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Continued: Fooled by pal Petters, restaurateur now bankrupt

  • Article by: DAVID PHELPS , Star Tribune
  • Last update: May 21, 2012 - 8:32 AM

They were best of buddies, mates, as the British would say.

Tom Petters and Dean Vlahos laughed together and anguished together. They spent lavishly on each other and did joint business deals.

Today, Petters sits in the federal penitentiary in Leavenworth, Kan., serving a 50-year sentence brought on by the demise of his $3.65 billion Ponzi scheme.

And because of his association with Petters, Vlahos is trapped in his own financial box, virtually broke and owing millions of dollars that he has no hope of repaying.

Earlier this month, as Petters' last direct appeal for a new trial was denied by the U.S. Supreme Court, Vlahos was in U.S. Bankruptcy Court in Minneapolis making a Chapter 7 filing to wipe away more than $11.8 million in obligations.

It has been a stunning fall for Vlahos, the dashing Minneapolis restaurateur who created Champps, the successful sports bar chain, then developed Redstone, the upper-end casual dining chain, and more recently unveiled BLVD, a Minnetonka bistro he manages but doesn't own.

In his bankruptcy petition, Vlahos lists assets of $45,812; no property ownership; just $200 cash on hand, and a wardrobe worth $500 -- a fraction of what the stylish restaurateur once spent on clothes. He owes back taxes to the state and federal governments of almost $240,000.

"He's embarrassed in the classical sense," said Vlahos attorney Thomas F. Miller of Wayzata. "He had no choice but to file. He needs to get rid of that debt and move on."

Through Miller, Vlahos declined to comment further.

But Vlahos has not been penniless. According to the bankruptcy filing, he earned $254,000 in 2010 and $390,000 last year from Redstone and BLVD. But at the same time, a half-dozen savings and checking accounts were seized by the IRS and the Minnesota Department of Revenue.

His largest listed liability is $7.6 million owed to Home Federal Savings Bank of Rochester, where Vlahos had a long-term banking relationship, according to Miller. The bank, through its attorney Zachary Crain, declined to comment.

But most of the amounts in the 14-page list of creditors are simply marked as "unknown."

Also not specifically itemized in the filing is a $39 million claim against Vlahos and his ex-wife Michelle by Petters bankruptcy trustee Doug Kelley, who is attempting to claw back millions of dollars in alleged "false profits" from Petters' investors. Of that amount, Kelley is seeking more than $23 million in so-called false profits and more than $15 million in principal.

"People like Dean Vlahos pose a dilemma to my bankruptcy estate," said Kelley, who has been attempting to recover assets for Petters' creditors for more than three years. "They took out astronomical amounts of money [as profits] and now claim they have virtually nothing left. I have no confidence in their disclosures. If the money is gone, where did it go?"

Kindred spirits

For the years before and after he met Tom Petters, Vlahos lived a rock-star lifestyle as a successful innovator in the restaurant business. He drove fancy cars and had a 13,000-square-foot home in Deephaven and properties in Florida worth more than $20 million.

Vlahos' Champps was one of the nation's very first sports bars. He sold it to a national firm in 1996 in a stock deal worth $22 million to him at the time. Redstone was described as a dressed-up version of Champps that grew into a chain of five until the bad economy and Vlahos' Petters problem converged.

They met when Petters was selling hangover pills to bars and restaurants and Vlahos still owned Champps. For a decade afterward, Vlahos and Petters were pals. They socialized together, traveled together and exchanged gifts on birthdays and at Christmas. Vlahos once gave Petters a Bentley automobile; Petters gave Vlahos expensive watches. Vlahos also served as chair one year of an annual gala Petters threw in Minneapolis to raise scholarship funds in the name of his late son.

"I never had a friend like that before," Vlahos testified in Petters' fraud trial in 2009.

Petters outlined his business model to Vlahos in 2001 and asked him to invest. The idea, according to Petters, was to buy consumer electronics at a manufacturer's discount and sell them at a profit to big-box retailers.

On the promise of a 36 percent return, Vlahos signed up and eventually invested $16 million. It was a lucrative investment, Vlahos testified.

"We were very close, we talked about very personal things," a sometimes emotional Vlahos said from the witness stand. "When I was diagnosed with cancer, I relied on Tom. When his son was killed, we went to Florence [Italy] for the murder trial."

Taken for $26 million

Vlahos testified that he never knew the consumer electronics operation was a fraud and that no products were being bought or sold. Indeed, the profits paid to old investors came from the money given to Petters and his partners by new investors.

In late 2007, Petters was desperate for money as his Ponzi scheme began to unravel. He asked Vlahos for $10 million to purportedly purchase inventory from troubled Circuit City. Vlahos got two banks to provide him with the money, which he gave to Petters.

But it was too little too late as authorities got wind of the scheme and shut it down. In the end, Vlahos said he was out $26 million -- his original investment of $16 million plus the 11th-hour loan of $10 million.

"That was Dean's only financial problem," said attorney Miller. "But he's a classic entrepreneur. He'll rise again."

BLVD, which was financed by Vlahos' friend Gary Holmes, the president and CEO of developer CSM, remains open. Vlahos is paid $11,538 a month to be its manager, according to the bankruptcy filing.

Until the bankruptcy, Vlahos' role at Redstone was that of a small minority shareholder, although news of the bankruptcy caused concern that the restaurant was in trouble.

"We had to call all our major suppliers to tell them we're good," said Redstone attorney William Mower, noting that Redstone is in talks with the city of Maple Grove about putting a restaurant in the Shoppes at Arbor Lakes.

"Sit down with Dean. He's a charming salesman," said Mower, who worked with Vlahos at Redstone. "Somebody else will take a chance on him."

David Phelps • 612-673-7269

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