfinger blamed the clawbacks on the creditor's committee in the bankruptcy case because that group sustained the largest losses.
"The trustee is under a lot of pressure to recover as much as he can from wherever he can," Heffelfinger said.
Kelley, however, describes the bonuses paid to Petters employees not involved in the Ponzi scheme as "hush money."
"They don't ask questions and they don't look too hard to see where it came from so they can get a bonus the next year," he said. "You receive $200,000 in salary and get a $1 million bonus? You know that's not the retirement plan."
'Test trials expected'
Kelley said employees will be given an opportunity to justify what they received.
Kelley said he expects the bankruptcy court and the defendants to do some test trials with a limited number of cases to see how they turn out and make decisions to proceed based on those outcomes. "You don't want to waste money of the [Petters] estate chasing money you can't get."
And then there's Vennes, the shadowy Petters associate who, after funneling large amounts of funds into the Petters operation, was forced into receivership by a federal judge along with Petters.
Vennes has never been charged in the criminal case involving Petters, although he was captured on a tape recording when Petters -- who is serving a 50-year prison sentence on fraud and conspiracy charges -- and his co-defendants were discussing the fraud.
Since the Ponzi scheme collapsed two years ago, a court-appointed receiver has been disposing of Vennes' assets, including property, in order to repay victims. However, in two years, receiver Gary Hansen has collected $6.3 million, far less than the multiple billions sought by Kelley, although considerable real estate owned by Vennes is still on the market.
Dave Vang, chairman of the Finance Department at the Opus College of Business at St. Thomas University, said the clawback efforts are an act of desperation "to find funds from wherever you can."
But the Petters bankruptcy estate will likely collect pennies on the dollar "at most."
"You have a two-prong problem here," Vang said. "One is the legal challenge and, two, most of the money is not there anyway."
David Phelps • 612-673-7269