2 entrepreneurs testify on how Petters duped them

A pair of Minnesota business titans -- Irwin Jacobs and Ted Deikel -- testified Friday in the federal fraud trial of Tom Petters about the challenges they faced when attempting to collect on loans to the Wayzata businessman over the past decade.

Jacobs testified that he had to threaten Petters with foreclosure to prompt payment on a $4 million transaction involving Petters' purchase of Jacobs' retail chain, World's Greatest Deals, in 1998.

Jacobs said Petters was "not timely" in interest payments in the deal and asked for more time to repay two notes. One note was to be repaid in five months, the other in six, Jacobs said.

He said Petters' checks bounced "a couple of times."

"I told him we couldn't give him more time, and we would foreclose, if necessary," Jacobs testified.

"Petters said, 'Frankly, I'm broke,' and that I wouldn't get anything if I came after him."

Petters is defending himself against charges of conspiracy, fraud and money laundering in what the government contends was a Ponzi scheme that bilked $3.5 billion from investors in the past decade.

Jacobs testified that Petters once asked him to provide inflated invoices to multiply the value of the goods he was buying. A key allegation in the trial is that Petters would provide lenders with phony invoices and inventory lists to make it look as though their money was being used to buy merchandise for resale through major retailers when no such activity took place.

Jacobs testified that he told Petters he didn't want to be part of anything crooked.

Petters responded, "It's not your problem, it's mine," Jacobs said.

Jacobs, who testified for about 15 minutes, said Petters ultimately repaid the loans.

Deikel, who bought Fingerhut's catalog business with Petters in 2002, testified that he lost $7.5 million of a $10 million loan he made to Petters in June 2008, ostensibly to buy consumer electronics goods for resale. He said Petters told him he was looking for outside funding because his traditional funding source was under a lot of pressure at the time.

Deikel said he loaned Petters the money for 60 days at an annualized interest rate of 60 percent.

"I started to become nervous when we hit the 60-day mark [and he didn't pay], but there was a 30-day grace period, so I was not hysterical," Deikel said.

He said Petters sent him a check for $10.2 million -- which bounced -- in September 2008. Petters eventually paid him $2.5 million.

Deikel said he was speaking to Petters daily at the time about why he could not come up with the money. He quoted Petters as saying, "I don't know what's happened. I'm sick. I don't know how this happened."

Deikel said Petters pledged him some shares of stock in Chicago-based uBid Inc., an online retailer that Petters Group Worldwide bought in 2003.

One of Petters' top lieutenants approached government agents Sept. 8, 2008, and reported that Petters was running a fraud scheme. Petters' home and business offices were raided a couple of weeks later and he was arrested shortly after that.

Illinois hedge fund manager Gregory Bell also testified Friday. Bell, whose hedge funds lost $1.5 billion, pleaded guilty recently to one charge of mail fraud connected to the Petters case. Harold Katz, one of Bell's executives, also pleaded guilty to conspiracy to commit wire fraud.

Bell called Petters "a very persuasive" salesman and that early loans to Petters Co. Inc. were paid off on time and with interest. Bell said he usually reinvested the principal and profit from those loans in a day or two after a payout. He said Bell's Lancelot Investment Management and Petters did 100 to 150 such deals a year.

Bell said Petters blamed the sagging retail economy when the maturity of notes was extended and payments were missed. Bell said he was unaware of any fraud until federal agents executed search warrants on Petters' properties.

But on cross-examination by Petters attorney Jon Hopeman, Bell acknowledged creating trusts for himself and his family, including an off-shore trust that involved a $15 million bank account in Switzerland.

"In August of '08, with no money coming in, you transfer $15 million to a Swiss bank account. Was that from your [fund management] fees?" Hopeman asked.

"Yes," replied an occasionally tearful Bell.

Federal prosecutors will likely complete their case Monday. The defense will present its case after that.

David Phelps • 612-673-7269