The intimate who told the feds about Tom Petters' business deals described the alleged fraud in court.
In a federal courtroom Monday, Deanna Coleman recalled the day last year that she stepped into the office of her boss, Wayzata businessman Tom Petters, to discuss the growing pressure from his investors who were sick of excuses and wanted to be repaid.
On that September afternoon, Petters had been on the phone looking to drum up new money to support his ever expanding need for cash.
"Otherwise we're going to sink," he told Coleman. "Aren't you sick of this?"
What Petters didn't know, however, was that Coleman was wearing recording devices provided by federal authorities. Earlier that day she had confessed to a decade-long scheme to deceive investors. Government prosecutors contend that Petters' business was a Ponzi scheme from the get-go.
In a subdued, matter-of-fact manner, the government's star witness told a packed courtroom Monday how she secretly recorded conversations with Petters and others for a couple of weeks after she walked into the U.S. attorney's office in Minneapolis on Sept. 8, 2008.
The 43-year-old Plymouth woman's allegations brought down Petters' business empire last fall when federal agents raided his home and headquarters along with other locations related to the alleged scheme. The revelations must have been a stinging rebuke coming from such a close confidante who, according to Assistant U.S. Attorney Joe Dixon, was once "intimate" with Petters.
Petters' defense asserts that Coleman spearheaded the Ponzi scheme. But under questioning from Dixon, Coleman insisted that almost all decisions were made by Petters in the alleged investment fraud scheme, which involved the creation of phony purchase orders and invoices to make it appear that Petters was using investors' money to buy consumer merchandise at a discount for resale at a profit.
In 2008, money was tight and there were several hedge funds asking about their investments. On the government recordings, Coleman sounds exasperated with the investors' persistent calls.
"I'm tired of it," she says at one point to Petters. "You can pick up the phone and lie as well as I can."
In testimony earlier Monday, Dyan Decker, a forensic accountant for PriceWaterhouseCoopers, read from a letter she had found on Coleman's computer.
In the letter to Petters, dated October 2004, Coleman said she was worried about the stability of Petters Co. Inc. (PCI), the engine that the government says was used to bilk investors of more than $3.5 billion.
"You always promised we'd find a way out. And yes, I believed you," the letter said. "Now it's nonstop that I worry about going to prison. I've lost trust in you. All I see is a black hole at the end of the tunnel."
Prosecutors could use the letter to counter Petters' claim that Coleman and other associates ran a fraud scheme without his knowledge. But on cross-examination, Decker said that she couldn't say whether the letter was ever sent to Petters.
Coleman's testimony was punctuated by audio clips from the secretly recorded conversations with Petters. She said she wore two recording devices. One looked like a car key and the other was a square device that she put in her pocket, she said.
She testified that she once resisted a hug from Petters out of concern that he would discover the tape recorder that she was wearing on her back.
In the first recording, Coleman's conversation with Petters was interrupted several times by phone calls.
Petters can be heard in the background sounding somewhat desperate as he tried to raise financing to satisfy anxious investors -- including Frank Vennes Jr., a longtime associate who was paid millions of dollars for referring investors to Petters. Vennes has not been charged in connection with the case.
At one point, Coleman asks Petters if Vennes knows that PCI used fake purchase orders to fool investors into believing that their money was secured with electronics merchandise. "No," Petters responded.
Petters can be heard saying that he needs to raise new money from hedge funds, "otherwise we're going to sink." One of his plans included an effort to sell half of Polaroid for $1.5 billion.
Petters said despite his efforts to juggle the investors' demands, "All I've done is bought us some time."
Coleman testified that she routinely made up false purchase orders and that Robert White, the former chief financial officer of PCI, routinely made up false invoices. Coleman and White have pleaded guilty in the alleged scheme.
A desperate scramble
Coleman said the pressures intensified in spring and summer 2008. Dixon introduced e-mails between Coleman and Petters in which they frequently discussed where to raise money.
"Money was tight. A lot of investors had redemptions. We didn't have any new money coming in and didn't have any real deals," Coleman said.
She talked about a $60 million investment in April 2008 from Interlachen Capital Group in Minneapolis and the "game plan" that she, Petters and Los Angeles business associate Larry Reynolds came up with to fend off their increasingly anxious creditor.
On one recording, the three were on a conference call in which they discussed a plan to tell Interlachen why some TVs they were trying to market through Costco hadn't been selling, and they talked about using an excuse that some TVs were being returned at unexpectedly high rates.
Coleman said Petters actually used the money from Interlachen to pay other investors.
On the recording involving the Interlachen investment, Reynolds said: "I have one stipulation. I will not work with Bob White. He scares the s--- out of me. I think he's an imbecile."
The investors apparently were closing in as Coleman made her decision to cooperate with federal authorities. On the tape Coleman made in Petters' office, they can be heard discussing their concerns about a Swiss hedge fund, Gottex Fund Management Holdings Ltd., which was seeking to audit Petters' books. Coleman said in court that Gottex wanted proof the merchandise securing its investment existed, "and we didn't have that stuff."
At one point in their conversation, Petters said that Harold Katz, an accounting executive with an Illinois hedge fund who has pleaded guilty to helping Petters fool investors, "looks like he's going to jump off the roof."
After Petters' arrest, that fund, Lancelot, filed for bankruptcy liquidation, claiming losses of $1.5 billion on its PCI investments.
Petters' attorneys, Jon Hopeman and Paul Engh, contend that Petters was disengaged and any fraud that took place was the work of Coleman and others.
On the recording, Petters tried to reassure Coleman. "If worse came to worst, you would not go to jail," he said. "I'm sure I would."
Dixon, the prosecutor, and Coleman spent much of the afternoon in court going through long trails of e-mails that discussed the creation of purchase orders, invoices and other documents.
After introducing each new document, Dixon would ask, "Who made this?"
Coleman's reply: "I did."
"Is it real?" asked Dixon.
"No," Coleman said.
Coleman's testimony continues today.
David Phelps • 612-673-7269