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Continued: Part 2: Burned: The human toll of the Petters case

  • Article by: CURT BROWN , Star Tribune
  • Last update: October 26, 2008 - 10:31 PM

Charles Kleinsteuber had just returned to his Victoria home after six days on the road as a Sun Country Airlines flight attendant. He'd been working on vice presidential candidate Joe Biden's campaign charter and was making breakfast for his four kids.

He hugged his wife, Dana, when she came downstairs and noticed she looked tired.

"She actually fainted and I had to lay her on the kitchen floor and the kids were screaming," Kleinsteuber said. "The doctor said it was stress. When the FBI takes away the person who signs your paychecks, throwing a wrench in your finances, it stresses things out a lot -- not a little."

In the month since authorities raided financier Tom Petters' Wayzata home and Minnetonka offices and began mounting their massive fraud case against him, the ripples from the investigation resemble what happens when a boulder is heaved into a lake.

Amid the sea of lawsuits and bankruptcy claims, countless lives, businesses, nonprofits, pension funds and building projects have been disrupted and derailed.

Among those who fear they've been burned: a Rochester bank president stung with $12 million in allegedly fraudulent collateral, a Malaysian investment firm possibly out more than $1 million, numerous small-time local pastors, local and far-flung billion-dollar hedge funds and housing developments from Aspen, Colo., to Northfield, Minn.

Not to mention Billie Bagwell, a Dallas woman in her 70s, holding back tears and worrying about trying to get back nearly six figures in savings she stands to lose from Petters' alleged Ponzi scheme.

"I'm trying not to cry," she said in a telephone interview. "As a result of what Mr. Petters did, he's destroyed my retirement account."

Bagwell said she wants to write a letter to the jailed Petters, who professes his innocence.

"I don't know if the man has any comprehension of what he has done," she said. "He should be forced, even if he has to wash windows, to make restitution."

Bagwell is afraid she's lost nearly $100,000.

"That may not be a lot to many people," she said. "But I'm in my 70s and it will be difficult, if not impossible, to recoup that by going out and working."

Petters, 51, is accused of bilking investors out of more than $3 billion over the past 13 years. His financial holdings include Sun Country Airlines and Polaroid, and he's a minor shareholder in mail-order giant Fingerhut Corp. His charitable donations have been prodigious, and the fallout from the probe is widespread.

'Looked to be legitimate'

For example, the Christian-based Minnesota Teen Challenge, one of the state's largest residential treatment centers, laid off 22 of its 260 employees because more than $5 million of the organization's reserve nest egg was invested in Petters' businesses.

"Here's a guy who was, by all accounts, a pillar of the community for 14 years and a near-billionaire," said an executive with a hedge fund that has hundreds of millions of dollars in claims in Petters' bankruptcy filings. He spoke on the condition of anonymity.

"A lot of smart people got sucked in," he said. "I wouldn't say they were dupes or hacks or in any way co-conspirators -- just people who had no idea what was going on."

People such as Michael McNeil, president of the Home Federal Savings Bank in Rochester, who met Petters a few years ago and found him enterprising, cordial and personable.

"I've watched Petters for the last several years as far as his business enterprises and charitable giving and all the companies he was buying and selling," McNeil said. "He looked to be a legitimate person and when the alleged fraud was uncovered, it was a shock."

McNeil's bank, a 75-year-old fixture in southern Minnesota, made $11.3 million in 2007 -- one of its best years ever. McNeil said an out-of-town customer borrowed $12 million from the bank this year and passed it on to Petters Co. Inc. (PCI), taking a security interest in PCI receivables as collateral on the commercial loan.

"We are victims just like our borrower because the collateral turned out to be fraudulent," McNeil said. "The problem occurred at the end of the quarter and that didn't give us time to put together alternative collateral, so we took the full loss."

To illustrate the intricate connections of the Petters' fallout web, consider Home Federal's completely separate involvement in a housing development called Village on the Cannon in Northfield.

The three-year-old upscale development, the brainchild of Petters' brother Jon and his wife, Colleen, was aimed at senior citizens who might want to spend their golden years back near their alma maters, in this case, Carleton and St. Olaf colleges.

Last October, Jon Petters sold his interest in the development to his brother, Tom Petters. Twenty-five of the condos have been sold, but one of Petters' subsidiaries holds 22 unsold units.

Those who bought condos worry that a fire sale of the unsold units could reduce the value of their properties.

"How do we rationalize our budget not knowing what's going to happen to the unsold units?" said Jerry Mohrig, a retired Carleton chemistry professor and president of the condo association.

He said Home Federal is negotiating with another buyer and foreclosure seems unlikely because most of the units are sold. Still, it's stressful for a 72-year-old chemist turned condo president.

"I've learned more about finance in the last three weeks than I probably didn't ever want to know," Mohrig said. "I had to learn because I was the person responsible. We're not victims, but we're in an awkward situation."

Mohrig said the Village on the Cannon community has "really rallied around beautifully," since news of Petters' case broke. One condo owner even lent the association $100,000 -- interest-free -- to help get through the tough times.

'Anger, confusion, shock'

Kleinsteuber, the Sun Country flight attendant, said the anxiety has had a similar bonding effect among family-like employees at his bankrupt, Petters-controlled airline.

"Our reaction was pretty devastating and everyone was asking if we were going to be OK," he said. "There was a lot of anger, confusion and shock during the crazy first week."

That's when his wife fainted on the kitchen floor. Sun Country employees agreed, before the Petters bombshell, to take a 10 percent wage cut earlier this year because high fuel costs were hurting the business. After the Petters case prompted bankruptcy, pay was "deferred" 50 percent for one pay period. The pay reductions now sit at 30 percent with a pledge to make it back up next year.

For a longtime employee such as Kleinsteuber, 42, that adds up to roughly $1,000 a month. With his on-again, off-again flying schedule, Kleinsteuber works a second job selling ads for Chamber of Commerce publications in the South St. Paul area. That way, his wife can stay home and look after their kids, 10, 8, and twin 5-year-olds.

"I have 16 years invested in this airline, and our whole way of life -- with my wife staying home with the kids -- could possibly change," Kleinsteuber said.

The Petters matter compounds uncertainty from the financial meltdown on Wall Street and steep gas and food prices. "It's a perfect storm-type thing," he said.

The Kleinsteubers have dipped into savings, "hit the Visa harder," cut back on kids' sports fees and bought more generic brands.

"We knew it was temporary, but the biggest fear is, what if it's not?" Kleinsteuber said.

He recalled the DVD player and digital Polaroid cameras Petters gave his workers the past couple years.

"When I met him, he truly seemed like a great guy," Kleinsteuber said. "I'm sure that's one of the reasons this got so deep and so wide."

The hedge fund executive hopes people don't dismiss the investors as a bunch of rich folks who can painlessly absorb the financial hit.

"I have a feeling people might just say these are faceless, greedy Wall Street guys and hedge fund managers -- Who cares about them getting their money back?" he said.

"But if you look far enough up the feeding chain and beyond the nameplate on the door of a billion-dollar fund, you'll find pretty ordinary individuals -- factory workers, teachers -- who aren't going to get their pensions. Maybe there are millionaires who lost millions, but it's real money.

"A billion dollars doesn't come out of nowhere -- unless you're Tom Petters."

Staff writer Dan Browning contributed to this report. Curt Brown • 612-673-4767

Coming Tuesday: Foundations are bracing for fallout.

  • about this series

  • The Star Tribune's coverage of the federal fraud case against entrepreneur Tom Petters and the struggles of Petters-owned Sun Country Airlines.
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