Tom Petters seemed to enjoy giving away money almost as much as making it. The Twin Cities entrepreneur created two foundations that doled out millions of dollars to colleges, churches and social causes across the country.
But now that Petters is fighting allegations that he defrauded investors of more than $3 billion over the past 13 years, those linked to the charitable foundations are wrestling with questions of whether their money fell from a poisoned tree. Some recipients have quarantined the money until the criminal case is resolved. Others have spent the money and say they don't know what to do.
St. John's Abbey, a monastery in Collegeville, Minn., received $2 million from one of the Petters foundations over the past few years. It used the gifts to upgrade the lower level of Abbey Church, where Petters' parents have worshipped, said Brother Paul-Vincent Niebauer, spokesman for the abbey. Returning the money would be difficult, he said.
"Of course we're concerned and ultimately we will do the right thing," Niebauer said. "We don't know what that is yet."
Petters, whose business holdings include Sun Country Air Lines and Polaroid, continues to profess his innocence. But four of his associates already have pleaded guilty and await sentencing in a case that may rank among the largest investment scheme frauds in history. Two were generous contributors to a foundation Petters created in memory of his son, John Petters.
Deanna Coleman, a former Petters Company Inc. executive who said she earned millions by conspiring with Petters to defraud investors, gave at least $84,000 over the years to the John T. Petters Foundation. (Petters executives were encouraged to give generously to fundraisers and charities, according to records reviewed by the Star Tribune.)
Las Vegas businessman Larry Reynolds, who also pleaded guilty to conspiracy, was another major donor. He and his company, Nationwide International Resources Inc., gave at least $70,000 to the John T. Petters Foundation.
The Thomas J. Petters Family Foundation, meanwhile, was funded almost entirely by Petters, who gave $11.8 million between 2004 and 2007. Most of that money has been disbursed.
Nonprofit experts say the beneficiaries of Petters' largesse aren't legally required to return the gifts unless they knew of the fraud.
Petters investors hoping to recover their losses from the foundations or their beneficiaries would have to prove that Petters controlled the foundations and made donations specifically to defraud investors, said Bruce Hopkins, former counsel for the Association of Fundraising Professionals, a national group in Alexandria, Va.
Nonprofit experts say tax documents filed by the foundations raise questions about how they operated.
• The lavish fundraising galas hosted by the John T. Petters Foundation consumed inordinate sums of money from his friends, employees and business associates, yet the foundation has awarded relatively few scholarships.
• The Thomas J. Petters Family Foundation in some cases gave money to an outside nonprofit that was simultaneously giving money to the John T. Petters Foundation.
• The family foundation also collected an unusually large outside contribution from a business that brokered some of the suspect investments for Tom Petters.
• Federal tax documents for both family foundations were signed by James Wehmhoff, former executive vice president of finance at Petters Group Worldwide. Wehmhoff, 67, of Plymouth, has not been charged in the investigation but is identified as a "co-conspirator" in an Oct. 2 affidavit by Eileen Rice, a special agent with the FBI. He has left the company. Both he and his attorney declined to comment.
Calls about the Thomas J. Petters Family Foundation were referred to his criminal defense attorney, who did not respond to multiple messages or e-mails.
Public tax records illustrate a tight web of relations between those who invested or did business with Petters and those who donated to or received grants from the Thomas J. Petters Family Foundation.
In 2004, the Sabes Foundation in Minneapolis gave $250,000 to the John Petters foundation, while receiving a $25,000 gift from the Tom Petters family foundation to sponsor student athletes. The exchange repeated in 2006, with different dollar amounts.
The Sabes Foundation is the legacy of Twin Cities businessman Robert Sabes, former owner of the Minneapolis strip club Sheik's Palace Royale. Neither the Sabes foundation nor Sabes responded to numerous phone messages.
In 2006, a company called Metro Gem, run by Shorewood businessman Frank Vennes Jr., donated $60,000. That same year, the foundation gave $275,000 to Minnesota Teen Challenge, an investor in Petters Co. Inc. that runs one of the state's largest drug and alcohol recovery programs. Vennes sat on the Teen Challenge board for seven years until he resigned Oct. 2.
Vennes has not been charged in the fraud case, but court documents say he made nearly all of his substantial income by brokering investments for Petters' companies.
Steve Klingaman, a Minneapolis nonprofit consultant, said it's common for nonprofits to give one another mutual donations. He said the practice is acceptable as long as donors keep an arm's length from how the money gets spent. Yet Klingaman called the Petters-Vennes exchanges "somewhat inexplicable" because they could easily have donated money directly to Teen Challenge.
The John T. Petters Foundation was smaller, but in some ways better known.
John Petters had been studying at Miami University in Ohio when he was murdered while in Italy in 2004. His father and sister, Jennifer, created a memorial foundation that year to award overseas study scholarships to honor his son's interest in world cultures.
The John Petters foundation has thrown lavish fundraising galas in Minneapolis and Florida. The 2006 and 2007 parties cost about $1.2 million, or more than 40 percent of the $2.88 million raised over those years, according to tax records. Two events were held this year. The most recent one, held in August, raised $1.3 million but cost $400,000 to put on.
The foundation has awarded 74 scholarships, averaging about $5,000 each, from 2004 to mid 2008. It plans to award another 30 this fall, said Andrea Miller, a Petters company spokeswoman.
Miller defended the foundation's management and said the parties were helping the foundation to build an endowment.
Dawn Fish, former executive director of the foundation who left last winter to join the Humphrey Institute of Public Affairs, said she never witnessed anything improper.
"No matter what comes out of the rest of this, Tom had the foundation run with tremendous care and passion," Fish said.
But Jon Pratt, executive director of the Minnesota Council of Nonprofits, described the fundraising strategy as unusual for a memorial foundation like the John T. Petters Foundation.
"For a memorial foundation it seems like a lot of attention-getting activity," said Pratt. "That definitely puts it out of the norm for most charities."
Tax records show that major gifts to the John Petters foundation came almost exclusively from people or businesses with direct ties to Petters or his business ventures. Pratt, at the Minnesota Council of Nonprofits, said such practices flow from "natural reciprocity."
But some links may draw scrutiny because of the pending fraud case.
A number of investors also contributed.
Lancelot Investment Management LLC, a hedge-fund in Northbrook, Ill., invested $1.5 billion in a Petters company. Lancelot head Gregory Bell gave nearly $1 million to the John Petters foundation through 2007. Lancelot has since filed a federal racketeering lawsuit against Petters and associates.
In an e-mail to the Star Tribune, Bell said the murder of John Petters "touched many and I truly believe in the good work of the Foundation which I was proud to support. That said, I can't disguise my anger and disappointment in the massive fraud perpetrated by Tom Petters and others at PCI."
Jennifer Bjorhus • 612-673-4683