MN Hedge Fund Exec. Admits to Fraud in Petters Case

Michelle Palm admitted to misleading investors during Tom Petters' massive Ponzi scheme and later lying about it during a sworn testimony.

A hedge fund manager from Edina on Friday admitted in federal court to concealing information from investors and lying to U.S. Securities and Exchange Commission (SEC) officials during the investigation of Tom Petters' $3.65 billion Ponzi scheme.

Michelle Webster Palm, 43, pleaded guilty to one count of securities fraud and one count of providing a false statement to a government agent, according to Minnesota's U.S. attorney's office.

Palm was a vice president and managing director of finance at Arrowhead Management, which managed three hedge funds that “almost exclusively” invested in Petters Company, Inc., (PCI) promissory notes.

In her plea agreement, she admitted that from September 2007 through September 2008, she illegally concealed information from investors regarding the sale of securities.

Petters, who owned and operated PCI, is currently serving a 50-year prison sentence for running a Ponzi scheme took place for more than a decade.

Petters misled investors into believing that funds invested in PCI notes were used to finance the purchase of consumer electronics and other goods, which were then supposedly resold to retailers like Sam's Club and Costco-when in fact, no goods were bought or resold. Petters instead diverted the money for his personal use.

According to the U.S. attorney's office, Palm was not aware that the investments in PCI were part of a Ponzi scheme, but she did help perpetuate the fraud by lying to investors about the structure of PCI investments and their performance.

For example, Palm indicated that when a retailer purchased goods from PCI, the retailer paid for the products by depositing money into an Arrowhead Management-controlled account. She knew, however, that the payments her firm received came from PCI.

She also admitted to concealing the fact that millions of dollars in PCI notes held by her firm's funds were nearing default, and Arrowhead had given an extension on the payments. She continued to pursue new investors-raising between $20 million and $50 million-while she knew that the notes were on the verge of default.

On December 14, 2010, Palm lied to SEC lawyers in a sworn testimony, stating that she believed payments to the hedge fund were coming from retailers, the U.S. attorney's office said.

“Some people have lamented that executives in the financial industry are immune from prosecution. That is not true here in Minnesota,” U.S. Attorney B. Todd Jones said in a statement. “There is no second set of rules. Over the past several years, this office and our investigative partners have worked diligently to ensure the citizens of Minnesota that those who financially defraud others are held criminally responsible.”

Palm faces a maximum penalty of five years in prison for each of the two charges she faces. U.S. District Court Judge Richard H. Kyle will determine her sentence at a future hearing that has not yet been scheduled.

The aftermath of Petters' massive Ponzi scheme is far from over. Doug Kelley, the trustee overseeing the Petters bankruptcy proceedings, filed more than 200 clawback suits in an attempt to recover money for victims of the fraud scheme. George Singer, an attorney for Kelley, on Tuesday reported to a federal judge that the targets of 109 clawback lawsuits have asked to have the suits dismissed.