Trust Me

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?

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.
 

 

PETTERS’S INCREDULITY was understandable. Over the years, he had come very, very close to getting caught on any number of occasions. Fraud charges brought against him in Colorado in the 1980s were sealed. A lawsuit filed by an early investor—a suit that could basically be taken as a primer on how Petters’s scheme worked—went nowhere, in part because the putative victim’s antics got him barred from the courts. Then there was the investment company that, using Google, discovered that a warehouse storing the electronics in a proposed deal didn’t exist. Instead of blowing the whistle, though, the company simply walked away from the deal.

If the record that has emerged in the wake of his arrest is true, after each near miss Petters never really altered course. Year after year, the story at the center of the fraud remained the same: He was getting a good deal on something—usually stereos, TVs, and other consumer electronics—that he could resell quickly for a tidy profit. He played the same hand again and again, but with ever-bigger amounts of money at stake each time.

He had first lit upon the idea when he was just 15. As a junior at Cathedral High School in St. Cloud, he was an indifferent student but an enthusiastic stereo salesman. “I had really little use for the things I thought I already knew,” he told an audience at the University of Minnesota’s Carlson School of Management in August 2008. “I liked to be outside the classroom.”

He was in charge of his own class schedule, so that wasn’t too tough: “I could show up at 8 in the morning and at noon I could be all done, leave my books in my locker, and go down and sell stereo equipment.” He eventually rented an office in downtown St. Cloud and recruited a sales force to stuff flyers under dorm-room doors at St. Cloud State, St. John’s University, and the College of St. Benedict. It didn’t matter that he didn’t have any capital and, therefore, no inventory; when he got an order, he forwarded it to a distributor in Virginia who fulfilled it.

His company, Ear Electronics, enjoyed $5,000 a month in sales until Petters’s mother, Rosemary, heard one of his radio ads while driving one day: “She said, ‘My car went off the road [when] I heard you on the radio today,’ ” Petters later recalled.

He was the fifth of seven children, the fourth generation of a family that had done business in St. Cloud since Charles Petters arrived from Germany in 1885. Like his father, grandfather, and great-grandfather, Tom grew up reporting for work at the Petters Building, a red-brick storefront on a major downtown thoroughfare. Earlier generations were tailors, making suits for local notables; by the time Tom arrived, the enterprise was selling fur and fabrics.

In 1977, two years after Petters graduated high school, the family business closed. By then, he was working for a statewide chain of stores, Schaak Electronics. He would frequently describe it as his halcyon era: He loved the energy at the company, loved selling.

He left to hawk yellow-pages ads, but resurfaced before long in Colorado, pushing stereos and TVs. He had risen to regional manager for a small electronics chain, Pikes Peak Liquidators, when suddenly it appeared it might go under. Undaunted, Petters bought the business.

It was during Petters’s time in Colorado that he first had trouble with the legal system. In 1983, he was charged with writing a bad check. Six years later, in April 1989, Colorado Springs police received a complaint from a man who claimed to have given Petters $75,000 to finance the purchase of 450 Emerson VCRs. The VCRs were never delivered, and the buyer went to the police. The investigating officers phoned the two electronics refurbishers who were supposedly providing the goods, but neither knew anything about the deal.

Police also contacted one of Petters’s former employees. The person knew nothing about the VCRs, but told police that Petters had opened an American Express account in the employee’s name two years earlier, run up $6,300 in charges, and disappeared.

Several people told the investigator that Petters hadn’t been seen in Colorado since July 1989. He had gone back to Minnesota, where, broke and divorced from his wife, Jamie Wilcox, with whom he had two children, John and Jennifer, he was living with relatives. Some of the people police questioned said they thought he had returned to Minnesota for drug treatment.

In October of that year, Petters called one of the detectives on the case and said there had been a misunderstanding. He claimed to have sold Pikes Peak to a man who had agreed to assume its debts. Before he left Colorado, Petters had used some of the money from the incomplete VCR transaction to pay his creditors, he told the investigator.

Three weeks later, however, Petters was arrested on the Colorado warrant. He was charged with forgery, larceny, and fraud, though the record concerning what happened next was eventually sealed, something that usually doesn’t happen in cases where there is a conviction. In court last year, Petters’s attorneys said the charges were dropped after he repaid the alleged victim in April 1990. The Securities and Exchange Commission claims Petters was imprisoned in Colorado in May 1990; the agency also claims that before he reported to prison he was charged in Minnesota with two counts of passing bad checks, one of which he pleaded guilty to. (The Colorado Department of Corrections, however, has no record of Petters ever being incarcerated, and Minnesota’s Bureau of Criminal Apprehension also has no record of any convictions except traffic offenses.)
 

 

EVEN AS HE WAS SORTING out his legal troubles, Petters decided to launch a new venture: the Petters Company, a one-man brokerage of so-called opportunity goods, odd lots of unsold products that could be peddled to retailers. “Every deal required millions of dollars to finance,” a company history in the Petters Group quarterly magazine explained in 2006. “Because the risks were too great for normal sources of financing, Petters had to go to individuals and he always kept his word on repaying his backers.”

For a time, he dabbled in retail via Petters Warehouse Direct, a small chain of stores located in the Twin Cities. A man who went to work for Petters during that time says that despite the growth, the operation always had huge problems with cash flow. (Like others interviewed for this story, the source asked for anonymity because he works in the financial-services industry, where any association with Petters is now toxic.) After a deal in the 1990s in which the source was only tangentially involved, Petters tracked him down and offered him a job helping manage one of the businesses. “He offered a huge salary and a big bonus and I thought, fine, I’ll do something different,” the man recalls.

The employee spent the next six months fending off creditors. “It was just a mess,” he recalls. “[Petters] just didn’t pay the vendors for a lot. He was kind of a Svengali in a way. He was very bombastic and he would tell great stories but just never put money into the business.”

Something was clearly amiss, but the man had no idea what: “There was literally an inner sanctum no one got to go into. It didn’t pass the smell test after a while.” Like plenty of other people who had their private suspicions, he eventually just walked away.

Others, too, had inklings that not all was right with Petters’s operation. In the late 1990s, you couldn’t go far in Twin Cities banking circles without finding a loan officer who had been asked to extend money to a customer who had a line on a sure thing—a friend or associate earning 25 percent with Tom Petters. None of the bankers listed in court filings would talk on the record, but several confirm they were approached by Petters. “There are very few banks in town that have not been affected,” says one who passed on the entrepreneur’s offers. “Customers invested their money with Petters and then had loan problems.”

In 1997, one of those banks, Princeton Bank, loaned $700,000 to Ruth Kahn, the owner of a business called Deep Draw Manufacturing. Kahn put up unpaid customer invoices as collateral. The invoices turned out to be fictitious. Yet when she got caught, Kahn assured the bank that her friend Tom Petters owed her a favor and would pay at least $100,000 of the debt. Kahn’s court filings include photocopies of three checks from Petters ranging from $130,000 to $158,000; all three bounced. Kahn pleaded guilty to wire fraud in 2001.

Even murkier was a series of suits filed during the same period of time by a Bloomington man named Richard Hettler. Hettler claimed to have lost money in separate investments with Kahn and Petters, both times because the collateral for the loans didn’t exist. But Hettler didn’t have a lot of credibility: He was serving a two-year prison sentence for a 1998 conviction for felony theft by swindle, and a federal judge eventually declared him a nuisance and barred him from filing any more suits in Minnesota.

IN 2002, AN INTERNATIONAL fund called Lazard Financial Management asked Petters Group’s in-house counsel to explain the CEO’s criminal record. In response, Petters paid an attorney to have his Colorado record sealed and related fugitive charges in Minnesota expunged.

Another fund manager, his suspicions raised by the Petters executives’ “sense of urgency” about getting a deal done, logged onto Google Earth and typed the address of the warehouse listed on invoices Petters had given them, only to find that there was no warehouse. The property was a vacant lot. “Something just didn’t jibe with us,” the unnamed fund president later told the Hedge Fund Law Report. “Just in some of our cursory investigation, we found things that did not seem right.”

In 2004, one fund hired an investigator named Randy Shain to check into Petters’s background. Shain says the case stands out in his mind because of the exceptional number of red flags he turned up. Petters’s profile on Dun & Bradstreet, for example, indicated that he had graduated from college. But Shain’s research suggested he had attended St. Cloud State for only one term. The point wasn’t whether he had a degree, it was the possibility of dishonesty: “Dun & Bradstreet either got it from him or someone in the organization,” he explains. “They didn’t make it up.”

Shain looked at 20 years of court records and found allegations of bad check writing and about 15 lawsuits. “It was frankly astonishing from the outside looking in how anyone could think this was what it was purported to be,” he says. “I would argue that this was like every other scam in history. He traded on the good name of his family in his local area. It was a classic affinity fraud. Affinity fraud is a fancy term for cheating people you have some connection to. Whatever it is, whether it’s geographic or religious, it’s a connection people feel to you. The idea is that you know someone. But the reality is that you know of them.”

And yet, to the outside world, Petters seemed to have it made. He flew in private planes from his $8 million lakeshore estate in Wayzata to his $9 million oceanfront spread in Manalapan, Florida, a suburb of Palm Beach, and his $20 million properties in Colorado. He had two Tiara boats, a power cruiser, and a sailboat. He had a Bentley, five Mercedes, and a Lexus.
 

 

He bought Sun Country Airlines, Polaroid, and a publicly traded Internet auction house called Ubid. The advent of the Internet, in particular, proved the catalyst for Petters’s opportunity-goods dealing to really take off: Where better than an online outlet or auction house to find buyers for everything from dishtowels to appliances? After two years online, his Redtag.com reported $1 billion in sales.

But the acquisition that signaled Petters had truly arrived was the 2002 purchase of Fingerhut. Headquartered in Minnetonka, the catalog company had lost $1 billion over three years when its owner, Federated Department Stores, threatened to liquidate the business. The potential impact on Petters’s hometown was clear: the loss of 2,700 jobs in St. Cloud. Finding a white knight became the focus of everyone from union stewards to Senator Paul Wellstone.

Along with former Fingerhut CEO Ted Deikel, Petters put together a bid. The business pages ate up the story, depicting Petters as a hometown hero to the rescue, a role that upped his social standing in the local business community. The Petters family had always been active in social-justice circles, but now Tom was appointed to the board of trustees of his mother’s alma mater, St. Ben’s, and asked to speak to local civic groups.

“He had an infectious personality and he was very positive,” recalls a former associate. “He was always go, go, go. He had an idea a minute.”

In 2004, tragedy interrupted the fairy tale. Petters’s 21-year-old son, John, was stabbed to death on a spring-break trip to Florence, Italy. At 4 a.m., after a night on the town with fellow graduates of Edina High School who were also studying abroad, John attempted to visit a public rose garden. An antique dealer who lived on the property mistook the young man, who did not understand Italian, for a thief and stabbed him several times.

“He still is so sad about John every day,” Petters’s longtime girlfriend, Tracy Mixon, testified in court last year. “They were very, very close.” Petters would talk periodically about grief counseling, but increasingly he lost himself gambling, drinking, and taking prescription amphetamines and sedatives.

THE FIRST ANNUAL GALA fundraiser for the John T. Petters Foundation, established to honor Tom Petters’s slain son, packed the Minneapolis Hilton with celebrities and kingmakers. Staged at a cost of $400,000, it was over the top in every way. “People in Minnesota don’t do half-million-dollar parties,” recalls a former business associate who was in attendance. “It was more like a fundraiser for the Metropolitan Museum of Art in New York than anything you’d see here. It was like an inaugural ball. It was the best party in town.”

That first year, 2006, the theme was “A Night in Las Vegas,” and the bland exhibit hall had been transformed into a casino as glitzy as anything on the Vegas strip. Comedian David Spade headlined, backed up by a tribute act called the Rat Pack Revue. Four showgirls circulated wearing outrageous feather headdresses and little else. A floodlit Lexus SC430 sat atop the bar, on display for guests who might want to bid on a two-year lease in a live auction.

It was a pivotal moment. Petters had gone from local-boy-made-good to the larger-than-life high roller at the center of everything—such a titan that celebrities and politicians wanted access to him. While shutters whirred, he posed with a parade of notables. Governor Tim Pawlenty was on hand, as were state attorney general Mike Hatch, former governor Wendell Anderson, and a sizeable portion of the state’s congressional delegation.

All told, the bash raised more than $1.2 million. Virtually everyone Petters did business with was invited to attend—and donate. Acorn Capital Group gave $10,000, as did several less prominent “sources of alternative financing,” as many of the exotic, risky investment vehicles were described. Chicago hedge fund Lancelot Investment Management gave $50,000, as did its president, Gregory Bell.

Petters and Bell had met several years earlier while Bell was working for a Florida hedge fund. Bell wanted to strike out on his own and Petters encouraged him. From 2002 to 2008, Bell’s Lancelot operated as a “feeder” fund for Petters, investing $2.6 billion from hundreds of retirement plans, IRAs, trusts, corporations, individuals, and other investment funds.

Bell told investors the fund’s main strategy was to finance the purchase of merchandise for resale by big-box retailers. He had visited the warehouses himself and seen the goods, he told people, adding that, as an additional safeguard, investors’ money would be kept in a “lock-box” account—a kind of escrow account to be paid out directly to suppliers upon delivery of the goods, and not to Petters. In turn, investors would be reimbursed directly by retailers.

According to Securities and Exchange Commission documents, in 2004 Bell realized he was being paid not out of a lock-box account but by Petters himself. According to investigators who perform due diligence for investment funds, that kind of direct payment is usually a red flag. It’s not clear what Bell thought, only that after receiving a “feeble explanation” from Petters, he then learned that Petters’s background contained criminal allegations. “These facts should have led Bell to question everything Petters was telling him,” asserts a federal complaint against the two men. “But instead, Bell deliberately concealed Petters’s prior convictions from the funds’ investors and continued to invest the funds’ money in Petters [Company] notes.”
 

 

 
If the SEC complaint is to be believed, Bell had a powerful motive. His cut was typical of hedge-fund managers: A percentage of assets, 20 percent of profits, and other fees. During the six years he funneled investors’ money to Petters, Bell earned $245 million in fees.

By mid-2007, it became clear that Petters couldn’t keep up with his obligations to Bell. Yet Bell, if the allegations against him prove true, had little recourse. He was in too deep to do anything but keep the scheme going. Aided by Petters’s inner circle, Petters and Bell began making “roundtrip” payments designed to make it appear as if new money was coming in and old investors being repaid. “Each of these bogus transactions consisted of a pair of multimillion-dollar transfers,” court documents explain. “First, Bell’s employees would wire a large amount to Petters Company, purportedly to purchase one more new note. Shortly thereafter—sometimes within the hour—Petters Company employees would send a return wire, usually in an almost identical amount, purportedly in repayment of several overdue notes. When the transaction was completed, the cash had made a roundtrip from Bell to Petters and back to Bell.”

The size of the supposed payout to new investors was increasing in direct proportion to Petters’s desperation: By early 2008, Petters was pledging interest rates of up to 361 percent. Desperate to cover their own losses in a softening economy, investment firms accepted the promissory notes despite the fantastical returns.

“If you have a company that promises you 300-plus percent or 70-something on a promissory note, your alarm bells should be going off,” says Felix Meschke, an assistant professor at the University of Minnesota’s Carlson School of Management.

Says one Petters business partner who was taken by surprise by his arrest: “A big question to me is, Who were the people who run these funds and what did they tell their investors?”

The answer: not much. Many of the funds investing with Petters were not subject to the same level of scrutiny and disclosure that govern traditional investment vehicles. The rationale for the lack of regulation is that they cater to sophisticated investors. “The underlying assumption is if you have all of this money, you know what you are doing,” says Meschke. “It’s a curious assumption: If you are rich, you are sophisticated…. The whole business is trust-based.”

IN THE SUMMER OF 2008, a diverse array of investors had entrusted Petters with hundreds of millions of dollars. A Plymouth nonprofit, the evangelical Fidelis Foundation, loaned his businesses $28 million; the religious drug-and-alcohol treatment center, Minnesota Teen Challenge, invested nearly $10 million. Redstone Grill co-owner Michelle Vlahos invested $18.8 million. Half a dozen investment funds agreed to huge deals.

As depicted in a tangle of lawsuits filed since then, the job of keeping all of those investors’ nerves soothed required superhuman efforts. Petters had wooed the managers of a Minneapolis-based hedge fund, Interlachen Harriet, for example, for three years. Unlike others, the fund’s managers were relatively careful. They passed on a number of deals even though their due diligence failed to turn up any red flags.

In April 2008, however, Interlachen gave Petters $60 million to finance the purchase of thousands of high-end TVs from a Los Angeles company called Nationwide International Resources. Supposedly, major retailers were willing to pay a total of $122 million to buy the TVs. Four days later, at Interlachen’s request, Deanna Coleman sent a bill of sale transferring ownership of the TVs from Nationwide to Petters. A week later, Nationwide’s president, a man named Larry Reynolds, assured the fund’s managers on the phone that he was “spot-checking” the warehouses where the TVs were being stored in Los Angeles and Kansas.

All told, according to a suit filed by Interlachen in U.S. District Court, over the next few weeks the fund’s managers made 10 calls asking for status reports from Petters and Reynolds. Each time they were told how many televisions had been shipped out, and to which retailers. When no money materialized, Interlachen began demanding more detail. Petters claimed that retailers were coping with the slackening economy by stalling their vendors.

By then, Coleman had decided she could no longer stand the pressure, and went to the FBI. On September 12, four days after she began her surreptitious recording, Coleman, Reynolds, and Robert White, a member of Petters’s inner circle, told Interlachen managers there was another glitch: Consumers were returning an unusually high percentage of the TVs to stores, but they had been assured that the manufacturer would take care of this.

A few days later, Petters called Interlachen and asked that they not contact the retailers directly. “I don’t think you’re going to get the satisfaction you need to get,” he said.

Court records show he was having similar exchanges with any number of investors.

To Coleman, he said he “just wanted to gamble, drink, and die.”
 

 

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.

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