Sept. 27: Feds' probe puts Petters' success story in doubt

The most recent issue of the glossy Petters Group magazine featured chief executive Tom Petters on the cover showing off a new Polaroid digital printer. Inside the magazine, Petters talks about the importance of education and giving, and about the charitable works of the John T. Petters Foundation, named after his late son.

But the accompanying pictures of smiling employees, grant recipients and foundation guests at a Florida polo outing masked a looming crisis facing the self-made millionaire.

In court documents unsealed late Friday, federal agents painted a starkly different portrait of the St. Cloud native and chairman of Sun Country Airlines, among other high-profile companies. In a search warrant filed in federal court in St. Paul, the FBI describes Petters as the key figure in a high-stakes fraud scheme that began in the mid-1990s and continues unabated.

He has declined to discuss the investigation publicly. Through his attorney, Jon Hopeman, he asserted his innocence and said he'd fight if he is charged.

The public metamorphosis of Petters from world-class businessman and philanthropist to the target of a major federal investigation began abruptly Wednesday morning, when his home and headquarters were rushed by a phalanx of federal agents brandishing search warrants.

Scores of agents herded employees of Petters Group Worldwide into the company's Minnetonka cafeteria, told them to turn off their cell phones, then escorted them from the property. Petters was out of town and had to quickly fly back to the Twin Cities.

In the meantime, agents with the FBI, the U.S. Postal Inspection Service and the IRS criminal investigative division worked from morning into the evening and left with trucks and vans packed with paper and electronic documents. A stunned business community could only wonder what it was all about.

But that was before the government released its bombshell: an FBI agent's sworn statement detailing allegations of a complex and massive fraud. One of Petters' associates was secretly recorded saying the fraud exceeded $2 billion. The affidavit says Petters and a handful of associates enticed investors into deals that were allegedly secured by retail products. But there were no products and the purchase and sale of those products was fictitious, according to the government.

'Out of all the people in world'

To friends and associates, the thought of Petters as the object of a federal investigation is incongruous with the businessman and benefactor they know.

"Out of all the people in the world -- everyone who knew him fell to the floor when they heard the news," said David Koch, CEO of the restaurant Bellanotte, in which Petters was an early investor. "He was always very considerate. He was always helping others make it in business," Koch said. "He invested significant amounts to help people get off the ground or pick them up from the ground."

To get a handle on all of Petters' business interests is a complex task. The parent company is called Petters Group Worldwide with headquarters on Baker Road in Minnetonka. In addition to Sun Country, the Petters umbrella includes Polaroid, Petters Warehouse Direct and Fingerhut. Petters Co. Inc., the object of the government's interest, is described as a finance company.

News of the raid last week prompted investors and investment advisers from Canada to Texas to call reporters for additional information, none of which was available on the tightly wrapped federal investigation until the close of business Friday.

Petters, 51, opened the first Petters Warehouse Direct in 1995 after several years working the retail floor at the old Schaak Electronics chain. In 2002, Petters and veteran entrepreneur Ted Deikel purchased Fingerhut's catalog business. Today, Petters remains a minority owner in the direct mail company.

The Petters Group bought Polaroid in 2005 for $426 million with a strategy of using the well-known brand name to sell a line of consumer electronics, including plasma TVs, DVD players and memory cards. The next year, Petters entered the money-guzzling airline business when he bought a stake in Sun Country. By late 2007, he expanded his investment and now owns all of the voting shares in Sun Country. The airline soaked up $25 million of Petters' cash within the past year as high fuel prices punished commercial carriers.

Petters entered the media business this year when he bought assets from Metropolitan Media Group. That enterprise was renamed Great Waters Media and became controversial when a number of former employees of the lifestyle magazines were refused back pay and accrued vacation.

Was cash flow a problem? A conversation between Petters and an associate mentioned in the FBI affidavit suggests so. In a conversation with the executive about the alleged fraud scheme, Petters reportedly says that "he doesn't know what choice they have" other than continuing to create false documents to attract investors.

Petters' apparent successes in business were marred by personal tragedy when his 21-year-old son, John, was stabbed to death while on vacation in Italy. Petters was killed after he and a companion accidentally wandered into a home's private garden and were confronted by the knife-wielding owner of the property.

"He had such a zest for life," Petters said of his son after the 2004 incident.

That led Petters to create the John T. Petters Center for Leadership, Ethics and Skills Development at Miami University in Ohio, where his son had attended college. Petters funded the center with a $10 million donation.

Philanthropy has become a big part of the Petters brand in recent years. He donated $8.3 million to the College of St. Benedict in St. Joseph, Minn., for its study-abroad program and renovation of the Benedicta Arts Center. Petters donated $4 million more to Miami University for a chair in Asian business, and he gave $12 million for international programs at Rollins College in Winter Park, Fla., where his daughter, Jennifer, got her degree.

In response to a Star Tribune inquiry, officials at St. Benedict called Petters and his companies "very generous benefactors" to St. Benedict and other colleges. Miami University officials declined to discuss the status of Petters' contributions to the school other than to provide press releases that praised his "vision and leadership" when the second gift was made in 2006.

Neis said Tom Petters had firsthand knowledge of the devastating effects of domestic abuse because he helped a family member escape an abusive marriage.

"It was an issue close to his heart. He introduced us to people who could provide financial help, and he supported our campaign for a new facility," Neis said. "He is a compassionate man who, when asked, will help people out."

On Saturday, Neis said: "It's always very sad when you've had a positive experience with a person who is compassionate about something and they find themselves in a bad situation. I feel sad for Tom. I feel sad for his family. It affects everyone."

Koch said Petters was a quiet investor in his Bellanotte restaurant business in downtown Minneapolis but offered advice when asked.

"He never got in my hair. He spoke to me about certain things business-wise where I had shortcomings," Koch said. "I learned that when you're judging something, you have to sometimes sit back and be fully analytical before you make a move."

Last week, after a raucous 12 hours when federal agents roamed the premises, the Petters corporate mantra was business as usual. But the contents of government search warrants suggests otherwise.

David Phelps • 612-673-7269