Petters' pal says he lost $26 million, best friend

Twin Cities restaurateur Dean Vlahos painted a trail of deception and betrayal Thursday by Wayzata businessman Tom Petters after their close personal relationship went disastrously wrong, financially, for both men.

Testifying in federal court during Petters' federal fraud trial, Vlahos said he ultimately lost $26 million through Petters, including a default on a 11th-hour, $10 million loan he arranged on behalf of Petters last year when Petters Co. Inc. was foundering.

Vlahos, who often exchanged e-mails with Petters in which they expressed their admiration and love for each other, lost his money after Petters was charged last fall with running a $3.5 billion Ponzi scheme for more than a decade.

"I talked to him every day, sometimes twice a day," said Vlahos, occasionally choking up. "I considered him my best friend. We were very close. We talked about very personal things together."

Under cross-examination by Petters attorney Jon Hopeman, Vlahos acknowledged that he made substantial profits from his investments with Petters. He said he earned 36 percent on a $16 million investment, which translated into $42 million total profit between 2001 and 2008.

Vlahos, founder of the Champps and Redstone American Grill restaurant chains, said he and Petters bought lavish gifts for each other, including expensive watches. And at one point Vlahos said he gave Petters a Bentley automobile.

"He was very good to my family. I was very appreciative of what he did for me," Vlahos said.

He said Petters once paid $40,000 for a month of in-patient treatments after Vlahos had been diagnosed with a form of cancer.

"Tom Petters was very good with people. He was a genius at making people feel good," Vlahos said.

He said his last investment with Petters was in 2008, when his friend called to borrow $10 million. Petters said he wanted to buy $30 million in inventory from Circuit City, on the brink of bankruptcy at the time, Vlahos said. He said when he asked about the return, Petters replied, "Don't worry, I'll take good care of you."

Vlahos got two bank loans to provide Petters the money in a hurry. "It was always an urgency with Mr. Petters," he said.

The loans deteriorated, and Vlahos said Petters told him he wasn't getting the inventory he expected from Circuit City. Prosecutors introduced several e-mails between the men. In one, Petters says he'll pay down the loans or "cash out." He closed the e-mail, "Love you and miss you."

Vlahos said the banks pressured him to repay the loans. In an e-mail he sent Aug. 21, 2008, to Deanna Coleman, one of Petters' executives, Vlahos wrote: "I need answers."

Petters responded: "We haven't made money on the deal. It's taken way too long to ship inventory. All is not lost if I can get Circuit City to give me more goods. I will call you, Dino."

Vlahos said he told Petters, "Look, I cannot go south with these banks." And at one point he said in an e-mail to Tom Hay, another Petters executive, "I have no more assets to pledge. The note is being called."

Petters' chief financial officer, Robert White, took the witness stand after Vlahos. White said he had known Petters since the mid 1990s. In 1999, he said, Petters called and said he was in trouble and needed help. White said he dummied up some bank statements for Petters to show to investors that made it look like certain checks had been paid.

White became the company's master forger and created false financial statements, invoices, purchase orders and business letters for nine years. He testified about how he'd use Wite-Out and cut and paste items to make documents look authentic.

White has pleaded guilty to mail fraud and money laundering charges. But he said Petters ran the operation.

"There is no question he was in charge," White said. "He was involved in every aspect of everything."

When the FBI knocked on his Petters Co. office door during a raid in September 2008, White testified, he knew the jig was up.

"I said I would show them everything and tell them what they wanted to know," White testified. "I was ready to cooperate. I wasn't feeling good about what was going on."

White said Petters advised him to leave the country after federal authorities executed search warrants concerning the alleged investment scheme. Instead, White went to the FBI and agreed to tape a phone call in which Petters repeated references to leaving the country. That tape contributed to the government's successful attempt to deny Petters bail in the year-long run-up to trial.

White faces up to 30 years in jail, which he described as a life sentence, given his age of 68.

Petters faces conspiracy, fraud and money laundering charges, which he denies. If convicted, he also could face life in prison.

David Phelps • 612-673-7269