Petters: Underlings turned firm into big fraud

The closest lieutenants of Tom Petters took control of his namesake company and turned it into a Ponzi scheme without his knowledge, the Wayzata businessman testified Wednesday during his second day on the witness stand.

Petters said two top executives of Petters Co. Inc. (PCI), Deanna Coleman and Robert White, filled the company's balance sheet with constantly maturing promissory notes that eventually broke the company and cost investors $3.65 billion.

Coleman and White generated bogus merchandise transactions as Petters worked on other elements of his conglomerate, Petters Group Worldwide, and grieved over the 2004 murder of his son John in Italy, Petters told jurors.

A tearful Petters recounted at his fraud trial that he paid "little, if any" attention to PCI after his son's death.

PCI was the main vehicle in the scheme alleged by the government. Petters said he thought the company was doing "a few deals here and there," and that it was "tremendously profitable."

The government has presented a picture of a company doing rapid-fire deals with investors using falsified documents to give the appearance of successful transactions involving purchase and resale of consumer electronics goods. Coleman and White, who have pleaded guilty for their parts in the fraud scheme, testified that Petters ran the operation.

Petters described a largely hands-off role at PCI, telling jurors he was more engaged in acquiring the catalog company Fingerhut, instant photo pioneer Polaroid Corp. and Sun Country Airlines as his business empire expanded. He said a 2008 attempt to acquire failing Circuit City took up to half his time early in the year.

"When you're doing incubator companies, you have to withstand losses for a certain period of time. That's the life of an entrepreneur. I love to see people succeed. I like to put something together and watch it work."

Prosecutors contend funds invested with PCI propped up other Petters companies and that PCI was the only profitable operation in the network.

Petters testified he is not a finance expert. "I'm not good at numbers. I'm not good at financial statements. I'm not good at a lot of things," he told jurors. "You probably realize that by now."

Petters said Coleman, who rose from receptionist to be a top executive with PCI, and White, chief financial officer, handled business transactions.

"She was the finance person, the controller of cash. She was paid well," Petters said. "Whatever things that had to be handled, she did." Asked by defense attorney Jon Hopeman if he ever requested creation of false financial documents, Petters replied, "Absolutely, unequivocally not."

Coleman is the person who first told federal authorities in September 2008 that Petters had been running a mammoth scheme for more than a decade. White told jurors he dummied up business documents at Petters' request.

Petters denied guilt and blamed underlings and business associates. After he bounced hefty checks to repay a debt to GE Credit, he said, he asked Coleman for an explanation and she told him someone in finance misappropriated some money and had been fired.

"I can't tell you today how much I wished I had dug deeper into that conversation, but I didn't," Petters said.

He said that after his son was fatally stabbed, he found it difficult to go in to work and concentrate. He had to put ice bags on his eyes to reduce swelling and redness from crying before going to the office, he said.

His attorneys showed pictures of his living room and a mantelpiece covered in family pictures, many of his deceased son. They also showed a portrait of John, donated by Petters' friends Dean and Michelle Vlahos, Twin Cities restaurateurs.

Robert W. Sabes, 69, is a former owner of Schieks Palace Royale, a Minneapolis strip club. He now lives in Las Vegas. Petters estimated Opportunity Finance made $250 million to $260 million via their relationship. In a secret tape recording played earlier in the trial, Petters expressed fear that the Sabes are connected to organized crime. In testimony yesterday he said he saw no evidence of any mob connection.

Petters will testify again today. After Hopeman finishes his direct examination, prosecutors will conduct what likely will be a lengthy cross-examination. It is unclear when closing arguments will be because of the Thanksgiving holiday.