Petters Ponzi scheme spawns two lawsuits

  • Article by: DAVID PHELPS , Star Tribune
  • Updated: January 9, 2012 - 8:51 PM

Accounting firm says it was a victim of the fraud, but receiver says it failed to do its duty.

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Tom Petters

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A Fargo-based accounting firm is on the offensive, seeking to block a potential $25 million lawsuit stemming from the Ponzi scheme of former Wayzata businessman Tom Petters with a lawsuit of its own against Petters receiver Doug Kelley.

The suit, filed in U.S. District Court in Minneapolis, asserts that the accounting firm, Eide Bailly, is not liable for damages for professional services it provided to Petters' related entities because it, too, was a victim of the fraud.

But, in a separate lawsuit filed Monday on behalf of Kelley, Eide Bailly is accused of malpractice in its relationship with the Petters business entities, known as Thousand Lakes and PAC Funding.

The Kelley suit alleges that Eide Bailly failed to examine or audit the inventory that these businesses claimed was stored in numerous warehouses and did not verify the receipt of cash from purported retail customers for the sale of consumer electronic goods that turned out to be fictitious.

The Kelley lawsuit says the accounting firm showed $1.2 billion in inventory at the two companies when the balance was zero.

"Eide Bailly's opinions were integral in keeping the flow of money continuing for Tom Petters' Ponzi scheme," Kelley said in an interview Monday.

The $3.65 billion Ponzi scheme centered on the purported purchase and sale of nonexistent consumer electronics. Money from new investors would be used to pay profits to old investors and so on.

But the Eide Bailly lawsuit contends that the firm was "tricked" and provided with "elaborately falsified records" by two of Petters' cohorts when it conducted audit and review services for the Petters investment vehicles, which were used to raise funds for the fraud.

The financial reviews provided by Eide Bailly would have been used by the Petters organization to recruit new investors by giving the entities the look of financial stability when, in reality, there was none.

However, the Eide Bailly reports were delivered in June, less than three months before the Ponzi scheme broke and apparently were ''not supplied to any person outside of the Petters conspiracy," according to the accounting firm's lawsuit.

The Eide Bailly suit says Petters' accountant James Wehmhoff and vice president for operations Deanna Coleman both signed written representations to Eide Bailly stating that they were responsible for "fair representation in the financial statements of financial position."

Coleman and Wehmhoff also twice said they had no "knowledge of any fraud or suspected fraud" in the Petters companies, according to the lawsuit. The last of those pledges, the suit notes, was just two months before Coleman went to federal authorities and blew the whistle on the decade-old fraud.

The accounting firm's suit also quotes Coleman's courtroom testimony during the fraud trial of Petters in which she stated that she never told any outside auditors that the business was a fraud and misled them about the company's financial condition.

Eide Bailly contends that Kelley "stands in the shoes" of Petters, Coleman and other co-conspirators and that the firm is protected by the legal doctrine "that no court will aid a thief." Eide Bailly characterizes itself as "just one more victim of the Petters Ponzi scheme."

Eide Bailly attorney Thomas Shroyer of Moss & Barnett declined on Monday to comment on the Kelley lawsuit.

Richard Painter, an ethics professor at the University of Minnesota Law School, said suing a professional firm for services rendered involves "complex issues" but added that outside firms "can be liable" when a client does something illegal.

"The whole point of an auditor is to catch this stuff," Painter said.

The Kelley lawsuit states no specific damage claim other than the return of $45,000 in professional fees paid to Eide Bailly. But the Eide Bailly lawsuit said that attorneys for Kelley have said they will seek "unspecified damages in excess of $25 million."

David Phelps • 612-673-7269

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