Federal investigators allege that Tom Petters spent years building a multimillion-dollar Ponzi scheme to finance his luxe lifestyle. So why didn’t sophisticated investors see any red flags?
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THE MORNING OF SEPTEMBER 8, 2008, Tom Petters and Deanna Coleman each arrived at work shouldering the weight of the world. Each had reason to fear that something catastrophic was about to happen inside the shiny glass-and-brick complex in Minnetonka that housed Petters Group Worldwide, one of the largest privately held companies in the United States.
Petters’s chief goal that day was to woo some visitors from a high-flying New York investment firm called Fortress. A rakish, hyperkinetic figure, he had scrapped his way up from hardworking roots by seeing opportunity where others saw only failure. He had started out buying odd lots of things like stereos and TVs from bankrupt retailers and thinking up clever ways to market the goods. As his fortune grew, he branched out, putting together deals to rescue dying businesses.
But now Petters’s own business was the one in trouble. He desperately needed an infusion of cash. His empire—60-plus companies, including such well-known brands as Sun Country Airlines, Polaroid, and Fingerhut—was drowning in debt, and the amount of money he needed to placate his creditors was staggering. Over the course of the summer, he’d borrowed hundreds of millions of dollars from investment firms all over the United States and Europe. One was already suing over missed payments.
Coleman, Petters’s second-in-command, carried a psychic burden that was every bit as heavy, but for different reasons. Just hours earlier, she had walked into the Minneapolis office of the FBI and told agents that the trouble her boss was facing had nothing to do with poor business decisions or a sour economy. It was because the business, at heart, was a $3 billion fraud. A mirage. Coleman couldn’t take the pressure of being one of the few who knew the truth. After relaying the tale, she agreed to cooperate with agents, then drove to work, wearing a wire.
At the meeting with Fortress, Petters and Coleman walked through a proposal to use the firm’s cash to buy flat-screen TVs and other electronics from a company called Enchanted Family. Supposedly, big-box retailers, including Wal-Mart and Costco, were lined up to buy them. Petters would turn a quick profit and Fortress’s investors would be handsomely compensated for financing the transaction.
The visitors didn’t ask to see the TVs. Hardly anyone ever did. Good thing, too, because the discount electronics, which were supposed to serve as collateral for the loan, didn’t exist. Instead, the money people loaned Petters went to pay for mansions and yachts and every luxury imaginable for him and his inner circle. Petters had been making similar transactions for at least 14 years, Coleman told the FBI. And for 14 years, no one had figured it out.
On the contrary, people bragged about earning 25 percent or more on their money. Few realized that their profits—which most were quick to re-invest with Petters—came not from actual sales but from fresh investors. The catch, of course, was that the scheme had a voracious appetite for cash; it always required bigger and bigger amounts of money to allow for such eye-popping returns.
Coleman didn’t have to push much to get her boss to talk about the scheme. He had long agonized over the fact that there were no actual goods. He hated it, he said, but he needed Coleman to forge more documents to make the deal look bona fide.
“Does Fortress know that all these purchase orders are fake?” she asked after the financiers left.
“Fuck no,” Petters replied. “They don’t know they’re fake.”
Ponzi-scheme perpetrators have been around for ages. But Petters, if the allegations against him are borne out during his trial in U.S. District Court in St. Paul in October, is something truly new: a fraudster who, by virtue of his insatiable need for cash, became one of the financial superstars of his day.
Like Bernie Madoff and other operators of the mind-boggling, unprecedented pyramid schemes that have come to light in the last year, Petters was helped enormously by the fact that he operated in an era when even the sophisticated and the mega-rich were willing to suspend disbelief. The notion that anything that sounds too good to be true probably is? That was for suckers.
The decade leading up to last fall’s stock-market crash saw the rise of any number of highly speculative, perfectly legal ways to gamble with once unimaginable sums of money. Petters’s largest investors were hedge funds, loosely regulated ventures that charge fees upwards of 20 percent in exchange for cutting potentially lucrative deals considered too risky for mainstream investment funds. The cowboys of the financial world, hedge-fund managers supposedly made millionaires with strong stomachs into billionaires with financial empires. How? By finding deals with guys like Petters.
Talking to Coleman after the potential investors left, Petters seemed as boggled by the artifice he’d constructed as the rest of the world would be within a few days. “The only thing that makes me think there is some divine intervention is how we could have gotten away with it for so long,” he told her.