The cashier’s check and fake company names were standard practice in the diverting business, Johnson and Petters say. Discount chains hungry for name-brand products were growing rapidly, and diverters were in high demand. Retailers would pay via cashier’s checks to companies such as PCI that were using fake names so that the name-brand manufacturers couldn’t trace how their merchandise wound up in a discount retail store.
In addition, diverters such as Petters created fictitious purchase orders that were used for internal purposes only—including for affixing to shipments. If a manufacturer found and read such an order, it would see a fake company’s name as either the original buyer of the TVs or the entity that was now buying them, and be unable to trace where they really came from or were going, Petters says. As diverting became even more competitive, diverters had to keep manufacturers out of warehouses altogether. Some manufacturers or competitors would disguise themselves as auditors or insurance agents—tricks that Petters became aware of and warned his team about repeatedly.
Amicus grew into a successful and profitable company. By the mid-1990s, it consisted of Johnson, Petters, White—who joined in 1993 to help with financing and investor relations—and Coleman, who also joined in 1993. She was an organized, bookkeeping type who made sure documents for deals were drawn up correctly and that everyone received payment as planned. Shortly after she started working for Petters, Coleman was signing all of his company’s checks and before long, was authorized to use signature stamps with Petters’ signature.
In 1994, Petters met Reynolds, “a vendor who sold me deals. He purported to own 10 to 15 stores and introduced me to people at companies such as Adidas and Nike,” Petters says. He also met Frank Vennes, who from that point forward helped attract investors willing to provide short-term financing for PCI to buy merchandise.
Business was going well and growing, but Petters grew tired of it. “I didn’t like the diverting business because every time money was being made it wasn’t as much as it first seemed it would be. There would be times when I thought we made $100,000 and it would end up being only $15,000—what happened?” he says today. Instead, he wanted to open and operate his own retail operations—sort of like Costco stores but smaller—called Petters Warehouse Direct Inc.
Later in 1994, Petters says, “we had a board meeting. Bob White was secretary-treasurer. I told them I really wanted to do retail and wanted to let this [current] business go. Bob says, ‘Let’s continue the financing business—you can do deals for your stores and for wholesalers. We can make 2 percent to 3 percent working for the wholesalers, so let’s do the hybrid of closeout businesses, buying for stores, and the diverting business.’
“We had a checklist of things to check on with every transaction done to make sure they were by the book. Larry [and his Nationwide International Resources business] was to check on deals west of the Mississippi, and Catain [who later established his Enchanted Family Buying Group] was to do the same on the east. Deanna was to divide things as needed,” Petters says. “We would make a return of 6 percent or 7 percent on average, and give up 1.5 percent of it to Reynolds or Catain for making sure the deal was legitimate and clean. (See “Cast of Characters,” online at http://bit.ly/HsD3OP.)
“I became convinced I could have these other people do this. And we’d continue to generate profits that could help me grow the retail business. In the 10 years afterwards, I maybe did 10 deals in PCI. I never looked at another purchase order—I just looked at the signature page and trusted they were doing things correctly.”
By 1995, Amicus had changed its name to Petters Companies Inc. (PCI) and was driven more and more by White and Coleman, allowing Petters to focus on his retail business and come back to PCI only when needed to help bring in a new investor or deal with any major client issues that arose. And it continued to conduct legitimate transactions under the PCI name.
“I remember his business calling on us and their selling products to us. And I met [Petters] a few times, sort of a meet-and-greet,” says Mark Cohn, co-founder and former CEO of Damark International Inc., then a publicly traded, national direct marketer of name-brand merchandise based in Minneapolis. “By then, we were a $500 million or $600 million company and were doing business with many vendors. PCI probably sold us a million or two [million] dollars’ worth of product. Then his business sort of got very big and he began to open retail stores.”
Petters Group Worldwide
Over the next three years—fueled by profits from PCI—Petters Warehouse Direct went on a buying spree. By early 1998 it was operating 14 national-brand, discount-retail stores in Minnesota, Wisconsin, and North Dakota, the Profits Journal story reported. Petters reported that he had just acquired eight World’s Greatest Deals retail stores from Minneapolis financier Irwin Jacobs’ Jacobs Trading Company, as well as closeout merchandise from seven Montgomery Ward distribution centers; assets of Florida-based Standard Brands Electronics’ 21 stores; inventory from three Incredible Universe stores; Detroit-based Fretter Inc.; Kent Distributing; and 16 defunct Steinberg stores.
Later in 1998, as the internet became the land of opportunity for commerce, Petters opened RedTagBiz Inc., a Web-based business to do essentially the same thing as Petters Warehouse retail stores, only without the bricks and mortar. Within its first two years, Redtag.com reported $1 billion in sales. By 2003, Ted Mondale was its president and the company employed 62 people.
Through the 1990s, PCI’s earnings continued to generate cash for Petters’ other business expansion plans because its timing was so good; it offered expertise in finding and financing discounted name-brand consumer products to feed what was then a budding industry in America—the large-volume, discount retail business.
PCI’s annual revenues grew from $4 million in 1993 to more than $120 million in 1997, with a gross profit of $18.5 million and earnings before taxes of $11.6 million, according to filings it made with lender GE Capital at the time. After doing its due diligence on PCI, GE provided the company with a $50 million line of credit in 1998, and PCI continued to flourish.
Within the next few years, Petters Warehouse Direct stores were eventually sold off (half of them to Coleman to help her expand her professional experience, Petters says); PCI focused more on providing financing for others who wanted to sell diverted merchandise, and Petters set his sights on bigger projects through a new business called Petters Group Worldwide (PGW).
His first major opportunity surfaced in 2002: Fingerhut, a Minnetonka-based direct-to-consumer marketing company selling products and services through catalogs, the Internet, and direct marketing. The nation’s second-largest consumer catalog marketer, it had been purchased by Federated Department Stores Inc. for $1.7 billion in 1999. Federated couldn’t make a go of it, however, and after losing more than $1 billion, decided to shut it down and lay off more than 6,000 people worldwide, including more than 2,000 who worked at its warehouse facility in Petters’ hometown of St. Cloud. By May 2002, it had laid off 3,800 people.
Petters approached Ted Deikel, who had originally sold Fingerhut to Federated, and asked him to lead it again if Petters could pull together the financing to acquire most of its still-viable assets. PCI loaned the money and obtained other financing for the two of them to purchase Fingerhut through a newly formed company, FAC Acquisitions LLC, for about $78 million. At that time, there were only a few hundred employees left. Petters soon sold Fingerhut’s real estate, used the proceeds to pay off what had been borrowed to buy the company, and eventually increased the company’s headcount by more than 1,000 positions, mostly in St. Cloud. Fingerhut became part of a new holding company, Bluestem Brands Inc., and today is a profitable nationwide direct retailer via online and mail-order services. It’s poised to go public and is valued at approximately $525 million.
Also in 2002, Petters approached Polaroid with the idea of using its name to sell consumer electronics such as televisions and DVD players. He purchased a license to do so, then went to China to have low-cost, quality TVs made. His company imported them to the United States, put the Polaroid name on them, gave buyers a warranty, and sold $1 billion worth, he says. By the end of 2003, Petters Consumer Brands was set up under the PGW umbrella, and it went on to sell more portable DVD players than any other brand sold in the United States. PCI helped finance Consumer Brands’ activities.
By this time, Petters had established a reputation as an up-and-coming, charismatic business leader. He purchased Chicago-based uBid, the second-largest Internet auction site, in 2003, as well as several smaller companies, while investing in startups, and donating to charities and universities. During the next four years, he would donate tens of millions of dollars to dozens of organizations, including the Juvenile Diabetes Research Foundation, St. Jude Children’s Research Hospital, Minnesota Teen Challenge, the University of Minnesota Foundation, Miami University of Ohio (his son John’s alma mater), and the Order of St. Benedict.
Petters also remained close to his parents, brothers and sisters, and children. “That was one of the most important things to him, family,” says an individual who knew Petters personally and asked to remain nameless. “He was always texting and talking with his kids, almost more so than with his business associates or workers. And he always kept in touch with his ex-wife [Jamie Wilcox] and continued to help her with things.”
But then the unthinkable happened. On March 14, 2004, Petters’ son John was murdered while visiting friends in Italy. “After John’s death, my personal and professional life was on steroids . . . more was better, so I didn’t have to deal with anything I was feeling.” (For more on Petters’ response to the tragedy, see Q&A).
Meanwhile, Petters Consumer Brands had done so well selling under the Polaroid brand that officials at Polaroid told Petters they wanted to end the licensing arrangement, he says. Instead, he wound up buying Polaroid outright for $426 million in January 2005, using personal funds and financing provided through JPMorgan Chase. Within a few years, Polaroid was poised to launch a new technology called ZINK (which stands for “zero ink,” because it produces full-color prints without ink cartridges).
“I was working on a worldwide licensing strategy [for Polaroid] that was going to bring in an estimated $2.8 billion—I had just made preliminary deals in three countries for over $900 million,” Petters says. “I also was working on a pending sale of half the company, and my attorneys were in the midst of completing a letter of intent with an overseas investor for $1.4 billion.” He says he also was working on acquiring Kodak and merging it with Polaroid.
As if Fingerhut and Polaroid weren’t enough, Petters heard that Sun Country Airlines was on the brink of shutting down in 2006 and decided to become co-owner of the airline, along with Minneapolis hedge fund manager Whitebox Advisors. In November 2007, Petters bought full ownership of the airline.
“It looked like a bargain, and we saved about 800 jobs,” he says. “We were going to augment this by developing a private-jet completion center where the old Champion Air used to be at the [Minneapolis/St. Paul International] airport, which would have brought another 500 or 600 jobs. Corporate jets are sold ‘green,’ meaning they have the cockpit, oxygen masks, and that’s about it. They have to go to completion centers, and they’re mostly outside the country right now. We had the exclusive contract to complete Airbus private jets.” Petters’ last news conference was held September 25, 2008, at the airport, celebrating the new Petters Aviation facility and its plans. But little was mentioned of it by the media, which focused instead on the raid that had occurred the day before, the government’s allegations, and Petters’ likely upcoming demise.
By 2008, Petters’ time was spent largely on PGW matters, speaking at university business schools, participating in fundraising and charitable events, and spending time with his family. With all this on his plate, he spent almost no time working on PCI activities, he says, and instead left them in what he thought were the trustworthy hands of Coleman, White, Reynolds, and Catain.
While the FBI and forensic accountants today say there was never any real business taking place at PCI, Petters says the $50 million line of credit from GE proved there was actual business taking place. GE Capital does thorough due diligence before financing anybody, he says, and it continued to run periodic checks on PCI—including visits to warehouses to check on inventory backed by its line of credit. GE did believe that everything was fine at PCI until payments started to come in late in mid-2000, according to court records. When that occurred and GE asked PCI about it, it was told by Petters’ associates that the delays were because Costco was late paying what it owed PCI. But GE Capital contacted Costco directly to inquire why it was late, and was told by Costco that there were no outstanding orders with PCI.
Petters says he was then brought into the situation and, based on what his team told him, he wrote Costco, apologizing for the confusion, and said he would let GE Capital know that there had been a mistake at PCI. However, in his phone conversations with GE Capital, he continued to blame Costco, according to court records. He continued to assure payment would be made soon, only to then give additional reasons for further delays that stretched things out by months. Toward the end, checks sent to pay what was owed bounced, records show. The prosecution during his criminal trial said this sequence of events proves he knew fraud was taking place in 2000.
Though Petters concedes that much of what occurred was messy and included checks bouncing, he continues to insist that he acted on what his PCI leadership team was telling him. “This raised [red] flags to me but I found it conceivable that the list of receivables involving Costco really was a mistake on our part. I hit the problem head-on and called them, said it was a mistake and we’ll take care of it right away, which we did,” he says. The line of credit in question was paid off. And his relationship with GE Capital continued to be good, he adds, citing as evidence that it provided his organization with $55 million in additional financing for the RedTagBiz operation that same year.
There also were other incidents that Petters now realizes he should have looked into.
In about 2002, he received a call from Coleman saying the FBI wanted to talk with him about a company PCI was doing business with. “She told me the bank accounts were closed and it had wired money to PCI. Then I heard the FBI wanted to talk with us. From what they told us at the time, I figured we should simply not do business with that company anymore, and that’s what I told the FBI, and that’s what we did.
“I can’t tell you how many times I wake up wishing that at that meeting, I would have asked more. It’s a shame [the FBI] didn’t look further,” he says. “I told them exactly what it was: I received a call from Deanna saying we’re having a problem [with a vendor], and that the FBI is coming out. I said, ‘OK, let’s call Fredrikson to have an attorney there.’ I told them what I knew. I told them what Deanna told me. The essence of that investigation would have benefited us—they were looking at bank accounts” of the vendor.
PCI also had an inquiry from the Minnesota Department of Finance at about that time, Petters says, but nothing came of it.
While the prosecution would later use these and other events as proof of his knowledge of the fraud at PCI, Petters says he viewed them as the opposite: The finance department found nothing wrong; the FBI went away; GE Capital had previously audited and found everything fine except for that one mistake Petters had cleared up. Over the years and through 2007, he was told by his team at PCI that audits were done by accounting firms Virchow Krause, Eide Bailly, and others. And then, he says, there were the hedge funds with which PCI was doing business. They, too, audited the company before investing in it. “They hired Arthur Andersen in 2000 to audit PCI,” he says. “Everything looked fine, given there were all those audits.”
Petters didn’t review the audits, however. “Generally speaking, in a business with 51 companies, the CEO is not in them auditing the books,” he says. Instead, he was busy building PGW and helping establish licensing agreements for Polaroid. He says he believed PCI was continuing to really move inventory and make money from it, and trusted Coleman, White, Reynolds, and others as they told him it was operating as expected—as a finance company that used equity and buying power and made a spread. Indeed, several e-mails from Reynolds and between Coleman and others through early 2008 show them discussing details on major merchandise transactions.
As for the times Coleman would call him in to help with a problem, such as with GE, “if you only get called to a scene when there was an accident, you never see how many cars really go through the intersection,” Petters says.
Continuing with the metaphor, he says he believed legitimate traffic was otherwise extremely heavy when, in fact, it was becoming lighter as PCI began to generate false documents telling investors their money was supporting diverting sales; in reality, they were paying off other investors, as well as financing the growth of PGW.
Meanwhile, PCI had been originally set up so only two people had access to its bank accounts—Coleman and Petters. Over the years, Petters called Coleman when something needed to be done with the account, but he let her have complete control. Even his accountant could not access the account; only Coleman could. There is no paper evidence showing Petters conducted PCI bank transactions, only witness statements saying he would sometimes call a bank to request transfers. It’s also unknown where such funds may have gone—Petters often used his personal accounts to purchase assets for his companies, invest in other businesses, and donate to charities.
Compounding matters was the fact that the relationship between Petters and Coleman turned sexual in 2005, then ended a year later. Thereafter, things seemed to change at PCI, and Petters seemed too busy to realize it, longtime associate Johnson says.
“I worked with all three of them for nearly eight years,” Johnson says about Petters, Coleman, and White. “Back in the beginning, the three of us were the closest because we spent a lot of time together. Deanna was one of the guys, like us.
“But around 2005 or 2006, Deanna really became very distant whenever I called or tried to talk with Tom. She’d always say he was out of town and she wouldn’t give him my messages,” Johnson adds. “Bob White also in the same way started acting distant, and I couldn’t figure that out. Things got fuzzier, and it seemed like the four of them [White, Coleman, Reynolds, and Catain] had their own ballgame going, and Tom wasn’t involved anymore. It seemed like something was up.”
Johnson says this led him to stop working with PCI in 2006, and because his main contact over the years—Petters—was no longer available. And it was Petters he trusted.
“Tom was always great at getting stuff going, but he rarely finished it—he’d turn it over to someone else to finish,” Johnson says. “He never rode it out to the end. Maybe he didn’t fully grasp what was going on as a result.”