Hundreds of millions are at stake as the trustee seeks to consolidate affiliates in an effort to claw back profits from Petters investors.
Deanna Coleman, the woman behind the crash of the biggest Ponzi scheme in Minnesota history, is scheduled to make her first extended public appearance in more than two years Monday when she takes the witness stand in a key bankruptcy proceeding where hundreds of millions of dollars are at stake.
Coleman, who was released from prison earlier this fall, will testify in the same St. Paul courthouse where she testified in 2009 against Tom Petters in a trial that resulted in a 20-count guilty verdict and a 50-year prison sentence for the former Wayzata businessman.
Coleman will be the lead witness for the trustee in the complex and contentious Petters corporate bankruptcy case involving several major investors and lenders whose profits during the Ponzi scheme's existence have become the target of lawsuits seeking the return, or "clawback,'' of profits they received.
Technically, the three-day proceeding involves a motion by attorneys for trustee Doug Kelley to consolidate certain affiliates of Petters Cos. Inc. (PCI) with the remainder of the Petters bankruptcy estate in order to proceed as one entity in the clawback process.
Coleman brings intimate knowledge of the PCI Ponzi scheme to the witness stand. She was Petters' top lieutenant in the decade-long financial go-around and was closely involved in moving funds to and from investors.
Coleman also helped oversee the fraud's dummy invoices and purchase orders that were ginned up to make it appear that the purported purchase and resale of consumer electronic goods was legitimate, as investors believed, when none of the goods actually existed.
Coleman helped bring down the operation in the fall of 2008 when she went to federal authorities, told them about the multibillion-dollar operation and agree to wear a wire to surreptitiously tape-record conversations inside PCI offices. Those tapes became part of the evidence used to convict Petters in 2009.
As part of a plea agreement with prosecutors, Coleman received a one-year prison sentence, the lightest sentence of any of the Petters' associates in the operation. She was released in September and is said to now be living in northern Minnesota.
Trustee Kelley asserts that the eight affiliate companies, known as special-purpose entities (SPEs), were shell companies and that all the funds invested in them were commingled in PCI and used to repay investors with so-called phantom profits.
Those opposing the trustee's consolidation motion -- large investment funds and banks -- contend they invested specifically with special-purpose entities that were separate from PCI, with their own books and records and sometimes directors and to lump them together would be prejudicial to them.
Coleman, the trustee said in a brief unsealed Friday, "will testify that each of the SPEs was managed by Petters and her, and they made all relevant executive decisions on each SPE's behalf ... Coleman also will testify that the SPEs maintained the same office location and phone number with PCI and had no independent employees."
But Epsilon/Westwood Parties, one group of hedge fund investors opposing the trustee, said in a brief, "Substantive consolidation is an extreme remedy of last resort. It merges separate debtor entities, pooling their assets and liabilities and inevitably causing some creditors to recover significantly less than they otherwise would receive."
The investment group also said it is clean because it made its last loan to its Petters special purpose entity in 2006 and was repaid in early 2007.
"That was long before anyone discovered or suspected that Tom Petters was engaged in a massive fraud," the brief said.
But the attorney representing unsecured creditors in the Petters bankruptcy said the trustee is correct to pursue consolidation.
David Runck of Fafinski Mark & Johnson said consolidation allows all victims of the Ponzi scheme to be treated equally.
"While most investors suffered devastating losses, others received hundreds of millions of dollars in profits that Petters stole from other investors," Runck said. "Why should fraud victims be treated differently based solely on which shell company they happened to invest with?"
David Phelps • 612-673-7269