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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According to Petters’s girlfriend, Tracy Mixon, by then he was mixing powerful prescription drugs—the stimulants Ritalin and Adderall for his attention-deficit disorder, the sedative Klonopin to balance out the amphetamines, and Ambien to get some sleep—with ever-increasing quantities of alcohol. On a typical day, that might mean two or three cocktails of Red Bull or Fresca mixed with vodka before dinner, wine with his meal, and then tequila afterward.
In August, Mixon—who would have two glasses of wine with dinner, followed by five to 10 beers—checked herself into Hazelden. According to his daughter, Jenny, Petters was concerned about his own drinking. He looked into Promises, a celebrity rehab program in Malibu, but didn’t go. “They wanted him to stay for four weeks and he didn’t have time,” Jenny Petters testified in court last year. “He’s dealing a lot with the economy right now. I think there was a lot of stuff going on and he wanted to stay for a week to two weeks and they said, ‘No, we can only take you for the full time.’”
He was also gambling away a fortune, the FBI learned from the Nevada Gaming Commission. He was the most-comped guest at the posh Bellagio casino, with losses totaling $10 million. In fact, he was in Las Vegas when the FBI made its move. At 7 a.m. on September 24, Special Agent Eileen Rice knocked on the door of Petters’s room at the Bellagio, hoping to ask him a few questions. He answered the door holding a cell phone; his lawyer was on the line, informing him that the FBI was raiding his Minnesota home and office, and those of several alleged co-conspirators. They seized so many boxes of papers, computers, and other documents it would take a semi to transport them back east, where the Justice Department would scan them and create electronic versions.
Six days later, Petters visited Mixon at Hazelden. According to Mixon, the two talked about going to Petters’s oceanfront spread outside of Palm Beach. There were too many people pulling at him in Minnesota, Mixon said, and Petters claimed he’d be better able to concentrate on his legal issues at his vacation home. Mixon could transfer to a treatment program nearby.
An hour and a half after Petters and Mixon said goodbye, in an effort to cooperate with law enforcement, Petters’s colleague, Robert White, called Petters. As White spoke, FBI Special Agent Timothy Bisswurm stood by his side. Later, Petters’s girlfriend and daughter would listen to a recording of the rambling, often-unintelligible conversation between White and Petters and say that Petters was too stoned and drunk to really know what he was saying.
To the FBI and the U.S. Attorney’s Office, it was pretty clear that the topic of discussion was fleeing the country. White said his wife, Robyn, was reluctant to leave. Petters urged him to simply take a vacation and see what happened. They talked—Petters in sentence fragments—about fake IDs and how to figure out which countries had extradition treaties with the United States.
“Where is your boat?” Petters asked.
“Chesapeake Bay,” White responded.
“So,” Petters said.
“It’s hard to just take off with a boat,” White protested. “You gotta do some preparations and it costs. You know, I mean, shit, there, you gotta put tons of fuel in ’em and everything else. You got, I mean, you gotta provision it and so on…. It’s not like driving to the cabin.”
“Yeah, you have to put food and everything on it,” Petters considered.
“It takes, um, um, ahhh, 2,000 gallons of fuel, I mean, you got, I mean, I mean, it’s just like, it’s a, it’s a project to get the thing ready to go,” White said.
Two days later, Petters was arrested at home. At his bail hearing on October 7, Jenny Petters testified that there was never a plan to leave the country. The whole family had planned to go to Disney World. The tickets had already been purchased.
Throughout the hearing, Petters displayed curious behavior, winking at friends and relatives in the courtroom, sweating profusely, blowing kisses to his grown daughter, and mouthing “I love you” even as the recording of his conversation with White was played. His attorney suggested he be evaluated for substance abuse.
On October 8, U.S. Magistrate Judge Jeffrey Keyes denied Petters’s request to be sent home with an electronic monitor pending trial. Petters, he noted, owned a 12,000-square-foot estate on the Atlantic Ocean and was “facing substantial risk of a very, very long prison sentence, perhaps the rest of his life.
“We have here in Mr. Petters a man who has controlled billions of dollars. He is accustomed to making grandiose schemes work.”
IN JUNE, PETTERS APPEARED briefly before a federal judge in St. Paul for a routine hearing, a matter that needed to be disposed of in advance of his trial, which is scheduled to start in October.
If convicted, Petters could spend the rest of his life in prison. His loved ones have already lost virtually all of the luxuries he lavished on them. And yet, dressed in orange jailhouse scrubs and white sneakers—with his empire being sold off piecemeal by a federally appointed receiver—he looked much calmer and healthier than at the time of his arrest eight months before. Gone was the pallor, the bizarre gestures, and the disorientation. Once unshackled, he waved at a couple of people in the gallery and seemed to find it humorous when the marshals, presumably worried he might act up, created a buffer zone around him by clearing two spectators from the courtroom’s front bench.
Whatever the trial’s outcome, it may never be revealed whether there was a moment when Petters made a deliberate choice to con investors or, as he suggested to Deanna Coleman during the conversation that was the beginning of his downfall, whether he just kept not getting caught. Certainly, there’s no way he could have imagined how successful he would be, or foreseen that becoming a billionaire would just make it all the harder to keep his house of cards from toppling. That his success—the regular infusions of hundreds of millions of dollars needed to placate Petters’s investors—would be his ruin.
The irony, of course, is that he might well have done brilliantly in business without the financial shell game. More than 3,200 people showed up for work every day at companies owned by Petters Group Worldwide. Many worked on developing the instant digital cameras and inkless printers that could put Polaroid back on top. Some ran the numbers to decide whether Sun Country should hedge its fuel contracts. Some actually bought and sold TVs. Tom Petters owned profitable businesses—but he appears to have acquired them with ill-gotten gains.
The problem with the Ponzi scheme, at least from the perspective of the perpetrator, is that there is no natural exit strategy. Inevitably, bridging the ever-widening chasm of debt becomes a mathematical impossibility. When the schemes collapse, it’s not uncommon to find that the fraudsters really intended to create a legitimate business with investors’ dollars. Instead of coming clean when one venture after another fails, they tell themselves the next idea will catch fire and they can pay everyone off.
It’s not hard to believe Petters was convinced he would hit the jackpot and make everything right. But it’s almost impossible to imagine the payday that would put him in the black.
Beth Hawkins is a contributing editor at Minnesota Monthly.