Clawback claims against some of the largest investors in the Tom Petters fraud case can be consolidated into a single legal proceeding to determine if funds should be returned to the Petters bankruptcy estate, U.S. Bankruptcy Judge Gregory Kishel has determined.
Kishel's ruling, filed late Friday, opens the door for bankruptcy trustee Doug Kelley to proceed with efforts to recoup hundreds of millions of dollars in so-called "phantom profits" from organizations that were, for the most part, early investors in the $3.65 billion Petters Ponzi scheme.
The clawback cases were filed in the fall of 2010 and have been on hold for nearly two years awaiting Kishel's ruling.
"The horrid fact was that those very returns were a major contributor to the damaged caused to later lenders," Kishel wrote in a 107-page order.
The ruling affects 10 different investors out of more than 100 separate clawback lawsuits still pending in the Petters bankruptcy.
"We can now get to trial on the merits of the [clawback] cases, and I can follow the money," Kelley said in an interview Monday.
The investing organizations include Opportunity Finance, Lancelot Investment Management, Epsilon (Westford) Global Active Fund, A to Z Investors Fund, Edge Capital, Ark Discovery, Arrowhead Capital Management, Metro Gem Capital, Acorn Capital Group and Palm Beach Finance Partners.
Some of the funds went out of business when the Petters Ponzi scheme collapsed in September 2008, although final disposition of their assets remains unknown and will be part of the pretrial discovery procedure.
Lawyers for the largest funds either had no comment or could not be reached. But in previous comments and court documents the parties have denied knowing that the Petters operation, which involved the purchase and sale of nonexistent consumer electronic goods, was a sham. Kishel, however, was not totally convinced by their denials.
"It [the legal claims] all came out of a massive fraud, directed and coordinated by one person in whom they seem to have reposed large and inordinate trust, very much to their own peculiar benefit," Kishel said of the investors in his order. "There seems to have been no legitimate, real, and nonconclusive business activity to generate revenue."
To date, the Petters bankruptcy trustee and attorneys for the Petters corporate estate have collected approximately $300 million for creditors and debtors through the sale of assets and recovery of other expenditures, including employee bonuses and charitable contributions.
About 100 unresolved clawback lawsuits contain claims totaling $1.7 billion, including nearly $500 million in the cases affected by the Kishel order. Discovery in the Kishel-affected cases will likely start early next year.
Leaders of three of the funds in the consolidation order — Arrowhead, Metro Gem and Palm Beach — have been sentenced to prison on various fraud charges for their roles in luring investors into those funds on behalf of Petters.