The Ponzi scheme-related hedge fund is locked in a billion-dollar legal battle.
A billion-dollar legal battle is brewing in Florida over who knew what and when about the decade-long Ponzi scheme operated by former Wayzata businessman Tom Petters.
The bankruptcy trustee for two failed Florida hedge funds that lost more than $1 billion in the Petters operation accuses General Electric Capital Corp., a major financing firm, of failing to warn regulators or law enforcement that it detected the fraud eight years before the scheme crashed in late 2008.
“GECC could have reported it and stopped Petters cold, saving victims billions of dollars,” said Michael Budwick, the attorney for Palm Beach trustee Barry Mukamal. “But instead, GECC joined the fraud and knowingly got paid tens of millions of dollars from defrauded investors. That is outrageous.”
GE contends its financial relationship with Petters was long over by the time the hedge funds, known as the Palm Beach funds, started investing with him. In a court filing, GE asserts that the hedge fund managers failed to perform adequate due diligence and were themselves guilty of fraud for misleading their own investors.
GE Capital ‘‘has not and has never been a conspirator with Petters in any way and did not know about the existence of or agree to be a member of the alleged ‘conspiracy,’ ” the company said in court papers.
Petters was found guilty on 20 counts of fraud, conspiracy and money laundering in 2009 for his role as ringleader of the $3.65 billion Ponzi scheme. He claimed to be buying consumer electronics and other goods from wholesalers and reselling to big-box retailers such as Costco and Sam’s Club. In reality, orders were being faked money from new investors was used to pay off earlier investors.
Petters’ three-year relationship with GE Capital was critical to his ability to sustain his operation. The revolving line of credit with GE Capital that he secured in 1998 gave him credibility in the investing world and helped him stay in business until 2008.
“It was his first source of corporate funds as opposed to funds from individuals,” Jon Hopeman, Petters’ criminal defense attorney, told the Star Tribune.
Petters and his close associates, primarily Bob White and Deanna Coleman, offered investors high rates of interest for short-term loans ostensibly to finance the purchase of electronic goods at the manufacturer’s level for sale to big box retailers. But there were no sales.
In documents filed in the lawsuit, GE Capital says its $50 million revolving credit line with Petters and his companies was a standard lending arrangement that lasted from 1998 until 2000.
During that time, GE Capital became concerned when Petters’ payments started arriving late. Petters blamed Costco for the delays. GE Capital contacted Costco, and officials at the discount retailer reported that the purchase orders that Petters provided to GE Capital as proof of sales were not legitimate.
GE Capital canceled Petters’ line of credit. Eventually, he paid his loan amount in full, presumably from money gleaned from other investors.
During Petters criminal trial in 2009, two GE Capital employees were key government witnesses. One of them testified that Petters was livid when he learned that GE Capital had contacted Costco about purchase orders.
“We had stopped funding. We said the loan was not working the way it was intended to,” testified Paul Feehan, a GE risk manager at the time. “We were taken aback by the information” from Costco.
Then a series of checks from Petters to GE Capital to repay the loan bounced. At that point, according to the Palm Beach lawsuit, Petters told GE Capital that he would obtain funds from other investors to pay off the credit line.
The Palm Beach suit, filed nearly two years ago, is about to enter an intense discovery phase, including depositions of principal players in the case. A trial is still more than a year away.
Petters has been interviewed several times by attorneys for the hedge funds at the federal prison in Leavenworth, Kan., where he is serving a 50-year sentence for conspiracy, fraud and money laundering. Twelve others also received prison sentences for their roles in the fraud.
“My motivation has always been to help those that lost money unknowingly,” Petters said in an e-mail to the Star Tribune. “I have NEVER been motivated to help those that helped perpetuate the fraud and knew about it.”