The cross-examination of a key government witness in the James Fry fraud trial became a sparring match Friday with neither side giving much ground in a battle over who knew what and when as the Ponzi scheme of convicted businessman Tom Petters skidded toward disaster in 2008.

Michelle Palm, a vice president with Fry's Arrowhead Capital Management, dueled with defense attorney Joe Friedberg for the better part of two hours as Friedberg pushed to show his client hid nothing from investors and was clueless about the $3.65 billion fraud operating out of Petters Cos. Inc. (PCI).

Friedberg argued that 90-day promissory notes owed by PCI to Arrowhead were actually payable for up to 182 days. And if they weren't paid after 182 days, "you had a remedy, default," Friedberg said.

"A default isn't really a remedy," Palm answered.

"You could sue," Friedberg responded.

"That's a collection action, not a remedy," Palm said.

Friedberg noted that all of the 12 promissory notes that were extended to avoid default were back within terms of the lending agreement by September 2008, when the Petters operation collapsed.

"Technically they weren't late," Palm agreed. "But they were still beyond the typical 90-day due date."

Friedberg and Palm, 45, also sparred over what investors were told about the late notes.

"I don't know that it was a secret but I'm not sure if all investors knew," she said.

Under questioning by Friedberg, Palm acknowledged that the average return on the investment with Petters was 10 percent. She also testified that Fry and investors felt confident in the security of their investments because of insurance policies the Arrowhead hedge funds carried to protect the creditworthiness of the big-box retailers like Sam's Club and Costco, which were allegedly buying consumer electronic goods from PCI.

"Arrowhead spent a considerable amount [of money] to get that insurance," Friedberg said.

"Correct," Palm replied.

"If a note wasn't paid by a retailer, then Arrowhead could make a claim?" said Friedberg.

"Yes," Palm answered.

But there were no retailers involved in the purported transactions. Instead investor money from one PCI pocket was used to pay off investors in another PCI pocket under the guise of selling surplus goods for a profit to retailers.

"A[n insurance] claim would have brought the whole deal down and that's why Mr. Petters and Mr. [Frank] Vennes wouldn't let it go that far," Friedberg concluded.

The Fry trial has at least a week to go. The government is expected to wrap up its case by the middle of next week.

Fry, 59, faces 12 counts of wire and securities fraud and giving false statements to the Securities and Exchange Commission.

The government contends that Fry did not inform investors that his conduit to Petters was Vennes, an ex-convict, or that payments on notes started running past 90 days in late 2007 and early 2008.

Palm, who earlier pleaded guilty to providing false information to investors and making false statements to the SEC, has a plea agreement with the government to cooperate in the prosecution of Fry in exchange for a sentence reduction recommendation by the U.S. attorney's office. She pleaded guilty two years ago and is awaiting sentencing.