Hedge Fund Mgrs. Face Civil Suit in Petters Scheme
The Securities and Exchange Commission (SEC) on Wednesday filed a civil complaint against two local hedge fund managers-who already faced criminal charges-for their alleged involvement in Tom Petters' $3.65 billion Ponzi scheme.
James Fry and his Minnetonka-based Arrowhead Capital Management, along with Michelle Palm, a former managing director at Arrowhead, are accused of violating federal securities laws. The SEC wants the two individuals and Fry's firm to be permanently banned from the securities business, and it also seeks an order requiring them to repay unspecified “ill-gotten gains.”
The SEC's civil complaint contends that Fry and Palm misled investors by telling them that their funds would be safeguarded by certain bank accounts held by the hedge fund. They allegedly told investors that retailers would deposit the proceeds of their purchases from Petters directly into those accounts, but in reality, the money came directly from Petters-which the defendants knew but did not disclose to investors.
The SEC says that Fry and Palm invested more than $600 million of their clients' money with Petters. The complaint also says that Fry and Arrowhead earned more than $42 million in fees over the course of a decade-long relationship between Arrowhead and Petters-controlled entities.
Both Fry and Palm already faced criminal charges related to their alleged involvement in Petters' Ponzi scheme.
Fry was indicted in July for several fraud charges, and he pleaded not guilty later that same month. According to a report by the Star Tribune, Fry is scheduled for trial next year along with co-defendant Frank Vennes, Jr., who allegedly used Arrowhead and related investment entities to funnel funds to Petters.
Palm, meanwhile, pleaded guilty in April to one count of securities fraud and one count of providing a false statement to a government agent, and she awaits sentencing.