Fredrikson, Others Agree to Pay Millions in Petters Clawbacks

Fredrikson & Byron, General Electric Capital Corporation, and the John T. Petters Foundation recently agreed to settle clawback lawsuits filed by bankruptcy trustee Doug Kelley.

Three defendants named in clawback lawsuits—including Minneapolis-based law firm Fredrikson & Byron, PA—recently agreed to pay millions of dollars to settle the suits, which stem from Tom Petters’ $3.65 billion Ponzi scheme.

According to court documents filed late Wednesday in U.S. Bankruptcy Court in St. Paul, Fredrikson has agreed to pay $13.5 million to settle a clawback suit that was filed by bankruptcy trustee Doug Kelley.

Fredrikson represented Petters and his companies for roughly 15 years as outside legal counsel, and the firm did not admit to any wrongdoing, according to the proposed settlement. The court documents state that Kelley did not uncover evidence suggesting that any Fredrikson employee had “actual knowledge” of Petters’ fraud, but he believes that there were “a number of red flags that should have alerted Fredrikson & Byron to the possibility that the business allegedly conducted by Petters was fraudulent.”

Fredrikson employs more than 500 people and had 230 licensed Minnesota attorneys as of April 30, making it one of the state's three-largest law firms. The settlement agreement was reached following confidential mediation between Fredrikson and Kelley.

“This settlement affirms our position that our representation of Mr. Petters and his companies was, in every respect, honest, ethical, and consistent with our professional duties and responsibilities,” Fredrikson counsel John Lundquist said in an e-mailed statement.

Lundquist added: “Like anyone, we don’t like to settle a case in which we’ve done nothing wrong; as attorneys, though, we know that even the strongest case faces uncertainty at trial and that it is often the prudent, cost-efficient option to settle such matters. Such is the case here.”

The firm said that the settlement is funded by its insurance company and “has no impact on the financial standing of the firm.”

Kelley has filed more than 200 clawback suits in an attempt to recover so-called “false profits” from investors and others who benefitted from Petters’ fraud scheme.

General Electric Capital Corporation has agreed to pay $19 million to settle the clawback suit that it faces, according to court documents that were also filed Wednesday. GE’s deal represents the largest such settlement in the Petters case to date, according to a report by the Star Tribune.

GE was a key lender to Petters and his business interests, according to court documents. GE denied “any and all liability” and said that it extended credit to Petters and received repayment “in good faith.”

In a third proposed settlement that was filed Wednesday, the John T. Petters Foundation, which received donations from Petters and his associates, agreed to pay a $1.25 million settlement.

All of the settlements are subject to the approval of a federal bankruptcy judge. The court documents call for a hearing before judge Gregory Kishel on June 20, or as soon as possible thereafter.

Kelley told the Star Tribune that the GE settlement is “significant,” as the company initially claimed that the statute of limitations had expired on claims against it. He said the settlement “sends a message to others” who have taken a similar stance.

“This was not just false profits, either,” Kelley told the Minneapolis newspaper. “It went well into the principal of the loan.”

Kelley’s roughly 200 clawback lawsuits have collectively sought to recover roughly $17 billion, but only a small portion of that sum is expected to be recovered. The original claim against GE, for example, was for $293.5 million, according to the Star Tribune.

Petters was convicted in 2009 of 20 counts of fraud, conspiracy, and money laundering, and he received a 50-year prison sentence in 2010. Petters’ attorney in April petitioned the U.S. Supreme Court to review his conviction, but the court denied that request earlier this month.

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