Defense witness describes Petters as beset by grief

Monday, it was Tom Petters' turn.

After 11 days of testimony in a case that could put the Wayzata businessman behind bars for the rest of his life, the defense of Petters began in earnest with the description of a grief-stricken father who poured himself into his businesses after the 2004 murder of his son John in Florence, Italy.

"He buried himself in his work," testified former father-in-law John Hagan, who called John Petters "dear" and "precious." "Tom's pace picked up from an already torrid pace," Hagan testified.

Attorneys for Petters contend that close associates ran the $3.65 billion Ponzi scheme that Petters is accused of engineering while he grieved for his son and concentrated on other businesses he owned, including Sun Country Airlines and Polaroid.

"I was very concerned how he could run that many entities at the same time," said Hagan, a former telecommunications and construction executive. "It would have been impossible for me."

Another former Petters executive testified that he didn't trust one of Petter's key lieutenants in the alleged investor-fraud scheme. Former Petters and Best Buy executive George Danko called Robert White "totally unreliable" with "very amateurish" business acumen.

White, the former chief financial officer for Petters Co. Inc. (PCI), has acknowledged that he crafted phony purchase orders, invoices, wire transfers and bank statements as part of an effort to fool investors into thinking that their money was being used to buy consumer electronics at a discount for resale through big-box retailers.

Defense attorneys also called a Petters cousin to the witness stand to demonstrate that Petters had a successful history of buying overstocked and discontinued goods for resale.

Karl Petters, however, also testified that another close Petters associate in the alleged Ponzi scheme, Deanna Coleman, had an integral role in the buying and selling of merchandise. "She worked the back end. She did the paperwork. She made sure we got paid," he said.

Petters attorneys called five witnesses Monday. They had said they expected to call a total of about 10, which means the case could be in the jury's hands later this week. It is not known whether Petters will testify.

Federal prosecutors rested their case Monday morning with the testimony of Kathy Klug, a special agent with the Internal Revenue Service. Klug spent the morning going through detailed banking records in an effort to show jurors that she found no evidence of investor funds being used to pay for electronics consumer goods.

Rather, the government contends, the funds were used by Petters personally and for business expenses. According to Klug's analysis, $82 million was diverted to Petters personally, while $315 million went to his business, most of which were money losers.

Klug also described a series of money transfers between PCI and Nationwide International Resources, and between PCI and Enchanted Family Buying Co., in which the money was used not to buy merchandise as the investors were told, but to pay off earlier investors.

Larry Reynolds ran Nationwide in Los Angeles, Calif., and Michael Catain ran Enchanted Family in Excelsior. Both men have pleaded guilty to money-laundering conspiracy charges in the case, and both testified in the trial that Petters ran the alleged scheme.

Under questioning from Assistant U.S. Attorney Joe Dixon, Klug said Petters also used the money to fund his other companies, including Sun Country. Asked over and over if she saw any evidence that the money was used to buy electronics merchandise as the investors had been told, Klug said no.

But she said Petters did use some of the money for personal expenses. Among his purchases was a 2008 Bentley, which cost him $98,000 in December 2007. Klug said he bought the car nine days after transferring $250,000 from a PCI account to his personal checking account.

From Jan. 1, 2003, through August 2008, there were deposits of $119.2 million into Petters' personal bank accounts. Among his expenditures were: $3.3 million to American Express; $486,000 to the Bellagio Las Vegas; $60,000 to Caesars Palace Las Vegas; $80,000 to the MGM Grand Hotel & Casino; and $159,000 to the Wynn Las Vegas.

But under cross-examination by Petters' attorney Jon Hopeman, Klug acknowledged that she didn't know how all the money was spent. And she said she did not do an analysis of the charitable contributions made by Petters or his companies.

Based on their opening statement, it appears that Hopeman and his co-counsel, Paul Engh, will try to convince jurors that Petters -- a noted philanthropist before his arrest in October 2008 -- was taken advantage of by his employees and business associates while he struggled to turn around such businesses as Sun Country and Polaroid Corp.

Petters' first witness was Alan Winik, a former Circuit City executive who recalled doing a deal with Petters in 2000.

He couldn't recall the amount of the transaction, but Petters' attorneys displayed a bill of sale for $28.5 million in appliances that Circuit City was discontinuing. Under cross examination, though, Winik said he did not recognize the signature of the Circuit City executive who signed the bill of sale, even though the executive worked in the same office.

Karl Petters, testifying next, recounted doing a $5 million deal with Sam's Club and other discount retailers that involved surround-sound home entertainment systems they had bought from 3M.

Karl Petters also described a number of other deals by the Petters organization in the late 1990s that involving salvaged goods, overstocked inventories, T-shirts, shoes, caps and electronics equipment. Assistant U.S. Attorney John Marti then added up those deals on cross-examination and noted that combined, they amounted to less than $1 million.

With its witnesses, the defense is attempting to portray Coleman as the day-to-day decision-maker at PCI. Coleman is the former Petters executive who walked into the U.S. Attorney's office on Sept. 8, 2008, and reported that Petters had been running a massive investment fraud scheme with her help. She has pleaded guilty to a single conspiracy count.

Petters faces up to life in prison if convicted of the charges against him, which include conspiracy, fraud and money laundering. Deemed a flight risk, he has been jailed since October 2008.

David Phelps • 612-673-7269