Petters aide: Everything was fake

A matter-of-fact Deanna Coleman on Monday recounted 14 years of living a lie, even acknowledging that she and business partner Tom Petters referred to their operation as a Ponzi scheme well before federal prosecutors did.

Testifying in a Petters-related bankruptcy proceeding, Coleman was on the witness stand for more than two hours as she described the repeated forging of business documents to fool existing investors and reel in new ones in a fraud that eventually lost $3.65 billion.

She revealed more detail than she has in previous court appearances, estimating that "99 percent" of the electronic consumer goods purportedly sold through Petters Cos. Inc. (PCI) "were fake."

Her testimony in St. Paul came amid an effort by bankruptcy trustee Doug Kelley to get more legal leverage over investors who made money during the Ponzi scheme. Kelley, who is seeking to consolidate several Petters-related investment entities under one bankruptcy umbrella, ultimately aims to recover, or claw back, nearly $1 billion in so-called "phantom profits" and assets.

Several hedge funds are fighting Kelley's efforts, contending that they made legitimate investments and loans and got legitimate returns.

Coleman, dressed in a dark pin-striped suit, testified how she first met Petters during a job interview in 1993 when he ran a small marketing company. Within a year, Coleman said, she learned of Petters' knack for creating false documents, including purchase orders and invoices from big-box retailers like Costco and Best Buy.

"Tom told me it was something to replace a purchase order until one came in from a vendor," Coleman said of the first forged documents of which she became aware. "I believed him at first."

But as time went on, Coleman became more involved in the document-forging business. "Tom would raise some money, I'd create a purchase order for $1.2 million to $1.5 million and the investor would give us $1 million," Coleman recalled. "Pretty much everything on the purchase order was fake."

Coleman, 45, now lives in north-central Minnesota after serving nearly a year in prison for her role in the Ponzi scheme that collapsed in 2008 after she secretly began cooperating with authorities. She received the shortest sentence of the five PCI co-defendants because of her whistleblower status.

Petters is serving a 50-year sentence in federal prison in Leavenworth, Kan., on fraud, conspiracy and money laundering charges. Coleman was a key government witness during Petters' 2009 trial in U.S. District Court in St. Paul.

Asked on the witness stand on Monday if Petters and his PCI colleagues had a name for their investment scam, Coleman replied: "Ponzi scheme."

"Tom used it quite a bit," she testified. "Every once in awhile we'd talk about it and use it. We were creating fake purchase orders to get investors to invest and then pay other investors."

Coleman also said she gave a Petters company accountant doctored spreadsheets so the company books would reflect the false or inflated purchase and sales of goods.

"Were the documents fake?" trustee attorney Mark Larsen several times asked Coleman.

"Yes," she'd reply.

"How do you know that," Larsen would ask.

"I made it up," Coleman acknowledged.

Coleman said she occasionally would make mistakes on purchase orders and other paperwork with investors, but nothing that ever blew the whistle on the operation.

She also said she once mistakenly gave the address of an empty warehouse to an insurance company that wanted to look at the consumer goods.

Larry Reynolds, one of Petters' inner circle, saved the day, Coleman said.

"Larry said all the goods had been shipped and we would be getting some more in a few days. They were OK with that," she said.

Only once did Coleman crack a smile. That was near the end of her testimony when she was asked by Larsen if she remembered the September day in 2008 when federal agents swarmed the Minnetonka corporate campus of the Petters operation, armed with search warrants that were based largely on her information from surreptitious tape recordings she made.