Mixing Business and Pleasure: Using Fraud Proceeds for Investment

December 2009

IN THIS ISSUE

— Fruitful Trees Grown From Bad Seeds: The Tom Petters Case
— Blurring the Lines: The Effects of Fraudulent Funds Invested in Real Companies
— In the next issue

GREETINGS!

Welcome to the December edition of our newsletter! In this issue, we’ll examine the case of Tom Petters, who is accused of using the proceeds from his Ponzi scheme to buy stakes in legitimate companies.

FRUITFUL TREES GROWN FROM BAD SEEDS: THE TOM PETTERS CASE

While Bernie Madoff was the face of modern-day Ponzi schemes — literally, with Halloween masks bearing his likeness being a hot seller this year — months before Madoff’s arrest another accused fraudster, Tom Petters, was quietly indicted on 20 counts of mail and wire fraud, money laundering and conspiracy related to a Ponzi scheme that allegedly reaped $3.5 billion.

What makes Petters unique? Not his entities arranged under the umbrella of his firm, Petters Worldwide, based in Minnetonka, Minnesota. Nor the allegation that Petters’ firms reportedly solicited investments from hedge funds and others by purporting to be a high-end electronics reseller while actually shipping no such products. No, what makes Petters’ fraud unique is that while Madoff appears to have turned his scheme’s proceeds into lavish personal items, such as real estate and watercraft, Petters used large portions of the scheme’s proceeds to invest in ailing, legitimate companies, such as Polaroid Corp. and Sun Country Airlines.

BLURRING THE LINES: THE EFFECTS OF FRAUDULENT FUNDS INVESTED IN REAL COMPANIES

Petters’ scheme came to light only after a business partner, Deanna Coleman, became an informant for the government. While prosecutors were aggressive in attempting to punish Petters, seeking life in prison if he is convicted, the commingling of legitimate firm investments with ill-gotten gains has reportedly caused some confusion among jurors as they deliberated before the Thanksgiving holiday, asking the judge if Petters’ investments in Polaroid and Sun Country were made through Petters Group Worldwide, which they were. Petters’ defense team also seized on the legitimate business investments as an attempt to bifurcate Petters from the Ponzi scheme, which Petters’ defense said was carried out by business partners without his knowledge.

Those investments, meanwhile, began to suffer even before Petters was indicted, with Sun Country Airlines telling employees they would only receive half pay in the last quarter of 2009 due to a “cash crunch” related to Sun Country becoming independent of Petters’ firm.

By using the gains of his electronics Ponzi scheme, at least in part, to fund investments in legitimate, often publicly traded companies – according to the prosecution – Petters was able to give the appearance of being a legitimate businessman who was defrauded by less scrupulous partners – the ultimate fall guy. While jurors continue to weigh his fate, it’s important to note that trained fraud examiners can trace the proceeds of the Ponzi scheme, helping litigators and jurors alike determine exactly how non-existent DVD players could become stakes in America’s first instant camera company and other legitimate concerns.

IN THE NEXT ISSUE

We’ll kick off the new year by looking at the recent corruption cases in the Philippines and examining how best to protect yourself from Foreign Corrupt Practices Act exposure when dealing with overseas partners.