Defense attorneys for Wayzata businessman Tom Petters attempted Wednesday to use the third day of testimony by his former lieutenant Deanna Coleman to show how deeply involved his aides were in the investment fraud and coverup that Petters is alleged to have masterminded.

They also attempted to portray Coleman, the government's initial informant and key witness, as an opportunist who used Petters Company Inc. (PCI), for her own financial benefit almost up to the point of its collapse.

But their argument that Petters himself was unaware of wrongdoing was undermined by Petters himself, who said in a secretly recorded conversation played for the jury by prosecutors that he and his associates all knew they had engaged in fraud.

Under cross-examination, Coleman repeatedly acknowledged that she lied about her knowledge of the alleged fraud to investors and, in one case, to an auditor.

"Did you tell the auditor that there was fraud here?" defense attorney Paul Engh asked.

"No," Coleman replied.

"Then you let them write a false report, true?" Engh said.

"Yes," Coleman answered.

Several conversations secretly taped by Coleman at the government's request were played to underscore the concern of Petters' associates as the alleged Ponzi scheme fell apart.

In a taped discussion among Coleman, PCI Chief Financial Officer Robert White and Los Angeles businessman Larry Reynolds shortly before the collapse of the alleged $3.5 billion scheme, the three talked about what to do if investors pressured Petters to pay up.

White: "The real solution is to come up with the money."

Reynolds: "In lieu of that, what do we do?"

In another conversation secretly recorded by Coleman, Petters said that he, Coleman, Reynolds and White have known for years that the purchase orders they used to fool investors were fakes.

"All of us. So it's not just me who knew we were committing a fraud," Petters says on the tape.

He blames his associates

Petters, who has pleaded not guilty to charges of fraud, conspiracy and money laundering, contends the alleged fraud was committed not by him but by his former associates as he tended to other business.

In another secretly recorded conversation, Reynolds asked Coleman what became of all the money Petters had raised. Coleman said some of it went to shore up his businesses, including Polaroid and Petters Warehouse Direct.

"Tom has a gorgeous house in Minnetonka and a gorgeous house in Florida. ... It all adds up," Coleman added on the tape. "It doesn't take long to get to $3 billion."

Coleman, White and Reynolds have all pleaded guilty to various charges related to the alleged Ponzi scheme, which the government says was masterminded by Petters.

Earlier, Coleman testified that she gave as much as $250,000 to her boyfriend, Scott Moellman, which wasn't reported as part of her income in divorce filings.

She also funneled nearly $1 million to a brother and acknowledged spending six-figure amounts on gambling trips to Las Vegas.

Shouting match in the office

David Margolis, Petters' personal assistant from 2004 to 2008, took the stand after Coleman. Margolis described himself as a go-fer with no college education. He ran errands, picked up groceries, helped extricate Petters from meetings, made excuses as to why Petters was late to meetings, and traveled frequently with Petters on business and personal trips.

Margolis said Petters started meeting more and more often with investors in 2006, though he didn't recall him meeting with any retailers.

Margolis testified that sometime in 2005 or 2006 White tried to quit the company and a shouting match ensued in Petters' office.

"You can't quit. You can't leave," he recalled Petters shouting. He said there were two or three such incidents. According to the government, White was important to the alleged scheme because he would forge invoices to make investors think deals were taking place.

Margolis said he thought Reynolds had a strange background, "maybe mob-related."

Reynolds, a disbarred Massachusetts attorney whose given name was Reservitz, entered the federal Witness Security Program in the mid-1980s after testifying for the government in an important fraud case.

Margolis also described a time when Michael Catain, another business associate of Petters' who has pleaded guilty in the alleged Ponzi scheme, handed Petters an envelope stuffed with cash. He said Petters counted out $50,000 in front of him.

Insurance broker Tim Gonsior took the stand Wednesday afternoon. Gonsior said he ran into repeated obstacles when inspectors asked to view the electronics goods Petters ostensibly was buying for resale with investor funds. He cited Reynolds as the main roadblock.

Gonsior, a vice president at AJ Gallagher/Stanton Group, prepared a letter in September 2008 at White's request that said to the best of his knowledge, insurance companies have inspected the warehouses and inventory and no deficiencies had been reported.

Friend takes the stand

Minneapolis restaurateur and Petters friend Dean Vlahos took the witness stand at the end of the day and testified that he invested $16 million with Petters over the years and received healthy returns in the early days of his investment. Vlahos will continue testifying today.

Before Vlahos took the stand, two Twin Cities bankers testified how longtime customer Vlahos came to them in early 2008 seeking separate loans of $4 million and $6 million to finance a purported merchandise investment led by Petters.

Both Kevin McShane from the Edina office of Home Federal Savings Bank and Kenneth Brooks of Signature Bank in Minnetonka testified that those loans now lie in default.

"It was a large transaction for us, but Dean was a longtime client," Brooks said.

Previous testimony in the trial has shown that Petters and his associates were desperately seeking financing in 2008 to stay afloat. Prosecutors that he was running a Ponzi scheme and was unable to find new investors to pay off old ones. According to government charges, there wasn't any merchandise being bought and sold by the Petters operation.

David Phelps • 612-673-7269