Government: Desperate Tom Petters was 'full of shame'

More than two years before government agents raided his companies and home, Tom Petters expressed anguish about a Ponzi scheme he allegedly had perpetrated on unwitting investors for more than a decade, according to an outline of the government's criminal case filed Wednesday in federal court.

In an April 2006 e-mail to longtime confidante and business associate Deanna Coleman, Petters told her he had been crying "about all that I have done wrong in my life. I ask daily to be able to get up and to have God to help me change this company into one we are so proud of instead of full of shame."

The government cited the e-mail in a filing in preparation for the trial, which is scheduled to start Oct. 26. Petters, who built a liquidation business in electronics gear and other products before acquiring Polaroid and Sun Country Airlines, faces charges that he orchestrated a scheme to defraud investors out of $3.65 billion.

The government's filing indicates that Petters' core business, Petters Co. Inc. (PCI) came precariously close to collapse in 2000 in a dispute with one of his major lenders, General Electric Credit Corp., which nearly blew his cover as a purveyor of consumer electronic goods eight years before the government stepped in and charged him and a small circle of business associates.

The government's case outline states that when the alleged Ponzi scheme neared collapse again as the economy faltered in recent years, Petters turned to "long-time close friends and associates for millions of dollars" in investments that he never made.

Petters' defense attorney, Jon Hopeman, declined to comment on the government's filing.

The government credits the ultimate collapse of the Petters empire to a Sept. 8 visit to the U.S. attorney's office by Coleman and her attorney, in which she described a decade-long, multibillion-dollar fraud scheme that involved borrowing vast amounts of money and using it to repay earlier investors.

"The allegation was staggering," government attorneys wrote.

Coleman, wearing a government recorder, went back to PCI headquarters, where Petters acknowledged the existence of "fake" product purchase orders that were the heart of the investment scheme, the government says.

Federal agents raided PCI on Sept. 24 and arrested Petters a week later.

Since then, Coleman and six others have pleaded guilty to various conspiracy, fraud, money laundering and tax charges in the case.

The government contends that Petters used his outgoing personality and sometimes wrote personal financial guarantees to attract investors who thought they were providing funds for the purchase of electronic goods and other products that he would then sell through big-box retailers at a profit.

In fact, the government says, new investor funds were being used to pay old investors and, at the same time, expand the Petters business empire and support an increasingly lavish lifestyle for Petters and others.

Investor funds were used by Petters to purchase part or all of Fingerhut, Polaroid and Sun Country Airlines and to financially support those companies for regular operating losses, the government said.

The companies provided Petters "with the appearance of a corporate tycoon, which made it easier for him to lure in new investors," the government said, noting that "splashy" charitable contributions also contributed to his image, "solidifying investors' confidence."

A crisis 9 years ago

According to the government's timeline, the Petters operation faced one of its toughest tests in 2000 when General Electric Credit Corporation (GECC) became concerned over late payments by PCI on promissory notes that were supposed to fund transactions with Costco.

GECC contacted Costco about the transactions and learned that Petters had supplied the lender with copies of bogus purchase orders. Costco then contacted Petters, who apologized and said the person responsible had been fired, the government says. Petters then "angrily" confronted GECC about contacting "his" retailer instead of working through PCI.

Petters tried to resolve the dispute by paying GECC $38.5 million with eight checks, but they bounced. Eventually, using investor funds, Petters was able to repay the notes and GECC closed down the line of credit, the government says.

Besides Coleman, participants in the alleged Ponzi scheme included Robert White, PCI's chief financial officer who has admitted to fabricating the purchase orders; Larry Reynolds, a Los Angeles businessman whose bank account was used to funnel $12 billion from and to PCI; Michael Catain who admitted to operating a "sham" company in his Excelsior car wash to handle other allegedly phony PCI transactions; and James Wehmhoff who was Petters' personal and corporate accountant and responsible for tax returns.

The government memorandum details the desperate, waning months of the Petters operation and how he turned to Chicago hedge fund manager Gregory Bell to transfer large amounts of money from and to Bell's Lancelot Investment Management company, allegedly to keep existing investors satisfied that their notes were being paid off and to attract new investors.

'Family emergency'

At one point in August 2008, Petters told one of his investors that he had a family emergency and would repay the investor "within days," the government said, noting that Petters then sent an e-mail to Coleman that said, "Dancing...my sh[o]es have holes i[n] them."

Bell pleaded guilty last week to one charge of mail fraud. Harold Katz, one of Bell's executives, pleaded guilty last month to conspiracy to commit wire fraud.

One potentially hot issue outlined in the government's brief is the role Reynolds may play in the trial. Reynolds has been identified by the Star Tribune as a participant in the federal witness protection program for earlier crimes not associated with the Petters case. Prosecutors contend that the past crimes of Reynolds -- who they do not identify by name -- are irrelevant to the Petters case. They also say that he was last supervised in 1991, and that he's no longer in the witness protection program as a result of his guilty plea in the Petters case. Although Reynolds may be called to testify, his plea agreement does not require it.

Attorneys for Petters have been eager to learn about Reynolds' background and the government's role in overseeing his behavior while he was in the witness protection program.

That issue remains unresolved.

David Phelps • 612-673-7269