Petters trial judge won't hear restitution pleas

The judge who sent Tom Petters to prison for running a massive Ponzi scheme decided Thursday to pass off the big, messy job of divvying up a limited amount of restitution available to victims.

More than 400 people and institutions, including many hedge funds, lost more than $2 billion in the scam.

U.S. District Judge Richard Kyle, who sentenced Petters to 50 years in prison in April, decided that alternative ways of recovery are available to victims, and said Congress doesn't want district courts "saddled by complicated fact-finding" to figure out who deserves restitution.

Another federal judge presiding over receivership and three bankruptcy judges already are sorting through Petters' former business empire, which once included Sun Country Airlines and Polaroid. More than $200 million in assets have been rounded up so far to compensate victims.

By contrast, only about $10 million to $20 million is available for restitution in the criminal case from assets forfeited by defendants. That partial payout should be handled by the Justice Department, the judge ruled. The payout will amount to less than a cent on each dollar lost, Kyle noted.

"[T]he victims needing it most -- unsophisticated individual investors who saw their life savings frittered away by the Defendant's fraud -- likely would recover the smallest amounts, since the vast majority of losses were suffered by hedge funds and similar entities," Kyle wrote in his order.

The scheme, which offered high returns on supposed merchandise loans, collapsed in September 2008 when a Petters executive told federal investigators it was a fraud.

Kyle ordered federal prosecutors to notify victims of the process, which involves filing a petition with the Justice Department in Washington.

Payouts in the bankruptcy cases will be greater partly because of "clawback" lawsuits to extract money from early investors who unwittingly profited from the Ponzi scheme. Attorney Doug Kelley, who is serving as receiver, has identified more than $500 million in clawback targets.

Kyle noted that many victims who surfaced in the criminal case already have claims in bankruptcy court, and that option is open to the others. His order means that any legal battles over how much victims lost will be fought in bankruptcy proceedings.

David Shaffer • 612-673-7090