Federal prosecutors have charged a top accounting executive at an Illinois investment firm for helping to defraud investors connected to Wayzata businessman Tom Petters.

Harold Alan Katz, a vice president of finance and accounting for Lancelot Investment Management in Chicago, conspired to create fake banking transactions to make the fund's investors believing that Petters was repaying loans in a timely manner, according to documents filed with U.S. District Court in St. Paul.

The documents, unsealed Friday by U.S. District Judge Paul Magnuson, indicate that Katz has struck a plea agreement and will likely cooperate with prosecutors in their criminal case against Petters and Lancelot founder and owner Gregory Bell.

Katz could not be reached for comment. His plea hearing is scheduled for Sept. 2 in St. Paul.

Petters, whose holdings once included Polaroid and Sun Country Airlines, is fighting federal charges of mail and wire fraud, money laundering and obstruction of justice related to what authorities say is a fraud scheme exceeding $3 billion.

Bell, who was arrested last month, is accused of defrauding investors and helping Petters by moving large amounts of money to and from Petters Company Inc., (PCI) the main vehicle for the alleged scheme.

According to the government, hedge funds operated by Bell through his Lancelot firm were "feeder" funds for Petters. Petters raised money from investors to purportedly finance the purchase of discounted consumer electronics goods for resale to big-box retailers at a profit. But the government contends no such goods existed, and the money from new investors was used to pay promised returns to earlier investors.

Katz helped Bell wire money from a Lancelot bank account in Chicago to a PCI bank account in Milwaukee, documents say. Shortly after, the money was rewired back to the original Lancelot account. Those transactions, known as round tripping, helped convince Lancelot investors that Petters was repaying the notes on time with PCI money.

"The transactions were structured to make it look like PCI was paying off an outstanding PCI promissory note, and Lancelot investors were not advised that Lancelot was in fact funding those payments," according to the government charges.

When confronted by an investor, Katz created a fake spreadsheet that showed PCI was paying the notes on time, documents say.

Katz and Bell's scheme essentially bought more time for Lancelot to raise $243 million from new investors.

Thomas Lee • 612-673-7744