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The Quiet Downfall of a Billion-Dollar CEO

POSTED: 10:39 AM ET, 10/ 9/2008 by Derek Kravitz

In the chaos of Wall Street's financial crisis, a major business scandal in Minnesota has unfolded largely out of the national spotlight.

Tom J. Petters, a self-made mogul who wound up controlling a slew of major companies including Sun Country Airlines, Polaroid and uBid.com, now stands accused of defrauding investors out of $3 billion over the past 14 years.

As Petters Group Worldwide struggles to remain solvent, a federal judge yesterday ordered the 51-year-old founder held behind bars.

Petters started Petters Group as a one-man trading company in 1988. It grew into a worldwide operation with 3,200 employees working in 60 different companies.

Now, Peters sits in a county jail, accused of spearheading an elaborate Ponzi scheme since the mid-1990s, in which he allegedly dummied up fake sales transactions between his company and Big-Box stores like Sam's Club, Costco and BJ's Wholesale Club to entice investors.

Court documents allege that Petters started the scheme to "support his extravagant lifestyle." Nevada Gaming Enforcement agents told the FBI that Petters is the single largest "comped-room guest" at the Bellagio Casino in Las Vegas and that Petters has gambling losses totaling more than $10 million.

A copy of the FBI affidavit filed in connection with the Petters indictment


Download This Document (PDF) | More Investigations Documents

Investigators found that the receipts for thousands of bulk-merchandise items, such as 2,800 Hitachi projectors and more than 10,000 camcorders, were fake and that the documents were created to fool investors.

It was revealed yesterday that the whistleblower who came forward last month to federal authorities was a top official in Petters's company: Deanna Coleman, the former vice president of operations of a financing unit within Petters Group.

Coleman, 42, accepted a plea agreement from prosecutors, pleading guilty to one count of conspiracy. She faces up to five years in prison when she is sentenced. Two other officials also pleaded guilty.

Coleman's attorney, Allan Caplan, told reporters in St. Paul that Coleman wanted to bring the scam "to a screeching halt ... It was a courageous thing for her to do. The other people involved were people she'd spent the last 12 years with."

Company bank records show that Petters and other company executives personally withdrew millions in fraudulent funds, which were recorded as salary and bonus checks. Petters personally took out $500,000 from the account on Sept. 29.

Since Petters was charged (PDF of Justice Department statement) Oct. 2, his attorneys have argued that he should be released from custody, saying that his three children and a "significant other" are in Minnesota; that he surrendered his passport; and that his more than $1 billion in assets have been frozen.

However, federal prosecutors have pressed to have Petters held without bond, claiming that he discussed fleeing the country in recorded phone calls with co-defendants from prison.

"Furthermore, the defendant encouraged the subject to obtain false identification through Internet web sites, and intimated that he has false identification," Assistant U.S. Attorney John Marti wrote in court documents.

By Derek Kravitz |  October 9, 2008; 10:39 AM ET Hot Documents
Previous: Judge Tosses Stevens Evidence, Voter Rolls Scrutinized, Inside U.S. Eavesdropping | Next: After Afghan Probe, Military Vows Changes

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How about some research on all other employees involved.There has to be more than 3 or 4 people involved or are the feds happy with getting the guy at the top.What about former employees that may have been involved?

Posted by: Tom | October 9, 2008 2:49 PM

This is not a quiet issue in Minnesota.... and the repurcussions will be felt globally once all the lawsuits are filed by the hedge funds and investors that believed Petters was legit. The layoffs began in Minnesota today, thank you TP, you are the pinnacle of corporate greed. You are an insult to your late son and everything he stood for, do yourself and everyone a favor and plead guilty soon.

Posted by: Anonymous | October 9, 2008 4:23 PM

Anybody with info on which HedgeFunds
that were hit byt this over and above
those that have been all over the media?

Posted by: Roger | October 10, 2008 5:05 AM

Money's not going to do him much good in prison. Too bad families' lives are shattered due to other's greed. "To get something you’ve never had, you must be willing to do something you’ve never done"……Consider self employment. www.LikeSoup.com

Posted by: MONEY | October 10, 2008 10:28 AM

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