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Another US Ponzi Scheme Hits the Dust
As The Wall Street Journal reported on December 3, a Minnesota jury has found the operator of a $US3.65 billion Ponzi scheme guilty of all 20 counts of wire fraud, mail fraud, money laundering and conspiracy, potentially consigning him to life in prison without parole. The racket dates back at least a decade.
At the time that 52-year-old Tom Petters was arrested in October 2008 and indicted two months later, the allegations against him amounted to one of largest Ponzi schemes in US history. But New York financier, Bernard Madoff, confessed a few months later to a much bigger fraud – an estimated $US65 billion – and is now serving 150 years in prison. Petters, a gregarious businessman, started out selling stereo equipment in high school and later became a liquidator of overstocked goods before his company ventured into retail-based fraud.
The US government has accused him of promising fat returns to investors who lent him money to purchase surplus merchandise, then resell it to big-box retailers such as Wal-Mart Stores and Costco Wholesale. But there were no such transactions and profits funded his ‘extravagant’ lifestyle, which included lavish homes in several states, a number of expensive boats, Mercedes cars and also a Bentley. Moreover, he acquired a number of legitimate companies, including Polaroid Corporation and Sun County Airlines. It all came crashing down in late 2008 when longtime Petters Company employee, Deanna Coleman, approached the US Attorney in Minneapolis. She laid out the nature of the fraud and her role in it, and agreed to wear a recording device that picked up damaging conversations with her boss and others in the following days. She later pleaded guilty to conspiracy to commit fraud, and testified for the government in the trial. In all, three co-workers and four business partners pleaded guilty to aiding the scheme and several testified against Petters.
During the trial, 42 government witnesses testified, compared with 12 called by the defence. Ms. Coleman’s tape recordings were key to the prosecutors’ case. In one of the tapes, Petters is heard saying, “This is one big [expletive] fraud.”
Once Petters was arrested, many of his companies filed for bankruptcy-court protection. The court appointed a federal receiver to sell the various pieces of his business empire and to dispose of most of his personal assets and those of the co-conspirators to raise funds to repay creditors. Polaroid was the largest asset so far to be sold, but less than $US200 million has been recovered, according to the receiver. Hedge funds suffered the biggest losses when the Petters collapse. Their managers thought they were providing short-term loans to finance deals for merchandise, but the goods didn’t exist. Instead, early investors were paid with later investors’ money.
Interestingly, in the closing arguments in the case in November, one of Petters’ lawyers claimed that his client’s life “is one of innocence, optimism and generosity … This has never been a Ponzi [scheme] for him.” The Assistant US Attorney, however, disagreed, saying that Tom Petters was not a victim. Instead he was committing fraud on a “massive, massive scale”.
For any corporate manager who senses that something like this might be going on inside his or her firm or inside a client company, it pays to call in an experienced professional team that can use state-of-the-art technology and financial and computer forensics to provide an accurate picture or reality. To delay is the worst thing you can do.
