Attorneys expect fireworks at Tuesday's bankruptcy hearing as an investment group tries to block the companies' trustee.
The Petters Group headquarters in Minnetonka was raided by government agents including the FBI initiating an investigation into company business transactions. Federal authorities arrested Tom Petters in October on fraud and money-laundering charges.
An Illinois investment group is heading to court in St. Paul today in an effort to block Minneapolis attorney Doug Kelley from being named trustee for some of Wayzata businessman Tom Petters' bankrupt companies. The investment group fears that Kelley may be working with the U.S. Attorney's office to see that victims of a $3.5 billion fraud scheme allegedly executed by Petters get paid restitution ahead of his other trade creditors.
At the very least, the investment group says, inherent conflicts of interest should bar Kelley from acting both as the court-appointed receiver for Petters and also as the trustee for Petters' bankrupt companies.
Those are the latest arguments posed by a group of investment entities headed by Thane Ritchie, a former All-American linebacker at Wheaton College who operates Ritchie Capital Management in Lisle, Ill. According to court filings, Ritchie's investment funds poured nearly $160 million into Petters' companies last year. Kelley contends Ritchie has been trying to wrest control of Petters Group Worldwide (PGW) and Petters Co. Inc. (PCI) from him since federal authorities arrested Petters in October on fraud and money-laundering charges.
Kelley denies any irreconcilable conflicts. In his court filings, he accuses the Ritchie group -- which was charging Petters 80 percent interest on a $146 million loan and 362.1 percent on a $12 million loan -- of trying to assert bogus claims to gain control of Polaroid Corp. and other potentially valuable assets owned by Petters.
Ritchie spokesman Lew Phelps said Monday that Kelley has made a big point of those interest rates, "but he has not said that these were very, very short-term loans. That's why they have a high annual rate, because of the front-end fees that are associated with them." He said such interest rates are common in the hedge fund business.
The two sides are set to square off today in St. Paul before U.S. Bankruptcy Judge Gregory Kishel. Attorneys for Kelley and the U.S. Trustee, who nominated him to manage 10 of Petters' bankrupt companies, say they expect a donnybrook.
So far, though, it looks as if the Ritchie group has an uphill battle.
The group lost miserably in its bid last Thursday to force Kelley to submit to a deposition, to compel him to turn over Petters' business documents, or to delay today's hearing pending discovery.
Legal discovery questioned
After a 90-minute hearing last week, Kishel said that the Ritchie group's court filings had a tone that implied "some kind of conspiracy" between Kelley and the government. He said it appeared that Ritchie wanted to use the legal discovery process to "burrow into" such issues, but lacked any basis for legal discovery.
Kishel said he knows of no evidence suggesting that Kelley is working "in concert with the U.S. government" to lock up Petters' assets. Besides, he said, it's the U.S. Attorney -- not Kelley -- who will decide whether to seek a forfeiture claim against Petters' assets. Forfeiture laws would allow the government to pluck away assets from the bankrupt estates regardless of who serves as trustee, he said.
According to government court filings, Petters solicited investments to finance the trade of high-end electronics gear through big box retailers. But no such merchandise existed, and Petters used the money to repay earlier investors, to pay for his lavish lifestyle and for other investments. Petters has maintained his innocence and is fighting the charges, though five of his business associates have pleaded guilty to conspiracy, fraud or tax charges resulting from the investigation, which first became public in lat September.
"From day one in the Petters fiasco the Ritchie group has been taking steps to intervene or take control," Kelley's attorney, Jim Lodoen, told Kishel. After investigators raided Petters' home and office, he said, Ritchie's representatives flew to Minneapolis. They quickly went to court in Cook County, Ill., to get a receiver appointed for PGW and PCI. And they tried to intervene in a federal civil proceeding in Minneapolis that resulted in Kelley's appointment as receiver for both companies, trumping the Illinois receivership.
In its latest filings, the Ritchie group tries to distinguish itself from other investors in Petters' companies. "Ritchie was an investor in asset-secured loans to PGW," said Phelps, the company's spokesman. "The real value is in Polaroid," he said.
James Jorissen, a Minneapolis attorney for the Ritchie group, said in court filings that PCI -- not PGW -- is the funding entity that Petters used for the alleged fraud scheme.
"PGW, a holding company, has subsidiaries owning significant assets and operating business," Jorissen said. "In contrast, PCI, also a holding company, owns subsidiaries that were mere shell companies primarily used for furthering Petters' fraud, have few assets and likely have no legitimate business operations. Indeed, PCI's only assets might be potential claims against PGW."
Thane Ritchie issued this statement Monday: "Based on the available evidence, we believe Petters Group Worldwide operated legitimate businesses like Polaroid and Fingerhut, and was not involved in the alleged Ponzi scheme conducted by Petters Company Inc. Unless it is proven that PGW was an active participant in that fraud, the court should presume that it was not involved. To protect the rights of the creditors who lent money to these legitimate businesses, an independent trustee should be appointed for PGW."
Lodoen called Ritchie's arguments "obstructionist nonsense." Although it does hold promissory notes from PGW and Petters personally, he told Kishel, "Every one of their dollars went into PCI, just like every one of the other creditors.'"
In court filings, Lodoen said this fact shows how loosely funds were distributed around the various Petters companies. "Virtually all of these funds went immediately to pay other investors. Any claim by the Ritchie Group to be a creditor of PGW would appear to be avoidable [under bankruptcy laws] on theories of fraudulent transfer," he said, noting that PGW and its subsidiaries never got the money.
Attorneys for the unsecured creditors committee and the U.S. Trustee filed motions supporting Kelley's appointment. The creditors say Ritchie's claims are either factually incorrect, legally incorrect or based on speculation. They say Kelley's role as Chapter 11 trustee and as receiver has the same, sole purpose: "to identify and preserve maximum value from the Petters assets for the benefit of creditors."
Kelley in legal limbo
Michael Ridgway, an attorney with the U.S. Trustee's office in Minneapolis, said Kelley has been in legal limbo since he was nominated as trustee Dec. 24. While he's the receiver for the non-bankrupt entities owned by Petters, Ridgway said, he's only the trustee-designee for the bankrupt companies and as such, he can't legally go forward until Kishel confirms the appointment.
Ridgway urged Kishel to dispense with "the unnecessary expense of having Mr. Kelley and others come here for these sideshows."
Kishel advised the attorneys last week that he does not expect "the factual dimension" of today's hearing to be very dramatic. He said the Ritchie motion contained a lot of accusations of disabling conflicts "without really having the goods for them."
Whether Kelley should be appointed as trustee or is barred because of mixed loyalties arising from the receivership will be determined as a matter of law, Kishel said. And whether one or more trustees should be appointed to oversee Petters' 10 bankrupt companies will depend largely on whether it makes economic sense, he said.
"If an active conflict results from the trustee's performance it can be raised again," Kishel noted. "We'll see what comes forward and what can be alleged when it comes to the hearing [today]."
Dan Browning • 612-673-4493