Witness details activities, deals with Petters

A seemingly despondent Tom Petters told his closest associates in September 2008 that their operation faced impending doom.

Jurors listened closely Monday as prosecutors played a secretly recorded tape in which Petters -- who is on trial for allegedly running a $3.5 billion Ponzi scheme -- proclaims, "This is one big [expletive] fraud and I'm dealing with it."

At one point, Petters says it will take "magic to get out of this. I'm sick of it," he says. "I don't have any solutions."

Petters made his comments as auditors from a hedge fund were about to arrive at Petters Co. Inc. (PCI) to review the status of promissory notes that the fund had made under the assumption that it was investing in consumer electronic goods to sell to big-box retailers.

"What are we going to give them?" Petters wonders aloud. "Empty hands?"

Petters' longtime confidante, Deanna Coleman, had agreed to wear a wire at the government's request a day before the Sept. 9 meeting with PCI's chief financial officer Robert White and Petters accountant James Wehmhoff.

At one point, Petters sounds both angry and frazzled.

Prosecutors played the tape at the end of a day that Petters' attorneys had been waiting for. It was their chance to grill Larry Reynolds, a Los Angeles business associate who has pleaded guilty to money laundering conspiracy and has a deep criminal background that qualified him for the federal criminal witness protection program.

Petters attorneys are trying to show that Petters' employees and business associates ran the alleged Ponzi scheme while Petters concentrated on other businesses, such as Sun Country Airlines and Polaroid Corp.

Petters attorney Paul Engh moved for a mistrial after he cross-examined Reynolds, claiming that U.S. District Judge Richard Kyle improperly limited his questions into Reynolds' criminal background and conduct in the witness protection program. Though the mistrial motion was denied, raising it preserved the issue for a possible appeal.

Under questioning by First Assistant U.S. Attorney John Marti, Reynolds acknowledged that his real name is Larry Reservitz. He grew up in Brockton, Mass., became a lawyer, then got caught in a phony accident scheme and was disbarred. He went to Europe but was extradited to face charges in a fraudulent check scam, involving the Bank of New England, to which he pleaded guilty.

Reynolds, implicated in a marijuana smuggling case, began cooperating with federal authorities in 1984. He said he wore hidden tape recorders. In 1986 he testified that he was involved in a scheme to cash a bogus check for $2 million out of the account of L. Ron Hubbard, the late founder of the Church of Scientology. Two of his cohorts were convicted in the scheme.

Reynolds said his lawyer informed the government of his participation in the program after he was arrested in the Petters case 13 months ago. He pleaded guilty to a single charge of money laundering conspiracy, which ended his participation in the program.

Reynolds said he met Petters in the mid-1990s in Los Angeles when they were both making shoe deals with LA Gear. Reynolds said he never told Petters about his criminal past.

"We talked. We discussed things and got along pretty well," Reynolds said.

Reynolds said he and Petters were both looking for merchandise such as footwear, golf bags, golf clubs and a variety of other goods. He said they had a "profitable relationship."

Reynolds used his company, Nationwide International Resources (NIR), to move surplus goods. He said Petters called him in 2002 and asked if he could start parking money in the NIR bank account overnight for a small commission. Reynolds acknowledged that $12 billion went through that account, earning him a commission of $4 million to $5 million.

Reynolds said that early last year, Illinois hedge fund manager Greg Bell approached him and said he was growing concerned that the Petters deals would unravel. Bell managed Lancelot Investment Management.

Reynolds said Bell told him he needed $50 million, and later $100 million, to recover redemptions in his funds. He said Bell told him that he was "deathly afraid the SEC will look at his funds." His firm claimed $1.5 billion in losses this year related to Petters.

In April, Reynolds said, Petters also was having problems with a $60 million investment from Interlachen Capital Group of Minneapolis. He said Petters asked him to see what he can do to pacify them.

Reynolds suggested telling Interlachen that some of the televisions they bought for resale through Costco were having high rates of returns. He said Petters was happy because the response bought him time to find alternative financing.

Petters listened intently Monday as Reynolds testified.

He asked Reynolds, "Who's in charge?"

Reynolds answered: "Tom Petters."

"Who got the money?" Marti asked.

"Tom Petters," Reynolds replied.

But under cross-examination, Engh produced several e-mails between Reynolds and Petters that discussed actual merchandise deals, including ladies apparel, footwear and consumer electronics. One of the e-mails asked Petters the status of various investments, including Polaroid.

"Yes, I did," Reynolds said.