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Tom Petters receivership seeking funds from co-conspirator Michael Catain as well as accountants and lawyers who provided advice to Petters or reviewed his investment portfolio on behalf of new investors and failed to detect the alleged scam.

10/03/09 - It has been an anguishing 12 months for the investors and creditors who put their faith in Wayzata businessman Tom Petters only to watch his business empire implode amid allegations that he had orchestrated a massive fraud for more than a decade.

The case has riveted the attention of the Twin Cities business community since that warm September day one year ago when federal agents swarmed Petters' business campus in Minnetonka and his home in Wayzata in search of evidence that would lead to the arrest of Petters and guilty pleas to various criminal charges from five of his immediate associates.

After a couple of delays, Petters' trial is scheduled to begin Oct. 26.

In the meantime, legal and financial experts have continued to sift through the wreckage of his business and personal holdings hoping to regain pennies on the dollars that were invested. To date, fees paid to attorneys and other professionals to untangle the complicated web are approaching $10 million, and the work is far from over.

Court-appointed receiver Doug Kelley has scored a couple of victories for creditors. His team of attorneys and advisers negotiated the $85.9 million sale of Polaroid, recovered $16 million from a Central American lottery operation and $9.5 million by canceling a deal with Airbus.

Even at the fire-sale prices Kelley has been getting in the down economy, the personal items obtained from Petters and his associates paint a picture of lavish living. A Florida mansion owned by Petters went for $9.5 million. A Costa Rican villa owned by co-conspirator Michael Catain brought in $1 million. A 2007 Bentley and 2004 Ferrari owned by Larry Reynolds, another participant in the alleged fraud, sold for $225,000. And courtside Timberwolves season tickets held by government informant and Petters lieutenant Deanna Coleman brought in $11,500.

It hasn't been easy sledding. The asking price on Petters' Lake Minnetonka home has been lowered twice, to $6.75 million, and remains on the market. So do Coleman's home in Plymouth and her condo in Costa Rica, Reynolds' Las Vegas home, and the 65-foot sailboat formerly owned by Robert White, another Petters associate who has pleaded guilty in the case.

To date, Kelley and his receivership team have recovered $196 million from the corporate and personal estates; $17 million from individuals and $179 million from various Petters business entities.

"I'm happy where we're at, but we still have a long way to go," Kelley said, adding that he is preparing for a new phase of reclaiming assets.

"The next step is to start playing offense and start regaining money from those who took some out," said receiver Doug Kelley, referring to a practice known as "clawback."

"We're dealing with something that started 13 years ago and trying to get your hands on bank records that go back that far is a very difficult proposition," he said.

Kelley's targets are expected to include early investors who actually made money in their dealings with Petters. It also likely will mean going after accountants and lawyers who provided advice to Petters or reviewed his investment portfolio on behalf of new investors and failed to detect the alleged scam.

Until New York financier Bernard Madoff came clean last December and confessed to a $65 billion Ponzi scheme, the Petters case had been the largest such case in U.S. history.

"This is a scandal of unprecedented size," said Ronald Peterson, chairman of the creditor's committee for two Petters companies and receiver for five hedge funds that lost more than $1.4 billion that was invested with Petters. "We'll be looking at third-party professionals who have malpractice insurance. Of course, what is $50 million in insurance coverage when the claim is $1.4 billion?"

Peterson said the losses continue to ripple through the investment community as feeder funds feel the impact of the Petters meltdown. "There is no question that the contagion is traveling vertically," said Peterson, whose client Lancelot Investment Management almost immediately filed for Chapter 7 liquidation when the alleged Ponzi scheme collapsed last fall.

Peterson predicted the Petters receivership will be tied up in litigation for the next nine years as creditors and investors file lawsuits, prepare for trial, and verdicts go on appeal.

Those who lost investments in the Petters operation range from the pension funds of Fortune 500 companies to a group of modestly paid Minnesota clergy.

"They experienced a loss of trust," attorney Carolyn Anderson said of the 100 or so ministers, missionaries and ministries who lost their life savings with the Petters meltdown. "The world looks a lot different to them today than it did before."

But the story behind the story won't unfold in detail until Petters goes to trial in U.S. District Court in St. Paul on money laundering, conspiracy and fraud charges. The trial is expected to last four to six weeks and will first involve seating jurors who can overcome or are unaware of the high volume of news coverage the case generated over the last year.

"The high level of scrutiny makes it more stressful for everyone involved," said Ted Sampsell-Jones, a criminal law professor at William Mitchell College of Law. "But for a case this big, it's moving fairly quickly."

Asked for comment, Petters' attorney John Hopeman said Saturday, "The presumption of innocence applies to everyone, including Mr. Petters. Its vindication is what this trial will be about."

http://www.startribune.com/business/63199687.html

David Phelps • 612-673-7269