Doug Kelley’s Clawback Incorporated, In the Wake of Petters’ Ponzi Scheme

Doug Kelley’s Clawback Incorporated, In the Wake of Petters’ Ponzi Scheme

Trustee Doug Kelley has created a mini-industry that’s out to recover as much as $18.4 billion for the victims of the Petters Ponzi scheme. But the recovery efforts are making many debtors—which include nonprofits—feel victimized. Kelley says he has no choice: “We are making law day by day.”

The mess left after the demise of Tom Petters’ business empire two years ago included a $3.78 billion Ponzi scheme involving 150 Petters companies. The courts needed a savvy and determined pro to pursue all means of recovering as much as possible for the victims, and they found him in Doug Kelley.

A longtime Minneapolis attorney with a reputation as a tough litigator who can handle complex cases, Kelley was named receiver by the federal government. He also was appointed as bankruptcy trustee for Petters Company, Inc., Petters Group Worldwide, and eight entities affiliated with Petters Companies through which investment funds were channeled. Kelley’s job is to reclaim money for the Ponzi scheme victims, who include unpaid Petters companies vendors and those who lost money they unwittingly invested in the scheme.

Kelley is going after these funds partly by gathering assets from Petters and other defendants. But the majority of his work centers around “clawing back” money from investors and others he contends took money belonging to the creditors.

Some of these clawback targets have simply repaid the money demanded. Others—some 202 of them—are being pursued by Kelley through lawsuits seeking upwards of $18.4 billion. Kelley realistically expects to win back less than one fifth of this amount and through December 9 had recovered $233 million for creditors.

Meanwhile, the process of pursuing Petters’ loot, and the business machine behind it—call it “Clawback Incorporated”—have generated more than $50 million in fees. Half have gone to Kelley’s firm and other businesses assisting it. (A chart totting up these fees follows this story.) The rest have gone to other attorneys that are working on Petters-related cases but who aren’t reporting to Kelley.

And 202 may not be the final tally of Petters-related clawback suits: Kelley is considering filing additional lawsuits against professional services providers, including other attorneys, that did work for Petters companies—thus generating even more fees for lawyers and accountants for years to come.

Kelley’s Minneapolis firm, Kelley Wolter & Scott, is directly handling 53 of the clawback suits. He has farmed out cases to two other Minneapolis firms: 124 to Lindquist & Vennum, and 25 to Fruth Jamison & Elsass. Lindquist also has done most of the bankruptcy work for Petters’ companies and Polaroid, a Petters holding that was sold in 2009. To date, Lindquist & Vennum has earned $7.8 million in fees.

Though Kelley is intensely disliked by many of the clawback suit defendants, “I’m pretty popular among attorneys,” he laughs. He says even lawyers who are publicly “shocked and chagrined” on their clients’ behalf by his aggressive clawback attempts “are happy to have some work.”

Lindquist & Vennum Managing Partner Daryle Uphoff says the firms that he’s talked to aren’t jealous of Lindquist’s millions. “The only thing I’ve heard from other firms is, ‘Thanks for keeping us busy,’ because they’re all representing defendants,” Uphoff says. “Nearly every law firm in town has a squad of attorneys involved in some aspect of these proceedings.”

It isn’t just law firms reaping the benefits of Clawback Incorporated. The biggest single winner so far has been PricewaterhouseCoopers, which has reported fees of $11.3 million. The accounting firm’s forensic unit has dug into millions of financial records dating back to 1996. Kelley says that the accountants’ work gives him ammunition to pursue claims against large hedge funds, whose assets are scattered worldwide.

The biggest suits are against large investors such as Minnetonka hedge fund Arrowhead Capital. (See “Long Arm of the Claw,” after this story, for a summary of the suits.) But Kelley’s own firm also is going after much smaller fish with what seems like equal ferocity. These include colleges and charities to whom Petters and his entities made donations.

“The charitable organizations were completely surprised” by the clawback demands, says Jon Pratt, executive director of the Minnesota Council of Nonprofits. “It was like ‘Zoinks!’ all of a sudden.”

Early last October, Kelley’s office sent a letter to the Make-A-Wish Foundation of Minnesota, which grants the wishes of children facing life-threatening medical conditions. The letter demanded the return of nearly $12,000 in funding given by Petters. When the foundation didn’t pay, Kelley filed a clawback suit. The foundation may end up returning the money. Fulfilling a child’s wish costs the foundation about $6,000. So “that’s two wishes,” says Tom McKinney, executive director of the Make-A-Wish Foundation of Minnesota.

As of early December, Kelley had filed 16 clawback suits against nonprofits. Entities being targeted include the Breast Cancer Foundation and the College of St. Benedict. He’s also collected nearly $8 million from 15 nonprofits without going to court. Ohio’s Miami University returned $5 million. St. John’s Abbey in College-ville gave back $2 million.

Some have asked whether is Kelley going too far by targeting nonprofits, particularly when the dollar amounts are so small compared with the millions that financial entities received from their investments in the Petters scheme. “Just because I think a charitable organization is a good organization does not mean I can say to them, ‘Keep the monies that were stolen from creditors,’” Kelley replies. He adds that he’s trying to keep the nonprofits out of court by offering to help them work out voluntary payment plans.

Kelley also is going after the sizable bonuses that some former Petters executives received. While not accused of committing fraud, they’re being sued to return the funds because they allegedly should have known something was fishy.

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Tom Heffelfinger, a former U.S. Attorney for Minnesota who’s representing several of the bonus recipients, calls Kelley’s actions “aggressive and unprecedented.” Heffelfinger’s clients “were paid for work that was actually performed.” He adds that Kelley could face as many as 50 trials where his attempts to claw back bonus funds will be fought by former employees and investors.

Given the relentlessness with which Kelley has pursued his work, many are wondering: What’s driving this guy? A run for public office? Kelley, who’s 64, says that’s not the case. But he is a man who loves intense challenges and an attorney who enjoys pursuing big, messy, and very visible cases.

The size of the fraud in the Petters bankruptcy is $3.78 billion—quite a pile, yet only a sliver of the $65 billion lost in the nation’s largest-ever Ponzi scheme, the fraud carried out by New York’s Bernard Madoff. Madoff bankruptcy trustee Irving Picard began filing hundreds of clawbacks in November, including suits seeking a total of more than $17 billion from three of the world’s largest banks and $19.6 billion from an Austrian banker.

Kelley insists that the Petters case is more complex than Madoff’s. Waving a spreadsheet packed with the names of dozens of interconnected entities, Kelley declares: “Madoff had one corporation, basically, with one computer that had all the records on it. [Petters] is 150 corporations spread all over the country, each with its own records.”

Kelley says that he’s taking a discount on his time in the Petters bankruptcy: “My normal rate is $650 an hour if you’re a Fortune 100. I think I’m doing this receivership at $475.” He adds that he discounted his fees at the request of the court.

Kelley also shrugs off the idea that he has too much power (see “A ‘Second Fraud?”) and that his clawback efforts are drawing unnecessary blood. “There are a lot of people looking over my shoulder,” he says, adding that he stays in touch with the creditors committee, keeping it abreast of any litigation.

As for how long the clawback process could go on, Kelley hopes to wrap up litigation in about 18 to 24 months, followed by six more to distribute the assets.

Others are less optimistic. “I have told my creditors it could take up to 10 years,” says Ron Peterson, the Chicago attorney who chairs the Petters creditors committee. Peterson has filed 61 clawback suits as an attorney for Lancelot, a bankrupt hedge fund entangled in the Petters web.

In other words, Clawback Incorporated could stay in business—and continue to generate fees for attorneys and others—for a long time to come.
—Dave Beal

Tracking the Fees

As of October 25, 2010
Receiver’s Fees

PricewaterhouseCoopers (forensic accounting)
$11.28 million

Lindquist & Vennum *
$3.2 million

Kelley Wolter & Scott
$5.57 million

Fruth Jamison & Elsass

Other law, financial, and accounting firms
$1.62 million

Subtotal: $21.91 million

Defendants and key witnesses **
$1.42 million

Receiver total: $23.33 million

Bankruptcy Fees

Petters Company, Inc.
Petters Group Worldwide
Bankruptcy total: $1.92 million

Combined total of receiver’s and bankruptcy fees: $25.25 million

* According to court filings, Lindquist & Vennum billed a separate $4.6 million, as of December 2010, in connection with the bankruptcy of Polaroid Corporation, a former Petters holding that was sold for $85.9 million in April 2009. Total fees in the Polaroid bankruptcy at that time amounted to $9.6 million.

** The receivership was forced to pay criminal defense expenses and other costs for codefendants in the Petters case. A directors and officers insurance policy eventually paid $3.3 million in defense fees for Petters himself.


Long Arm of the Claw

The 202 lawsuits filed as of October 10, 2010

As the trustee in the Petters bankruptcy, Doug Kelley has filed clawbacks against four target groups: investors, employees of Petters entities who got bonuses, charities, and banks. The four largest claims for interest from investors account for 56 percent of the $1.397 billion in interest he is seeking from inves tors. The $233 million that Kelley has recovered for creditors as of December 9 includes $120 million from the sale of Polaroid (a former Petters holding) and its related assets.

The claims listed here are for interest and other payments to investors. If principal is added in, that amount goes up to $18.4 billion.

cases amounts sought
Investors 128 $1.397 billion
    Largest 4 776.2 million
        Westford Special Situations 323.3 million
        Metro Gem 209.8 million
        Opportunity Finance 137.7 million
        Arrowhead Capital 105.4 million
    Remaining investors 124 621.7 million
Bonuses 51 44.5 million
Charities 16 706,029
Banks 6 61.1 million
J. P. Morgan Chase 1 241.0 million
Total amount sought $1.745 billion
Claims are for interest and other payments to investors.
Source: Douglas A. Kelley, Chapter 11 Trustee for PCI and PGW