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Twin Cities businessman Tom Petters, thrust into the spotlight earlier this week when his business and home were swarmed by federal agents, is the central figure in what authorities suspect is a multi-billion dollar fraud scheme that lured investors with empty promises, according to documents unsealed Friday in federal court.
In a sworn statement used to obtain nine search warrants, authorities said Petters used the capital raised through his equity company, Petters Co. Inc. (PCI), "for his other business ventures and to support his extravagant lifestyle."
Petters is chief executive of Petters Group Worldwide, with holdings that include Sun Country Airlines, Petters Warehouse Direct and Polaroid.
Petters' attorney, Jon Hopeman, said Friday evening, "Mr. Petters maintains his innocence and intends to fight this if he is charged."
Petters declined to comment Friday, but Thursday night he had told a gathering of friends and business associates that the federal investigation was an "unnecessary situation.''
The government, however, claims that Petters and a circle of associates played loose and free with investors' money by creating the impression of a successful retail business that bought and sold phantom goods for more than 10 years.
One of Petters' associates in the alleged scheme was secretly recorded estimating the fraud could be "in excess of $2 billion," the government affidavit said.
The government's allegations are contained in an affidavit prepared by an FBI agent seeking court permission for a series of search warrants. It was unsealed Friday afternoon in St. Paul. Search warrants do not contain charges but rather information to back up the government's request to search and obtain documents that might support their cases.
The affidavit reveals that an unidentified "cooperating witness" wore a recording device in meetings with Petters and others this month. According to the government, the witness has agreed to plead guilty to a conspiracy charge and faces up to five years in prison, but hopes to get that reduced in exchange for cooperating.
During one of those meetings, Petters indicated that he didn't want to continue having an employee prepare false documents for investors, but added that they must because "he didn't know what choice they have."
The government said that the balance sheet for PCI on June 30 showed total current liabilities of $3.5 billion against net accounts receivable of $1.9 billion, a figure that the government witness advised is "substantially less" than actual accounts receivable.
On one of the recordings, Petters "talks about fleeing the country and creating fabricated defenses if the fraud scheme is discovered," the government says. Petters also is warned by accountant Jim Wehmhoff that federal tax auditors will be examining Petters' taxes, including his expenses and deductions. Petters responded "by admitting that he cheats on all those items," the affidavit says.
According to the government, the scheme to lure investors into investments backed by allegedly phony consumer transactions included Deanna Coleman, PCI's vice president of operations; Robert White, 67, an Excelsior resident and a former PCI officer who is now a consultant; Michael Catain, 52, a Shorewood resident who ran one of the shell companies -- Enchanted Family Buying Co. -- used to facilitate the transactions in question, and Larry Reynolds, 65, of Nationwide International Resources (NIR), a firm with an office in Los Angeles.
Coleman, White, Catain, and Reynolds could not be reached for comment Friday night.
Phony purchases, sales alleged
Petters allegedly solicited investors to PCI by promising that their investment was secured by property, principally retail goods, that were purchased at wholesale from vendors such as NIR and Enchanted and sold to retailers such as Wal-Mart and Sam's Club for a profit.
But the purchase orders and the sales orders were phony, the government says.
At one point in the investigation, federal agents approached Wal-Mart, the parent of Sam's Club, with PCI purchase orders and was told the orders were "fictitious" and did not have valid purchase order numbers for Wal-Mart Stores or Sam's Club.
The wire transfers between PCI's preferred vendors were considerable, according to government calculations.
One California bank reported to authorities that $11.6 billion was transferred in and out of an account controlled by NIR between 2003 and 2006.
Enchanted, which has an office in an Excelsior car wash, received $35 million in transfers in less than a month this summer and transferred out slightly more than $35 million, mostly to PCI, the government says.
Frank Vennes is described in the FBI document as a broker with investors in PCI and other Petters' companies. Petters was recorded saying that Vennes had told him that he was operating "a little paper manufacturing plant," apparently referring to the alleged fraud. Vennes also is quoted as warning Petters and others that if investors send auditors to visit warehouses where the merchandise is located, "the scheme would implode."
The FBI noted that Vennes had a money laundering conviction in 1987 and pleaded no contest to a cocaine and weapons charge. He is listed as a board member of Northwestern College in St. Paul, and Minnesota Teen Challenge, a nonprofit drug and alcohol program. He has been listed as CEO of Excelsior-based Metro Gem, but it's unclear if that business still operates.
Catain was involved in a large number of businesses. At one point he worked out of Petters' headquarters building at 4400 Baker Road.
The two men also were linked when Petters was an investor in Liquid 8 Records, a Minnetonka business that Catain founded. And they apparently were involved in one other limited liability company.
Catain, who moved to the Twin Cities from his hometown of Los Angeles in 1996, told the Star Tribune in a 2003 interview that he was transferred here by a liquidation company.
He said he got the idea to call his record company Liquid 8 because he was a liquidator and had Liquid 8 as a vanity license plate.
"When people start record labels, they don't realize you have to have cash flow," Catain said in the interview.
In the affidavit unsealed Friday, the FBI agent described Catain's Excelsior business Enchanted as a "sham entity."
Among the allegations spelled out in the affidavit is the description of a "joint scheme" by Catain, Petters and White to "use false purchase orders to obtain $20 million from a large commercial lending company."
One of the alleged victims of false purchases of electronics goods is the Fidelis Foundation, a Plymouth-based foundation that was acting as an investment agent for Minnesota Teen Challenge.
"We're speechless," said Rich Scherber, executive director of Minnesota Teen Challenge.
Scherber said his organization received money from Vennes, a board member. "We were given money by Mr. Vennes that was put into the Fidelis fund for us," he said.
Scherber referred additional questions to Joe Smith at Fidelis. He did not respond to a message left on his voice mail.