2 Hedge Fund Managers Plead Guilty in Petters Fraud
One day after three Florida men were charged with securities fraud related to Tom Petters' $3.65 billion Ponzi scheme, two of them pleaded guilty in federal court in St. Paul.
Hedge fund managers David Harrold and Bruce Prevost each pleaded guilty to four counts of securities fraud, prosecutors said on Thursday.
Beginning in the late 1990s, Petters raised money to perpetuate a Ponzi scheme by selling Petters Company, Inc. (PCI) notes to hedge funds. Harrold and Prevost co-founded Palm Beach Capital Management, which served as the investment adviser for four Palm Beach hedge funds.
Harrold and Prevost began investing the money of their hedge fund investors in PCI in 2002. By September 2008, the hedge funds held about $1 billion in PCI investments. The two men admitted in their plea agreements that their companies grossed more than $58 million in management fees as a result, prosecutors said.
The hedge fund managers admitted to lying to investors by telling them that big-box retailers were buying goods from PCI and paying the Palm Beach funds directly-when in fact, transactions weren't occurring and the two men knew that the funds came from PCI.
In early 2008, millions of dollars worth of PCI notes were nearing default, and Harrold and Prevost admitted to swapping $1 billion worth of PCI notes to make it appear that PCI had sufficient funds to repay the notes held by the Palm Beach funds. They continued to tell investors during this time that the funds were profitable-and they raised more than $75 million from more than 30 investors.
The men each face a potential maximum penalty of five years in prison for each securities fraud count.
Court records indicate that Frank Vennes, a business associate of Petters who was indicted on Thursday along with Harrold and Prevost, did not enter a plea. He faces the same charges as the two hedge fund managers, as well as a money laundering charge, which carries up to 10 years in prison.
According to the indictment, Vennes told Harrold and Prevost to communicate with Petters and PCI only through him. Vennes was mentioned in an affidavit from the Federal Bureau of Investigation when the Petters scheme began to crumble, which indicated that Petters stated that Vennes and other co-conspirators had knowledge of his fraud scheme.
A report by the Pioneer Press suggests that the plea deals struck by Prevost and Harrold with the government are a sign that federal prosecutors are building a case against Vennes, and their cooperation with the government could reduce their sentences.
Petters is currently serving a 50-year prison sentence in Leavenworth, Kansas for running a Ponzi scheme that defrauded investors of an estimated $3.65 billion. Petters filed an appeal shortly after he was sentenced, and he recently told federal judges that his trial was tainted and he deserves another.