Petters seeks delay in fraud trial

Attorneys for Minnesota businessman Tom Petters on Monday sought to delay his trial on fraud and money laundering charges until November, citing the recent arrest of an Illinois hedge fund manager on charges that he had helped Petters cover up a multibillion dollar investment fraud.

According to a criminal complaint unsealed Monday, Illinois financier Gregory Bell routed investors' money to Petters and made it look as if the investments in electronics gear were being repaid from retailers such as Wal-Mart and Costco. In fact, the money was coming directly from Petters' own companies, according to Ruth Hovey, the FBI special agent who swore out the monetary wire fraud complaint.

In other matters Monday, a federal magistrate judge agreed to let attorneys in the Petters case submit motions -- with portions of them redacted from public view -- regarding an unnamed witness who may have been in the federal witness protection program. The Star Tribune, along with Petters' attorneys, sought to open up certain motions that have been filed under seal recently at the request of federal prosecutors.

Although the judge would not allow the attorneys to use the name of the witness, the newspaper reported earlier that it is Larry Reynolds, a Petters codefendant who has pleaded guilty to helping Petters launder money from the alleged Ponzi scheme. Reynolds' attorney, Fred Bruno, attended the hearing Monday in St. Paul but said nothing.

"That slows the process down when you don't know who the parties are," Petters attorney Paul Engh told U.S. District Judge Richard Kyle. "We have to do an investigation of him."

But Assistant U.S. Attorney John Marti said Engh and co-counsel Jon Hopeman have had months to review a dozen file boxes filled with information about the individual but left that job to a low-level member of the defense team.

At a separate hearing Monday before Magistrate Judge Arthur Boylan, Engh said the codefendant had a history of felonies that predated his association with Petters in the alleged Ponzi scheme.

"He's defrauded everybody he's touched in his life," Engh said. "Had [Petters] known that, would he have associated with him? The answer is an unequivocal no."

Bell, the hedge-fund financier, is a 44-year-old Russian immigrant who became a naturalized U.S. citizen in 1981, according to a complaint filed Friday and unsealed Monday. The complaint says Bell graduated from the University of Chicago with a master's degree in business administration in 1990 and met Petters in late 1999 or early 2000, when he visited Minnesota to evaluate a potential business investment for his employer at the time.

Since December 2001, Bell has operated several hedge funds. From 2001 until September 2008, when authorities raided Petters' businesses and his Wayzata home, Bell and his Lancelot Investment Management company in Northbrook Ill., raised more than $1.5 billion from investors, the complaint says. Nearly all of the funds were secured by notes from Petters Co. Inc. (PCI), "which are now of little or no value."

Hovey said in a sworn statement that the FBI has been investigating Bell and his companies since September, when Petters executive Deanna Coleman first alerted authorities to the alleged scheme.

The complaint says that Lancelot investors were told in a confidential memorandum that the fund's investment goal was to "attract capital appreciation with rigorous risk control."

"The Fund makes collateralized short-term working capital loans, financing distributors simultaneously purchasing goods from suppliers and selling to major U.S. customers," the memorandum says before going on to describe how the investments were protected.

According to the complaint, it was a ruse. Hovey said Petters and PCI set up a "special purpose vehicle," or SPV, called Thousand Lakes LLC to handle the sale of promissory notes to Lancelot. "Each family of hedge funds that invested with Petters -- there were several besides Lancelot -- had its own dedicated SPV," she said.

'Things were not right'

Hovey, citing an unidentified former Petters employee working as a cooperating witness, said the SPVs were used to conceal "round-trip transactions" so that investors wouldn't be able to tell that Petters -- rather than retailers -- was actually paying off the funds' notes. Although Thousand Lakes was a Petters company, Lancelot controlled the bank account, the complaint says.

Bell apparently grew concerned about the alleged scheme last year. In January 2008, he met Reynolds in Las Vegas and told him that his loan redemptions were due and that he needed $50 million "or the SEC was going to come in and see everything," Hovey said. "Bell said that things were not right and that the whole thing was going to blow up."

In May 2008, at a family gathering in Chicago, Bell told Reynolds he needed $100 million in new purchase orders and said he "didn't know how much longer 'this' could go on," Hovey said.

On Feb. 13, 2008, Bell had about $24 million wired from his bank account into two revocable trusts held in the name of him and his wife. Most of that money has since been withdrawn, the complaint says.

The trade publication Pensions & Investments said Bell's first court hearing will be on Wednesday.

On the Petters trial date, Marti said the government is prepared to begin the four-to-six week trial in September. Kyle took the defense request to delay the trial under advisement and indicated he would rule by the end of the week.

dphelps@startribune.com • 612-673-7269 dbrowning@startribune.com • 612-673-4493