On April 8, 2010, Thomas Joseph Petters, age 53, of Wayzata, was sentenced by United States District Court Judge Richard H. Kyle to 50 years in federal prison for orchestrating a $3.65 billion Ponzi scheme -- the longest term of imprisonment ever ordered in a financial fraud case in Minnesota history.
On December 2, 2009, after a month-long trial and five days of deliberation, a federal jury convicted Petters of orchestrating a $3.65 billion Ponzi scheme. Specifically, Petters, who was indicted in December 2008, was found guilty of ten counts of wire fraud, three counts of mail fraud, one count of conspiracy to commit mail and wire fraud, one count of conspiracy to commit money laundering, and five counts of money laundering.
According to the indictment and trial evidence, Petters, aided and abetted by others, defrauded and obtained billions of dollars and property by inducing investors to provide Petters Company, Inc., (“PCI”) funds to buy merchandise to be resold to retailers at a profit. Instead, the defendant and his co-conspirators diverted the funds for other purposes, such as making lulling payments to investors, paying off those who assisted in the fraud scheme, funding businesses owned or controlled by the defendant, and financing Thomas Petters’s extravagant lifestyle.
This investigation began on September 8, 2008, when co-conspirator Deanna Coleman and her attorney reported to law enforcement that she had been aiding Petters in a multi-billion-dollar Ponzi scheme for ten years. Coleman reported that she, Petters, and co-conspirator Robert White fabricated documents to entice investors into lending Petters money purportedly to purchase electronics to be sold to big-box retailers, such as Costco and Sam’s Club. The money, though, was not used for that purpose.
Coleman agreed to work with law enforcement. She wore a recording device to tape conversations with Petters and others to evidence White's and Petters’s involvement in it. Within the first few hours of Coleman’s recorded conversations, Petters was heard admitting that purchase orders were “fake” and claiming “divine intervention” was the only way to explain how he and co-conspirators had “gotten away with this for so long.” The recorded conversations chronicled the history of the scheme and the conspirators’ efforts to maintain it by obtaining new funds and lulling long-term investors. The recordings also detailed how the conspirators planned to avoid responsibility if the fraud was discovered.
Petters’s scam was in essence a Ponzi scheme. Often potential investors were provided fabricated documents that listed goods purportedly purchased by PCI from various vendors and then sold to retailers. In some instances, investors also were given false records purporting to show that PCI had wired its own funds to vendors, thus giving the appearance that PCI had money invested in the deals too. In addition, investors received false PCI financial statements that indicated the company was owed billions of dollars from retailers. To induce investors further, Petters often signed promissory notes and provided his personal guarantee for the funds received. Those who invested, however, were not paid through profits from actual transactions. Rather, they were paid with money obtained from new investors and, at times, from their own money.
PCI, owned solely by Petters, was used for fraud from day one. Petters inflated and falsified purchase orders in an effort to obtain more money from investors, which, in turn, he used to pay other investors as well as himself. When Petters could not pay investors on time, he employed delay and evasion tactics, such as promising payments in the future, making up excuses about slow payments from retailers, or providing bad checks. As the scheme progressed, Coleman, Petters’s office manager, became responsible for fabricating purchase orders and transferring funds among investors. Petters also recruited White to assist in the fraud.
To further his scheme, Petters alsorecruited two business associates to launder billions of dollars in investor funds. From 2003 to the fall of 2008, about $24 billion flowed through their accounts and back to Petters. Although the two recruits were supposedly selling hundreds of millions of dollars in products to PCI, records revealed money flowed from them to PCI.
Petters bought and operated additional companies in an effort to maintain the facade of a successful businessman and create an air of legitimacy to lure investors. His companies were purchased with proceeds of the PCI fraud and included Fingerhut, Polaroid, and Sun Country Airlines. Each year PCI wrote off millions based on losses incurred by funding these companies, but they were necessary to give Petters the appearance he needed in order to keep the scam going.
On September 24, 2008, 16 days after the crime was reported search warrants were executed at the Petters headquarters, his residence and other locations. On October 3, 2008, Petters was arrested on a federal complaint, and was detained pending trial. Petters, PCI and Petters Group Worldwide LLC were indicted by a federal grand jury on December 1, 2008. Coleman, White, and five others pled guilty for their respective roles in the scheme and now await sentencing.
This case was investigated by the FBI, the U.S. Postal Inspection Service, and the IRS-Criminal Investigation Division.