Just as Tom Petters' most recent appeal for a reduced sentence was denied on Monday, another chapter in the Petters saga was being written by a jury in U.S. District Court in Minneapolis.

Marlon Quan, a hedge fund manager and key investor in the infamous Petters Ponzi scheme, had been sued by the federal government for misleading clients whose money he put into it.

The jury began deliberations in the civil case Monday after hearing closing arguments from attorneys for Quan and for the Securities and Exchange Commission, which is seeking the return of purported ill-gotten gains, including $33 million in commissions from Quan's deals with the former Wayzata businessman.

Also Monday, U.S. District Judge Richard Kyle denied a last-ditch attempt by Petters to get another shot at an informal plea agreement that would reduce his current prison sentence from 50 to 30 years, grant him bail pending a decision on that request and remove Kyle from the case because his son works for a law firm that once represented Petters on business matters.

"All of the arguments fail on the merits," Kyle wrote.

After 13 guilty pleas and convictions in criminal cases related to the Petters conspiracy, the Quan case is the first lawsuit tied to it to go to trial.

"Marlon Quan lied to investors to make money," said SEC attorney Charles Kerstetter in his summation to the jury. "He decided that his relationship with Tom Petters was more important than his investors. He chose not to protect his investors."

Played for 'fools'

According to evidence submitted during a two-week trial before U.S. District Judge Ann Montgomery, Quan's clients lost $221.4 million when the Petters fraud collapsed in September 2008. The unraveling came when longtime Petters associate Deanna Coleman told federal authorities about the scheme, which turned out to be the largest business fraud in Minnesota history.

Quan's attorneys argued that Quan and his Connecticut-based hedge fund company "were played for fools" by Petters and his collaborators, who they said showered Quan with forged documents to make phony business transactions look real.

"The fund was defrauded by Tom Petters — not Marlon, Tom Petters," said Christopher Casamassima in his closing statement.

Casamassima also argued that it was not until Quan sued Petters in August 2008 over nonpayment of notes that the decadelong fraud came to light.

"The SEC failed miserably," Casamassima said of the agency's enforcement duties. "No one in the government had any idea that Tom Petters was running one of the largest Ponzi schemes until Deanna Coleman walked into the doors of this [federal] building [two weeks later]."

The trial included testimony from investors and Coleman.

In addition to Quan, defendants in the case include Quan's wife, Florene, and hedge funds Acorn Capital Group and Stewardship Investment Advisors.

Between 2001 and 2008, Quan invested $578 million with Petters, according to the government.

Funds had no protection

On the surface, the funds provided by Quan and others were supposed to be used to purchase consumer electronics at the wholesale level for resale to big-box retailers at a profit. However, no electronic goods existed, sales to retailers were fictitious and money from new investors was used to pay off old investors, while Petters used some of the funds for other business investments.

The SEC lawsuit, filed in 2011, alleges that Quan misrepresented to investors the safeguards that were in place to minimize risk, including the use of a lockbox account for receipt of funds from retailers, outside audits, due diligence reviews and insurance for short-term notes.

The lawsuit also alleges that Quan failed to inform investors when Petters began missing payments on short-term notes in late 2007 and into 2008. Eventually, Quan renegotiated his funds' short-term notes into long-term loans, the suit says.

"When the Petters empire collapsed, there were no protections," SEC attorney Kerstetter said.

But Quan was a victim who "bankrupted his own company," believing the notes he received from Petters were legitimate, said Bruce Coolidge, another of Quan's attorneys.

"Marlon's hedge fund was not a fraud," Coolidge said, noting that Quan also invested money from his wife, his sister and his employees' retirement fund with Petters. "These are the actions of a victim, not a perpetrator."

David Phelps • 612-673-7269