Tom Petters

., Sherburne Co. Jail

Cleanup of Petters case has become a 'fee fest'

  • Article by: DAVID PHELPS
  • Star Tribune
  • August 12, 2012 - 8:30 PM

Tom Petters' Ponzi scheme has been dead for four years now, but it's still producing big money for one select group.

Attorneys and other professionals sorting through the mess left by the collapse of the largest financial fraud in Minnesota history have collected nearly $70 million for their work, and the tab is still growing.

The $68.9 million spent investigating, dissecting and sorting through Petters' affairs includes an average of nearly $1.5 million a month collected by lawyers and other experts. The total spent equals more than one-fifth of the $302 million recovered so far for eventual disbursement to victims and creditors of Petters, whose holdings once included Polaroid Corp. and Sun County Airlines.

California attorney Brenda Grantland, who has represented creditors in various Petters legal matters, brands the spending a "fee fest" that "has not paid a single dime to honest victims and creditors."

Bankruptcy trustee and court-appointed receiver Doug Kelley defends the amount spent on professional services, saying it was crucial to making sense of what had been a $3.65 billion scheme.

"You've got to spend money to make money," Kelley said. "We've made good decisions in this case."

Kelley pointed to accounting firm PricewaterhouseCoopers, which has received the largest payout -- nearly $20 million -- for its forensic accounting of $40 billion worth of transactions.

"They were worth every penny of it," Kelley said. "I couldn't bring a single clawback case without their analysis."

Wal-Mart of fees?

Hourly rates in the cases range from $120 for paralegals to $225 for investigators to $300 for younger lawyers and up to $550 for senior litigators. Kelley charges $475 an hour down from his usual $650 an hour. In the receivership case, U.S. District Judge Ann Montgomery capped fees at $500 an hour.

Professional fees in the Petters case, while noteworthy, pale in comparison to fees awarded so far in the Bernard Madoff Ponzi scheme.

In that case, which broke shortly after the Petters collapse and eventually totaled $20 billion in losses, total professional fees so far exceed $500 million while the trustee and his law firm alone in that case have collected $214 million.

In Texas, professional fees in the $7 billion fraud of R. Allen Stanford are more than $110 million.

"When you compare us to other Ponzi schemes, our fees are significantly lower than Madoff and Stanford," Kelley said. "We are the Wal-Mart of attorney's fees."

But even for legal experts, the post-fraud fees seem staggering.

"This is a disturbing feature of our bankruptcy system," said Ann Graham, director of the Hamline Business Law Institute. "Legal fees for managing a bankruptcy often exceed what common sense would suggest is reasonable."

David Runck, an attorney with the Eden Prairie firm Fafinski Mark & Johnson, who represents the unsecured creditor's committee in the Petters corporate bankruptcy, said the legal costs are a necessary evil.

"The professional fees, while substantial, are a necessary investment to investigate and pursue hundreds of lawsuits against those who collectively received billions from the scheme," Runck said in an e-mail to the Star Tribune. "... We're seeing results."

Graham said the fee issue is a systemic problem in the bankruptcy process and called the Petters case in particular "the poster child of fees exceeding the reasonable expectations of the public."

But Kelley responded that his legal team had to do battle against giant hedge funds represented by $1,000-an-hour attorneys.

"People haven't exactly been falling over themselves to write me a check," he said of the difficulty in getting clawback settlements.

Graham praised Kelley for his "very innovative approach" using clawback suits to recover alleged ill-gotten gains.

Nonetheless, Graham said, "This is an extremely expensive proposition. Creditors will get cents on the dollar. It's counterintuitive."

More recoveries likely

Petters currently is serving a 50-year prison sentence in Leavenworth Federal Penitentiary after being found guilty of 20 counts of fraud, money laundering and conspiracy.

The convictions stemmed from a decade-long fraud that involved the purported purchase and sale of consumer electronic products. Petters and his associates would convince investors that their funds were being used to buy wholesale goods for sale to big box retailers at a tidy profit. However, there were no such transactions, and old investors were paid off with the funds leveraged from newer investors.

The scheme collapsed in September 2008, after Petters lieutenant Deanna Coleman confessed the misdeeds to federal authorities and became a cooperating government informant and then witness. Coleman spent a year in prison for her role in the scheme.

Pending legal actions in the form of clawback lawsuits to recover alleged "false profits" made by investors in the Ponzi have the potential to yield hundreds of millions of dollars more for the till. But those will take time to resolve and, as Chief U.S. Bankruptcy Judge Gregory Kishel has advised attorneys in the Petters bankruptcy, "Time is money."

Several smaller Petters holdings, including a 20 percent stake in Fingerhut, the St. Cloud-based discount catalog operation, could yield more for distribution. Fingerhut, now known as Bluestem Brands, last year considered going public in a stock sale but withdrew the offer because of unfavorable market conditions.

Polaroid trustee John Stoebner of Lapp, Libra, Thomson Stoebner & Pusch said his case has about 10 clawback lawsuits pending and some international licensing matters "and that's going slow."

David Phelps • 612-673-7269

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