Tom Petters Interview: Plausible Deniability?

Tom Petters

Illustration by Dale Stephanos

After more than three years of silence, Tom Petters explains how the nation's third-largest Ponzi scheme occurred on his watch.

by Dale Kurschner

May 1, 2012

With a bank account balance averaging $100 a month, 54-year-old Thomas J. Petters lives with a roommate in Cellblock C-1 of the United States Penitentiary at Leavenworth, Kansas, where he is expected to eventually die: He was sentenced to 50 years with no chance for parole.

Only four years ago, prisoner number 14170-041 was one of Minnesota’s most promising entrepreneurial success stories. He had saved nearly 2,000 jobs and the businesses of Fingerhut, Sun Country Airlines, and Polaroid. He was well regarded by employees and friends, and had become a multimillion-dollar investor in early-stage companies, charities, and university programs. His companies made hundreds of millions of dollars in returns for those who had invested in them over the years.

Because of his success, he and close associates were linked to a number of well-known business and civic leaders—individuals such as Ted Mondale, Ted Deikel, Dean Vlahos, U.S. Senator Amy Klobuchar, U.S. Representative Michele Bachmann, and former U.S. Senator Norm Coleman.

But in late September 2008, Petters’ name quickly became one to curse, distance oneself from, or both, as details emerged about a $3.65 billion fraud for which he is now serving time.

By all media accounts, to a jury, and to the U.S. Court of Appeals for the Eighth Circuit, the evidence against him seems unquestionable. It includes e-mails, recorded phone calls, and conversations, fraudulent records with his signature on them, and testimony from several witnesses. All of it was used by prosecutors to describe how Petters’ original company, Petters Companies Inc. (PCI), sought financing from investors to temporarily purchase and warehouse merchandise that would then be sold to retailers, whose payments would be used to repay investors with a lucrative rate of return. The problem was, by 2008, there was no merchandise trading places. PCI investors’ money was used instead to repay other PCI investors (a Ponzi scheme) and keep afloat Petters’ more recent business interests, mainly Petters Group Worldwide LLC (PGW)—the holding company for Fingerhut, Sun Country, and Polaroid Corporation.

On September 8, 2008, his longtime business associate Deanna Coleman turned herself in to the FBI for participating in those fraudulent transactions, with help from co-fraudsters Bob White, Larry Reynolds, Michael Catain, and several others. In the weeks that followed, Coleman secretly recorded conversations with Petters, which were used to help convict him. Petters and his attorney provided explanations for some of this during his trial.

But it was to no avail.

“What was clear at the end of his trial was that he would say anything and construct fiction in order to achieve his desired goal. He uses facts to manipulate people for his benefit,” said First Assistant U.S. Attorney John Marti in an interview last month. Marti helped prosecute Petters.  “He has no empathy or care for how his decisions impact other individuals. Tom Petters is about as narcissistic as they come.”

Those who know Petters tell a different story. But they prefer to stay quiet for the most part, given the prevailing animosity in Minnesota toward the words “Tom Petters.”  Hundreds of investors and dozens of business, charity, and university leaders were hurt by what became the largest white-collar crime in Minnesota history, and the third-largest Ponzi scheme to date nationwide.

“The fallout from this whole thing was so devastating to many people in the community,” says a friend of Petters who asked for anonymity. “It quickly became, ‘How could you have known him!?’ Even now, it’s ‘How can you say those nice things about him?’ The situation becomes a question of whether your allegiance is with those hurt by all of this, or [with] Tom because you knew him. And anyone you talk with who knew Tom may not have been directly affected by it, but they know a number of people who were.”  

Several individuals, including Coleman (through her attorney) and Deikel, did not return calls or declined to comment for this story. Others would talk only on condition of anonymity, worried about what friends and employers might think about their point of view, or worse, that they could become part of the related ongoing criminal and clawback investigations. Those inquiries are still seeking ways to punish the guilty, and demand repayment from hundreds of individuals and organizations paid by Petters over the years. Even charities are being sued by receiver and trustee Doug Kelley, who claims donations they received from Petters were proceeds from the Ponzi scheme and now must be repaid. 

Petters was given a fair trial and convicted. And it’s steroptypical for an imprisonned white collar criminal to claim he’s innocent, or at least, not as guilty as charged. But interesting questions arise when examining his account of events, media coverage before his trial, and what was presented (and lacking) in terms of concrete evidence presented against him in court. There also was the timing: What better time to convict someone for financial fraud than after millions of Americans had lost their jobs and/or homes due to what seemed like large-scale fraud committed by major U.S. financial institutions?

What if, as Tom Petters maintains, he really didn’t know about the Ponzi scheme going on in one of his businesses until shortly before the authorities found out?

This question may seem laughable, perhaps even insulting to some. Yet the court of public opinion has never heard Petters’ side of his own story. Since his arrest in early October 2008, he declined all requests for interviews from the media, per the advice of his legal counsel (who not only advised against this interview, but also declined to comment).

Here, for the first time, is the story of what happened to a once-upon-a-time, fast-rising Minnesota business star—from his perspective.

Lights Out

It was the morning of September 24, 2008, and Tom Petters was in his room on the 23rd floor of the Bellagio in Las Vegas. He had spent the last few days trying once and for all to understand what had been happening with PCI, the oldest business within his corporate empire. He flew in expecting to receive answers from business associate Larry Reynolds, who days earlier had implied he had records Petters was seeking regarding PCI.

Since the mid-1990s, Petters had trusted two longtime business associates to run PCI—Deanna Coleman and Bob White—but record keeping had run amok. Audits that Petters today says he had assumed covered all of PCI had only covered parts, and, he later learned, were fed by false information. Money was owed to several parties, and there wasn’t enough cash coming in to pay them. And as the U.S. financial system was floundering, so was Petters’ ability to keep PCI afloat. If there was anyone who could help him get to the bottom of what was going on, he figured it was Reynolds, who also had worked with PCI for more than a decade.

Instead, he found that Reynolds didn’t have any records—though he was still adamant that he would help Petters figure things out and get out of the mess he found himself in earlier in the year, when, he says, he first learned from White of “bad paper” (investment documents lacking proper collateral support) at PCI.

Once again, Petters says, he was stumped after trying to figure out through internal resources how PCI wound up owing more money than it had. But this additional setback helped further validate his decision of a day earlier, when he instructed his team to hire PricewaterhouseCoopers to conduct an independent audit of PCI.

A second means of trying to figure out what had gone wrong—selling PCI—was also underway but had slowed due to the economic and financial crisis gripping the world. Petters’ hope was that unloading the company would finally free him of the headaches it had been causing him, and that due diligence by the potential buyer would reveal who among his associates had been betraying his trust.

He had indicated to his PCI associates months earlier that he was seeking to identify where the fraud was occurring—and that he was willing to have outsiders come in to figure it out, and even risk getting sued as a result. This stance pushed the fraudsters into the open, but with a twist: In early September, Coleman went to the FBI to report fraud was taking place within PCI, confess that she was a participant, and work out a plea and cooperation agreement that would help her avoid significant jail time. From that afternoon through the end of the month, she wore a wire while talking with Petters, and met frequently with authorities to help interpret what they were hearing. White turned himself in a few weeks later, also with hopes of receiving a reduced sentence. Petters, meanwhile, continued to talk openly with them about the mess he insists he had only recently discovered they were in, and how he wanted badly to fix it.

At 9 a.m. on September 24, the Federal Bureau of Investigation, Internal Revenue Service’s Criminal Investigation Division, U.S. Postal Inspection Service, and local law enforcement raided Petters’ hotel room in Las Vegas and business headquarters in Minnetonka, much to his surprise and that of hundreds of employees.

“I was on the way to a meeting and a buff, Vin Diesel lookalike with bare arms wearing a police vest stopped me and told me to go to the cafeteria. My first thought was, ‘Oh, birthday-cop strip-gram,’ ” says Melinda Nelson, now a senior editor at Mpls.St.Paul magazine, who was working in the media group at Petters’ headquarters as editor of Lake Minnetonka magazine and Sun Country Airlines’ in-flight magazine.

“When I entered the cafeteria I realized there were nearly 100 Vin Diesel lookalikes in the room and saw other employees filing in. We took our seats, and a Tommy Lee Jones lookalike ordered us to hold our cell phones in the air. We all sat there, looking at each other with our arms over our heads,” she says. “You get used to the notion that at work, there isn’t anything bad taking place. It was hard to process what was happening. A colleague looked at me from across the table and mouthed, ‘This isn’t good.’ And the situation went from possibly funny to weird and surreal to, ‘This just really isn’t good.’” Employees were allowed to leave after they provided their cell phone numbers and driver’s license information. Several PCI employees were interviewed by authorities before being sent home.

Sixteen hundred miles to the west, Petters was going through a similar range of emotions as authorities raided his hotel room. “At first I thought this had to be some sort of joke,” he says. But he soon realized things had gone from bad—where he could still possibly fix them—to worse, and he was facing an uncertain future not only for his companies, but for himself.

“For the next week, I was in shock. I had this horrible feeling I had been deceived. In the flurry of events, I knew Deanna had done something but I didn’t know exactly what,” he says. “The weekend after the raid, attorneys Doug Kelley and Jon Hopeman showed up at my home. Jon reminds me that all of my [corporate] attorneys at Fredrikson have quit, as well as my in-house counsel.” With nowhere else to turn quickly and easily, Petters had retained Hopeman as his criminal defense attorney a day earlier. He then opted to retain Kelley as his corporate attorney. But to Petters’ surprise, Kelley soon switched sides and became the court-appointed receiver and trustee in charge of selling off Petters’ assets.

In the days that followed, White visited Petters at his home almost daily, asking if he could borrow $50,000 for a lawyer, Petters says. “I had by now been hearing bits and pieces that Bob had been forging documents,” he says. “I was furious. Then Larry told me in so many words that he had good reason to believe that Bob was going to mess up the investigation [into who was leading the fraud] and I should do what’s necessary to have him leave town for a while. So I told Bob, ‘You should leave.’” White had by then also agreed to wear a wire, and authorities recorded the conversation, which included mentions of fake IDs and international travel.

Within two days of that conversation, on October 3, the FBI and local law enforcement entered Petters’ home, guns drawn. “I had just gotten out of the shower and had gotten dressed when I heard, ‘Freeze!’” Because of his conversation with White, Petters was arrested for obstruction of justice and held without bail for being a flight risk—even though he had turned in his passport, and authorities’ search of his e-mails, Internet search history, bank accounts, and previous travel patterns found no evidence that Petters planned to leave the country.

“That was when the lights went out in terms of being able to communicate. I could no longer communicate with anyone other than my attorney in a county courthouse,” Petters says from Leavenworth. “Today is the first day since October 3, 2008, that I’ve talked with anybody other than my attorney, family members, and a few friends.”

 

The Beginning

Tom Petters grew up a salesman and entrepreneur. His great-grandfather started Petters Fur and Fabrics in downtown St. Cloud in the late 1800s, and through the early 1970s, it was a quality retailer that central Minnesota residents held in high esteem, as they did the Petters family name. Tom Petters started working at the store when he was 10 and learned the retail business by working with his dad.

His parents, Fred and Rosemary, taught him, as well as his five siblings, to “be cautious, understand the risk of retail, grow slowly, and sell when profitable,” he said in a 1998 interview with Monte Hanson, then a senior editor with Profits Journal, a monthly publication covering emerging, venture-backed, and small-cap stock companies. (The publication was owned and published by this writer). But Petters was young and had his own style about him, one that took on risk with gusto and had an insatiable appetite for quick growth.

By age 15, he started his own business, Ear Electronics, a mail-order operation that provided college students in St. Cloud a source of affordable stereo equipment. It was 1973, and Petters obtained turntables, speakers, and car stereos from wholesalers, then sold them for prices below retail. He managed his business from a downtown office, complete with his own secretary (one of his classmates). When his parents discovered this was why his grades were suffering, they forced him to shut it down and find a way to pay off a remaining balance of $7,000. “I had to pay $69.23 a month on a loan. It seemed like an eternity,” Petters said in the 1998 interview.

Petters barely made it through one semester at St. Cloud State University; he couldn’t stand school—in part, he later discovered, because he has attention deficit disorder. In 1980, he met his wife, Jamie; they married, and they moved to Colorado; by 1984, they had two children, John and Jenny.

Petters worked as a regional manager for Merrick, New York–based retailer Top Brass, managing half of its 144 stores for five years. When Top Brass declared bankruptcy, he purchased five of its locations in Colorado and Kansas and was promised financing to help operate them, he says. The financing didn’t materialize, however, so he decided to close the stores and move back to Minnesota. The situation led to a lawsuit and a warrant for Petters’ arrest that he says he was unaware of at first. When he learned of it, he returned to Colorado, paid restitution, and later had his record there sealed and references to it in Minnesota expunged.

During his trial years later, prosecutors would present this and another, similar situation as signs of a pattern—of how Petters would sell investors on an idea and then not repay them.

While he was still living in Colorado, Petters’ marriage ended, and he wound up using cocaine fairly frequently. “By the time I left Colorado Springs in 1987, everyone I knew was using it,” he says. “My neighbors, my lawyer, my real estate agent—everyone in the 1980s did cocaine.” One reason for moving back to Minnesota was the addiction treatment center Hazelden: Petters says he checked himself in for treatment and has since used cocaine “maybe once or twice. I’m a big advocate of Hazelden.”

At times in the years that followed, those around him would sometimes think he was on cocaine, especially after his son was murdered in 2004. But it was prescription medications—Adderall for attention deficit disorder, Klonopin for anxiety, and Ambien for sleeping—combined with alcohol that sometimes affected his behavior and speech.

“It progressively got worse as he was trying to manage more companies and whatnot,” his daughter, Jenny, said during his bail hearing in 2009. It’s also possible to hear on the government’s audio recordings of Petters how the combination of prescription drugs and alcohol would at times affect his speech and lead to rambling sentences. His defense counsel would later say the court needed to realize that he was making things up or talking half-seriously in some of those recordings, given his state of mind.

After Hazelden, Petters was able to raise a small amount of financing and in 1988 started Amicus Trading Company, a wholesale brokerage that bought and traded closeout, overstock, and factory-reconditioned merchandise and goods from distressed retailers, distributors, manufacturers, and financial organizations, and then sold them at prices typically 50 percent to 70 percent below wholesale cost to discount retailers such as Costco.

As the Costcos of the world grew quickly, they began to seek larger supplies of product—and product from name-brand manufacturers. Fred Johnson, a salesman for Van Nuys, California-based Sellway Trading (a company similar to Amicus) reached out to Petters for help finding Sony TVs that could be sold to Costco.

“Costco wanted name-brand goods. But big name-brand manufacturers didn’t want to sell to Costco” because doing so would depress prices that Sony was selling its televisions for elsewhere, Petters says. “So I bought thousands of Sony TVs from Best Buy’s commercial division, and then sold them to Costco. At the time, it had about 30 stores, and selling name-brand products such as Sony, Coach, and Prada helped it achieve higher square-footage sales.” The process was commonly referred to at the time as “diverting.”

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