Federal investigators' first inkling of a possible investment fraud involving Twin Cities businessman Tom Petters came Sept. 8, when one of his longtime employees approached them and said she had helped him bilk more than $3 billion from unwitting investors.
Joe Dixon, an assistant U.S. attorney in charge of white-collar crime prosecutions in Minnesota, said the government knew nothing about the scheme until Deanna Coleman, vice president of operations for Petters Co. Inc., confessed to her involvement and offered to help authorities investigate Petters.
Coleman, 42, of Wayzata, wearing a navy suit with orange pinstripes, stood nervously before U.S. District Judge Paul Magnuson on Wednesday morning and pleaded guilty to a single charge of conspiracy to commit mail fraud.
Her guilty plea was one of three Wednesday. Robert Dean White, 67, of Excelsior, and Michael Catain, 52, of Shorewood, also admitted to their roles in the scheme, which involved the creation of false bank statements and other documents that were used to trick investors into funding what they called a giant Ponzi scheme.
White, looking gaunt in a gray sportcoat and a scruffy white beard, said he got involved as a consultant in 1998, when Tom Petters -- one of the Twin Cities' best-known entrepreneurs, with holdings that include Polaroid, Fingerhut and Sun Country Airlines -- asked him to create a false bank statement. "It was used to convince a lender that we had spent the money appropriately," White said.
White said he created the document and soon went to work for Petters. He said he later learned from Coleman that all of the loan documents for Petters Co. Inc., or PCI, were false. White said that about the time he joined the company, PCI had used false documents to obtain about $100 million in loans. As of Sept. 24, when the government investigation became public, White said the total "exceeded $3 billion."
All three defendants said they earned millions of dollars by participating in the scheme. White said he got a salary and generous bonuses, "at Christmastime, usually." His bonuses last year amounted to $1 million, he said.
According to White's plea agreement, he faces a maximum term of 20 years in prison for a single count of mail fraud, and up to 10 years for money laundering. The federal sentencing guidelines, which are advisory, contemplate a prison term of 210 to 262 months. He also could face a mammoth fine -- up to twice the amount of the losses from the alleged scheme. But in cases like this, where restitution is required, judges often waive any fines.
White has agreed to help prosecutors with the case and could receive a reduced sentence if he provides substantial assistance.
Coleman faces up to five years in prison. Like White, she will be held "jointly and severally liable" for any restitution order. Allan Caplan, her attorney, said Coleman realizes that means she "will be penniless" for the rest of her life.
Coleman fought back tears during her plea hearing and responded to questions with one-word answers. She declined to comment afterward.
But according to Caplan, Coleman knew she was involved in "an astronomical fraud" and "made a determination to end it ... before billions of additional dollars were sucked into it."
"She wanted to bring it to a screeching halt," Caplan said in news conference outside the federal court building in St. Paul. "It was a courageous thing for her to do. The other people involved were people she'd spent the last 12 years with."
Caplan disputed the idea that Coleman approached authorities because hedge funds that invested with PCI had gotten wind of the fraud.
"Tom Petters was a master of dealing with questions and issues," Caplan said.
Petters wasn't around to defend himself against that. He was in another courtroom seeking to be released from custody pending his trial on charges of mail and wire fraud, money laundering and obstruction of justice. He lost that bid.
White, Coleman and Catain were each released on $25,000 unsecured bonds.
Catain pleaded guilty Wednesday afternoon to one count of conspiring to commit money-laundering. He faces a maximum of 20 years in prison, but has agreed to help authorities.
Between 2002 and 2008, Catain said, he helped Petters launder more than $12 billion through a shell company called Enchanted Family Buying Co., which he set up at Petters' direction.
Catain testified he knew that investors believed they were buying electronic merchandise. In fact, the money was being transferred through the company back to Petters. There were no products, he said. Catain earned more than $3 million in "commissions" for the transactions.
Individual investments in Enchanted ranged from $2 million to $25 million, Catain said. He declined to comment after the hearing.
According to the plea agreements, which were affirmed by White, Coleman and Catain, here's how the scheme worked:
At the direction of Petters, who was owner and president of PCI, Coleman and White would fabricate documents for Petters and others to use to obtain billions of dollars in loans. The phony records were used as proof that PCI was buying merchandise, generally electronic goods, from two suppliers: Nationwide International Resources Inc. (NIR), run by co-defendant Larry Reynolds, and Enchanted, Catain's shell company.
White and Coleman said that PCI would tell lenders it was selling the goods through big-box retailers and provided purchase orders to substantiate the deals. They said the deals were phony and the documents were fakes.
Most of the money lent to PCI was secured by promissory notes and sometimes security agreements, the plea documents say. The lenders would wire the money to NIR or Enchanted, which would pass it on to PCI, less a commission. "Reynolds and Catain were paid millions of dollars for the use of their respective company bank accounts to conceal the fraudulent nature of the transactions," the plea agreements say.
"Lenders oftentimes 'rolled' their loan to PCI from one fraudulently obtained loan into another without repayment. To the extent payments were made by PCI to lenders, it was with funds derived from other victim lenders who were also fraudulently induced to fund the Ponzi scheme," the agreements say.
"The vast majority of the fraud proceeds went to PCI and to Petters, and were then used to fund the operations of other companies owned by Petters, to pay others who assisted in the fraud scheme, and for Petters' extravagant lifestyle."
Staff writer Jon Tevlin contributed to this report. Dan Browning • 612-673-4493