Two Minnetonka-based hedge fund managers were charged Wednesday by the Securities and Exchange Commission for their involvement in the Tom Petters Ponzi scheme that collapsed into a $3.65 billion mess more than three years ago.
James Fry of Long Lake, Michelle Palm of Edina and Fry's Arrowhead Capital Management are accused of violating various sections of federal securities laws and the Investment Advisors Act. The SEC wants the two fund managers and Arrowhead permanently banned from the securities business and ordered to repay undefined "ill-gotten gains."
The civil complaint says that Fry and Palm invested more than $600 million with Petters from the hedge fund and collected $42 million in fees during a 10-year relationship between Arrowhead and Petters Co. Inc. (PCI).
"Fry and Palm presented themselves as protectors of their hedge fund investors when in fact they were facilitators of the Petters Ponzi scheme," said Merri Jo Gillette, director of the SEC's Chicago regional office. "Arrowhead's promises were filled with lies and deceit, and as a result investors lost more than $600 million while Fry pocketed millions in fees."
Both Fry and Palm already have been charged criminally for their roles in the Petters operation.
Palm previously pleaded guilty to one count of securities fraud and one count of making false statements to the SEC about what she knew. She awaits sentencing.
Fry is charged with multiple counts of securities fraud, wire fraud and making false statements to the SEC. He is scheduled for trial next year along with codefendant Frank Vennes Jr., who allegedly used Arrowhead and related investment entities to funnel funds to Petters.
William Mitchell College of Law Prof. Ted Sampsell Jones said it is not unusual for the SEC to file a civil action after criminal charges have been levied in cases of financial fraud.
"And to the extent they think they can get some money, they will do it," Sampsell Jones said.
The Petters Ponzi scheme involved the purported purchase and sale of consumer electronics to big-box retailers. Phony purchase orders and sales invoices were ginned up to create the impression of legitimate transactions when none existed. Money from new investors was used to repay principal and interest to old investors, creating the appearance of real business deals.
According to the SEC complaint, Fry and Palm assured investors that their money would be safeguarded through collateral accounts in which retailers would deposit the proceeds of their purchases from Petters. Instead the funds came directly from Petters, which Fry and Palm did not disclose to investors.
The complaint also alleges that when Petters was unable to pay off the 90-day notes held by investors, Fry, Palm and Arrowhead "secretly" extended the due dates of the notes to more than 180 days "to help Petters avoid default."
The SEC said Fry, Palm and Arrowhead also distributed "pitch books" to investors that falsely claimed that independent accountants were conducting quarterly examinations of the transaction procedures.
The Arrowhead case is the fourth enforcement action brought by the SEC against hedge fund managers involved in the Petters operation. The other actions involved two Florida-based fund managers and an Illinois manager.
Attorneys for Fry, Palm and Arrowhead declined to comment.
David Phelps 612-673-7269