The Tom Petters Interview: Plausible Deniability?
With a bank account balance averaging $100 a month, 54-year-old Thomas J. Petters lives with a roommate in Cellblock C-1 of the United States Penitentiary at Leavenworth, Kansas, where he is expected to eventually die: He was sentenced to 50 years with no chance for parole.
Only four years ago, prisoner number 14170-041 was one of Minnesota’s most promising entrepreneurial success stories. He had saved nearly 2,000 jobs and the businesses of Fingerhut, Sun Country Airlines, and Polaroid. He was well regarded by employees and friends, and had become a multimillion-dollar investor in early-stage companies, charities, and university programs. His companies made hundreds of millions of dollars in returns for those who had invested in them over the years. Because of his success, he and close associates were linked to a number of well-known business and civic leaders—individuals such as Ted Mondale, Ted Deikel, Dean Vlahos, U.S. Senator Amy Klobuchar, U.S. Representative Michele Bachmann, and former U.S. Senator Norm Coleman.
But in late September 2008, Petters’ name quickly became one to curse, distance oneself from, or both, as details emerged about a $3.65 billion fraud for which he is now serving time.
By all media accounts, to a jury, and to the U.S. Court of Appeals for the Eighth Circuit, the evidence against him seems unquestionable. It includes e-mails, recorded phone calls, and conversations, fraudulent records with his signature on them, and testimony from several witnesses. All of it was used by prosecutors to describe how Petters’ original company, Petters Companies Inc. (PCI), sought financing from investors to temporarily purchase and warehouse merchandise that would then be sold to retailers, whose payments would be used to repay investors with a lucrative rate of return. The problem was, by 2008, there was no merchandise trading places. PCI investors’ money was used instead to repay other PCI investors (a Ponzi scheme) and keep afloat Petters’ more recent business interests, mainly Petters Group Worldwide LLC (PGW)—the holding company for Fingerhut, Sun Country, and Polaroid Corporation.
On September 8, 2008, his longtime business associate Deanna Coleman turned herself in to the FBI for participating in those fraudulent transactions, with help from co-fraudsters Bob White, Larry Reynolds, Michael Catain, and several others. In the weeks that followed, Coleman secretly recorded conversations with Petters, which were used to help convict him. Petters and his attorney provided explanations for some of this during his trial.
But it was to no avail.
“What was clear at the end of his trial was that he would say anything and construct fiction in order to achieve his desired goal. He uses facts to manipulate people for his benefit,” said First Assistant U.S. Attorney John Marti in an interview last month.
Marti helped prosecute Petters. “He has no empathy or care for how his decisions impact other individuals. Tom Petters is about as narcissistic as they come.”
Those who know Petters tell a different story. But they prefer to stay quiet for the most part, given the prevailing animosity in Minnesota toward the words “Tom Petters.” Hundreds of investors and dozens of business, charity, and university leaders were hurt by what became the largest white-collar crime in Minnesota history, and the third-largest Ponzi scheme to date nationwide.
“The fallout from this whole thing was so devastating to many people in the community,” says a friend of Petters who asked for anonymity. “It quickly became, ‘How could you have known him!?’ Even now, it’s ‘How can you say those nice things about him?’ The situation becomes a question of whether your allegiance is with those hurt by all of this, or [with] Tom because you knew him. And anyone you talk with who knew Tom may not have been directly affected by it, but they know a number of people who were.”
Several individuals, including Coleman (through her attorney) and Deikel, did not return calls or declined to comment for this story. Others would talk only on condition of anonymity, worried about what friends and employers might think about their point of view, or worse, that they could become part of the related ongoing criminal and clawback investigations. Those inquiries are still seeking ways to punish the guilty, and demand repayment from hundreds of individuals and organizations paid by Petters over the years. Even charities are being sued by receiver and trustee Doug Kelley, who claims donations they received from Petters were proceeds from the Ponzi scheme and now must be repaid.
Petters was given a fair trial and convicted. And it’s steroptypical for an imprisonned white collar criminal to claim he’s innocent, or at least, not as guilty as charged. But interesting questions arise when examining his account of events, media coverage before his trial, and what was presented (and lacking) in terms of concrete evidence presented against him in court. There also was the timing: What better time to convict someone for financial fraud than after millions of Americans had lost their jobs and/or homes due to what seemed like large-scale fraud committed by major U.S. financial institutions?
What if, as Tom Petters maintains, he really didn’t know about the Ponzi scheme going on in one of his businesses until shortly before the authorities found out?
This question may seem laughable, perhaps even insulting to some. Yet the court of public opinion has never heard Petters’ side of his own story. Since his arrest in early October 2008, he declined all requests for interviews from the media, per the advice of his legal counsel (who not only advised against this interview, but also declined to comment).
Here, for the first time, is the story of what happened to a once-upon-a-time, fast-rising Minnesota business star—from his perspective.
Lights Out
It was the morning of September 24, 2008, and Tom Petters was in his room on the 23rd floor of the Bellagio in Las Vegas. He had spent the last few days trying once and for all to understand what had been happening with PCI, the oldest business within his corporate empire. He flew in expecting to receive answers from business associate Larry Reynolds, who days earlier had implied he had records Petters was seeking regarding PCI.
Since the mid-1990s, Petters had trusted two longtime business associates to run PCI—Deanna Coleman and Bob White—but record keeping had run amok. Audits that Petters today says he had assumed covered all of PCI had only covered parts, and, he later learned, were fed by false information. Money was owed to several parties, and there wasn’t enough cash coming in to pay them. And as the U.S. financial system was floundering, so was Petters’ ability to keep PCI afloat. If there was anyone who could help him get to the bottom of what was going on, he figured it was Reynolds, who also had worked with PCI for more than a decade.
Instead, he found that Reynolds didn’t have any records—though he was still adamant that he would help Petters figure things out and get out of the mess he found himself in earlier in the year, when, he says, he first learned from White of “bad paper” (investment documents lacking proper collateral support) at PCI.
Once again, Petters says, he was stumped after trying to figure out through internal resources how PCI wound up owing more money than it had. But this additional setback helped further validate his decision of a day earlier, when he instructed his team to hire PricewaterhouseCoopers to conduct an independent audit of PCI.
A second means of trying to figure out what had gone wrong—selling PCI—was also underway but had slowed due to the economic and financial crisis gripping the world. Petters’ hope was that unloading the company would finally free him of the headaches it had been causing him, and that due diligence by the potential buyer would reveal who among his associates had been betraying his trust.
He had indicated to his PCI associates months earlier that he was seeking to identify where the fraud was occurring—and that he was willing to have outsiders come in to figure it out, and even risk getting sued as a result. This stance pushed the fraudsters into the open, but with a twist: In early September, Coleman went to the FBI to report fraud was taking place within PCI, confess that she was a participant, and work out a plea and cooperation agreement that would help her avoid significant jail time. From that afternoon through the end of the month, she wore a wire while talking with Petters, and met frequently with authorities to help interpret what they were hearing. White turned himself in a few weeks later, also with hopes of receiving a reduced sentence. Petters, meanwhile, continued to talk openly with them about the mess he insists he had only recently discovered they were in, and how he wanted badly to fix it.
At 9 a.m. on September 24, the Federal Bureau of Investigation, Internal Revenue Service’s Criminal Investigation Division, U.S. Postal Inspection Service, and local law enforcement raided Petters’ hotel room in Las Vegas and business headquarters in Minnetonka, much to his surprise and that of hundreds of employees.
“I was on the way to a meeting and a buff, Vin Diesel lookalike with bare arms wearing a police vest stopped me and told me to go to the cafeteria. My first thought was, ‘Oh, birthday-cop strip-gram,’ ” says Melinda Nelson, now a senior editor at Mpls.St.Paul magazine, who was working in the media group at Petters’ headquarters as editor of Lake Minnetonka magazine and Sun Country Airlines’ in-flight magazine.
“When I entered the cafeteria I realized there were nearly 100 Vin Diesel lookalikes in the room and saw other employees filing in. We took our seats, and a Tommy Lee Jones lookalike ordered us to hold our cell phones in the air. We all sat there, looking at each other with our arms over our heads,” she says. “You get used to the notion that at work, there isn’t anything bad taking place. It was hard to process what was happening. A colleague looked at me from across the table and mouthed, ‘This isn’t good.’ And the situation went from possibly funny to weird and surreal to, ‘This just really isn’t good.’” Employees were allowed to leave after they provided their cell phone numbers and driver’s license information. Several PCI employees were interviewed by authorities before being sent home.
Sixteen hundred miles to the west, Petters was going through a similar range of emotions as authorities raided his hotel room. “At first I thought this had to be some sort of joke,” he says. But he soon realized things had gone from bad—where he could still possibly fix them—to worse, and he was facing an uncertain future not only for his companies, but for himself.
“For the next week, I was in shock. I had this horrible feeling I had been deceived. In the flurry of events, I knew Deanna had done something but I didn’t know exactly what,” he says. “The weekend after the raid, attorneys Doug Kelley and Jon Hopeman showed up at my home. Jon reminds me that all of my [corporate] attorneys at Fredrikson have quit, as well as my in-house counsel.” With nowhere else to turn quickly and easily, Petters had retained Hopeman as his criminal defense attorney a day earlier. He then opted to retain Kelley as his corporate attorney. But to Petters’ surprise, Kelley soon switched sides and became the court-appointed receiver and trustee in charge of selling off Petters’ assets.
In the days that followed, White visited Petters at his home almost daily, asking if he could borrow $50,000 for a lawyer, Petters says. “I had by now been hearing bits and pieces that Bob had been forging documents,” he says. “I was furious. Then Larry told me in so many words that he had good reason to believe that Bob was going to mess up the investigation [into who was leading the fraud] and I should do what’s necessary to have him leave town for a while. So I told Bob, ‘You should leave.’” White had by then also agreed to wear a wire, and authorities recorded the conversation, which included mentions of fake IDs and international travel.
Within two days of that conversation, on October 3, the FBI and local law enforcement entered Petters’ home, guns drawn. “I had just gotten out of the shower and had gotten dressed when I heard, ‘Freeze!’” Because of his conversation with White, Petters was arrested for obstruction of justice and held without bail for being a flight risk—even though he had turned in his passport, and authorities’ search of his e-mails, Internet search history, bank accounts, and previous travel patterns found no evidence that Petters planned to leave the country.
“That was when the lights went out in terms of being able to communicate. I could no longer communicate with anyone other than my attorney in a county courthouse,” Petters says from Leavenworth. “Today is the first day since October 3, 2008, that I’ve talked with anybody other than my attorney, family members, and a few friends.”
The Beginning
Tom Petters grew up a salesman and entrepreneur. His great-grandfather started Petters Fur and Fabrics in downtown St. Cloud in the late 1800s, and through the early 1970s, it was a quality retailer that central Minnesota residents held in high esteem, as they did the Petters family name. Tom Petters started working at the store when he was 10 and learned the retail business by working with his dad.
His parents, Fred and Rosemary, taught him, as well as his five siblings, to “be cautious, understand the risk of retail, grow slowly, and sell when profitable,” he said in a 1998 interview with Monte Hanson, then a senior editor with Profits Journal, a monthly publication covering emerging, venture-backed, and small-cap stock companies. (The publication was owned and published by this writer). But Petters was young and had his own style about him, one that took on risk with gusto and had an insatiable appetite for quick growth.
By age 15, he started his own business, Ear Electronics, a mail-order operation that provided college students in St. Cloud a source of affordable stereo equipment. It was 1973, and Petters obtained turntables, speakers, and car stereos from wholesalers, then sold them for prices below retail. He managed his business from a downtown office, complete with his own secretary (one of his classmates). When his parents discovered this was why his grades were suffering, they forced him to shut it down and find a way to pay off a remaining balance of $7,000. “I had to pay $69.23 a month on a loan. It seemed like an eternity,” Petters said in the 1998 interview.
Petters barely made it through one semester at St. Cloud State University; he couldn’t stand school—in part, he later discovered, because he has attention deficit disorder. In 1980, he met his wife, Jamie; they married, and they moved to Colorado; by 1984, they had two children, John and Jenny.
Petters worked as a regional manager for Merrick, New York–based retailer Top Brass, managing half of its 144 stores for five years. When Top Brass declared bankruptcy, he purchased five of its locations in Colorado and Kansas and was promised financing to help operate them, he says. The financing didn’t materialize, however, so he decided to close the stores and move back to Minnesota. The situation led to a lawsuit and a warrant for Petters’ arrest that he says he was unaware of at first.
When he learned of it, he returned to Colorado, paid restitution, and later had his record there sealed and references to it in Minnesota expunged.
During his trial years later, prosecutors would present this and another, similar situation as signs of a pattern—of how Petters would sell investors on an idea and then not repay them.
While he was still living in Colorado, Petters’ marriage ended, and he wound up using cocaine fairly frequently. “By the time I left Colorado Springs in 1987, everyone I knew was using it,” he says. “My neighbors, my lawyer, my real estate agent—everyone in the 1980s did cocaine.” One reason for moving back to Minnesota was the addiction treatment center Hazelden: Petters says he checked himself in for treatment and has since used cocaine “maybe once or twice. I’m a big advocate of Hazelden.”
At times in the years that followed, those around him would somtimes think he was on cocaine, especially after his son was murdered in 2004. But it was prescription medications—Adderall for attention deficit disorder, Klonopin for anxiety, and Ambien for sleeping—combined with alcohol that sometimes affected his behavior and speech.
“It progressively got worse as he was trying to manage more companies and whatnot,” his daughter, Jenny, said during his bail hearing in 2009. It’s also possible to hear on the government’s audio recordings of Petters how the combination of prescription drugs and alcohol would at times affect his speech and lead to rambling sentences. His defense counsel would later say the court needed to realize that he was making things up or talking half-seriously in some of those recordings, given his state of mind.
After Hazelden, Petters was able to raise a small amount of financing and in 1988 started Amicus Trading Company, a wholesale brokerage that bought and traded closeout, overstock, and factory-reconditioned merchandise and goods from distressed retailers, distributors, manufacturers, and financial organizations, and then sold them at prices typically 50 percent to 70 percent below wholesale cost to discount retailers such as Costco.
As the Costcos of the world grew quickly, they began to seek larger supplies of product—and product from name-brand manufacturers. Fred Johnson, a salesman for Van Nuys, California-based Sellway Trading (a company similar to Amicus) reached out to Petters for help finding Sony TVs that could be sold to Costco.
“Costco wanted name-brand goods. But big name-brand manufacturers didn’t want to sell to Costco” because doing so would depress prices that Sony was selling its televisions for elsewhere, Petters says. “So I bought thousands of Sony TVs from Best Buy’s commercial division, and then sold them to Costco. At the time, it had about 30 stores, and selling name-brand products such as Sony, Coach, and Prada helped it achieve higher square-footage sales.” The process was commonly referred to at the time as “diverting.”
Fake Purchase Orders
Johnson says he teamed up with Petters and the two sold thousands of TVs to various buyers. “The two biggest players back then were Sam’s Club and Costco. We’d find other sources where we could buy TVs under whatever name we’d make up. That name would then sell them to Costco, which would pay us through a cashier’s check,” he says. “Tom and I used to do a lot of it. RCA, Sony—we found plenty of sources we could buy from and it was legit. We used to find the merchandise and in some cases, we wouldn’t have the funds to buy it. So we’d receive the funds from Costco in the form of a cashier’s check, and then buy the inventory and have it shipped to Costco.”
The cashier’s check and fake company names were standard practice in the diverting business, Johnson and Petters say. Discount chains hungry for name-brand products were growing rapidly, and diverters were in high demand. Retailers would pay via cashier’s checks to companies such as PCI that were using fake names so that the name-brand manufacturers couldn’t trace how their merchandise wound up in a discount retail store.
In addition, diverters such as Petters created fictitious purchase orders that were used for internal purposes only—including for affixing to shipments. If a manufacturer found and read such an order, it would see a fake company’s name as either the original buyer of the TVs or the entity that was now buying them, and be unable to trace where they really came from or were going, Petters says. As diverting became even more competitive, diverters had to keep manufacturers out of warehouses altogether. Some manufacturers or competitors would disguise themselves as auditors or insurance agents—tricks that Petters became aware of and warned his team about repeatedly.
Amicus grew into a successful and profitable company. By the mid-1990s, it consisted of Johnson, Petters, White—who joined in 1993 to help with financing and investor relations—and Coleman, who also joined in 1993. She was an organized, bookkeeping type who made sure documents for deals were drawn up correctly and that everyone received payment as planned. Shortly after she started working for Petters, Coleman was signing all of his company’s checks and before long, was authorized to use signature stamps with Petters’ signature.
In 1994, Petters met Reynolds, “a vendor who sold me deals. He purported to own 10 to 15 stores and introduced me to people at companies such as Adidas and Nike,” Petters says. He also met Frank Vennes, who from that point forward helped attract investors willing to provide short-term financing for PCI to buy merchandise.
Business was going well and growing, but Petters grew tired of it. “I didn’t like the diverting business because every time money was being made it wasn’t as much as it first seemed it would be. There would be times when I thought we made $100,000 and it would end up being only $15,000—what happened?” he says today. Instead, he wanted to open and operate his own retail operations—sort of like Costco stores but smaller—called Petters Warehouse Direct Inc.
Later in 1994, Petters says, “we had a board meeting. Bob White was secretary-treasurer. I told them I really wanted to do retail and wanted to let this [current] business go. Bob says, ‘Let’s continue the financing business—you can do deals for your stores and for wholesalers. We can make 2 percent to 3 percent working for the wholesalers, so let’s do the hybrid of closeout businesses, buying for stores, and the diverting business.’
“We had a checklist of things to check on with every transaction done to make sure they were by the book. Larry [and his Nationwide International Resources business] was to check on deals west of the Mississippi, and Catain [who later established his Enchanted Family Buying Group] was to do the same on the east. Deanna was to divide things as needed,” Petters says. “We would make a return of 6 percent or 7 percent on average, and give up 1.5 percent of it to Reynolds or Catain for making sure the deal was legitimate and clean. (See “Cast of Characters,” online at http://bit.ly/HsD3OP.)
“I became convinced I could have these other people do this. And we’d continue to generate profits that could help me grow the retail business. In the 10 years afterwards, I maybe did 10 deals in PCI. I never looked at another purchase order—I just looked at the signature page and trusted they were doing things correctly.”
By 1995, Amicus had changed its name to Petters Companies Inc. (PCI) and was driven more and more by White and Coleman, allowing Petters to focus on his retail business and come back to PCI only when needed to help bring in a new investor or deal with any major client issues that arose. And it continued to conduct legitimate transactions under the PCI name.
“I remember his business calling on us and their selling products to us. And I met [Petters] a few times, sort of a meet-and-greet,” says Mark Cohn, co-founder and former CEO of Damark International Inc., then a publicly traded, national direct marketer of name-brand merchandise based in Minneapolis. “By then, we were a $500 million or $600 million company and were doing business with many vendors. PCI probably sold us a million or two [million] dollars’ worth of product. Then his business sort of got very big and he began to open retail stores.”
Petters Group Worldwide
Read more from this issue
Over the next three years—fueled by profits from PCI—Petters Warehouse Direct went on a buying spree. By early 1998 it was operating 14 national-brand, discount-retail stores in Minnesota, Wisconsin, and North Dakota, the Profits Journal story reported. Petters reported that he had just acquired eight World’s Greatest Deals retail stores from Minneapolis financier Irwin Jacobs’ Jacobs Trading Company, as well as closeout merchandise from seven Montgomery Ward distribution centers; assets of Florida-based Standard Brands Electronics’ 21 stores; inventory from three Incredible Universe stores; Detroit-based Fretter Inc.; Kent Distributing; and 16 defunct Steinberg stores.
Later in 1998, as the internet became the land of opportunity for commerce, Petters opened RedTagBiz Inc., a Web-based business to do essentially the same thing as Petters Warehouse retail stores, only without the bricks and mortar. Within its first two years, Redtag.com reported $1 billion in sales. By 2003, Ted Mondale was its president and the company employed 62 people.
Through the 1990s, PCI’s earnings continued to generate cash for Petters’ other business expansion plans because its timing was so good; it offered expertise in finding and financing discounted name-brand consumer products to feed what was then a budding industry in America—the large-volume, discount retail business.
PCI’s annual revenues grew from $4 million in 1993 to more than $120 million in 1997, with a gross profit of $18.5 million and earnings before taxes of $11.6 million, according to filings it made with lender GE Capital at the time. After doing its due diligence on PCI, GE provided the company with a $50 million line of credit in 1998, and PCI continued to flourish.
Within the next few years, Petters Warehouse Direct stores were eventually sold off (half of them to Coleman to help her expand her professional experience, Petters says); PCI focused more on providing financing for others who wanted to sell diverted merchandise, and Petters set his sights on bigger projects through a new business called Petters Group Worldwide (PGW).
His first major opportunity surfaced in 2002: Fingerhut, a Minnetonka-based direct-to-consumer marketing company selling products and services through catalogs, the Internet, and direct marketing. The nation’s second-largest consumer catalog marketer, it had been purchased by Federated Department Stores Inc. for $1.7 billion in 1999. Federated couldn’t make a go of it, however, and after losing more than $1 billion, decided to shut it down and lay off more than 6,000 people worldwide, including more than 2,000 who worked at its warehouse facility in Petters’ hometown of St. Cloud. By May 2002, it had laid off 3,800 people.
Petters approached Ted Deikel, who had originally sold Fingerhut to Federated, and asked him to lead it again if Petters could pull together the financing to acquire most of its still-viable assets. PCI loaned the money and obtained other financing for the two of them to purchase Fingerhut through a newly formed company, FAC Acquisitions LLC, for about $78 million. At that time, there were only a few hundred employees left. Petters soon sold Fingerhut’s real estate, used the proceeds to pay off what had been borrowed to buy the company, and eventually increased the company’s headcount by more than 1,000 positions, mostly in St. Cloud. Fingerhut became part of a new holding company, Bluestem Brands Inc., and today is a profitable nationwide direct retailer via online and mail-order services. It’s poised to go public and is valued at approximately $525 million.
Also in 2002, Petters approached Polaroid with the idea of using its name to sell consumer electronics such as televisions and DVD players. He purchased a license to do so, then went to China to have low-cost, quality TVs made. His company imported them to the United States, put the Polaroid name on them, gave buyers a warranty, and sold $1 billion worth, he says. By the end of 2003, Petters Consumer Brands was set up under the PGW umbrella, and it went on to sell more portable DVD players than any other brand sold in the United States. PCI helped finance Consumer Brands’ activities.
By this time, Petters had established a reputation as an up-and-coming, charismatic business leader. He purchased Chicago-based uBid, the second-largest Internet auction site, in 2003, as well as several smaller companies, while investing in startups, and donating to charities and universities. During the next four years, he would donate tens of millions of dollars to dozens of organizations, including the Juvenile Diabetes Research Foundation, St. Jude Children’s Research Hospital, Minnesota Teen Challenge, the University of Minnesota Foundation, Miami University of Ohio (his son John’s alma mater), and the Order of St. Benedict.
Petters also remained close to his parents, brothers and sisters, and children. “That was one of the most important things to him, family,” says an individual who knew Petters personally and asked to remain nameless. “He was always texting and talking with his kids, almost more so than with his business associates or workers. And he always kept in touch with his ex-wife [Jamie Wilcox] and continued to help her with things.”
But then the unthinkable happened. On March 14, 2004, Petters’ son John was murdered while visiting friends in Italy. “After John’s death, my personal and professional life was on steroids . . . more was better, so I didn’t have to deal with anything I was feeling.” (For more on Petters’ response to the tragedy, see Q&A).
Meanwhile, Petters Consumer Brands had done so well selling under the Polaroid brand that officials at Polaroid told Petters they wanted to end the licensing arrangement, he says. Instead, he wound up buying Polaroid outright for $426 million in January 2005, using personal funds and financing provided through JPMorgan Chase. Within a few years, Polaroid was poised to launch a new technology called ZINK (which stands for “zero ink,” because it produces full-color prints without ink cartridges).
“I was working on a worldwide licensing strategy [for Polaroid] that was going to bring in an estimated $2.8 billion—I had just made preliminary deals in three countries for over $900 million,” Petters says. “I also was working on a pending sale of half the company, and my attorneys were in the midst of completing a letter of intent with an overseas investor for $1.4 billion.” He says he also was working on acquiring Kodak and merging it with Polaroid.
As if Fingerhut and Polaroid weren’t enough, Petters heard that Sun Country Airlines was on the brink of shutting down in 2006 and decided to become co-owner of the airline, along with Minneapolis hedge fund manager Whitebox Advisors. In November 2007, Petters bought full ownership of the airline.
“It looked like a bargain, and we saved about 800 jobs,” he says. “We were going to augment this by developing a private-jet completion center where the old Champion Air used to be at the [Minneapolis/St. Paul International] airport, which would have brought another 500 or 600 jobs. Corporate jets are sold ‘green,’ meaning they have the cockpit, oxygen masks, and that’s about it. They have to go to completion centers, and they’re mostly outside the country right now. We had the exclusive contract to complete Airbus private jets.” Petters’ last news conference was held September 25, 2008, at the airport, celebrating the new Petters Aviation facility and its plans. But little was mentioned of it by the media, which focused instead on the raid that had occurred the day before, the government’s allegations, and Petters’ likely upcoming demise.
By 2008, Petters’ time was spent largely on PGW matters, speaking at university business schools, participating in fundraising and charitable events, and spending time with his family. With all this on his plate, he spent almost no time working on PCI activities, he says, and instead left them in what he thought were the trustworthy hands of Coleman, White, Reynolds, and Catain.
Warning Signs
During the fast-growth years between 1998 and 2007, there were instances in which—from an outsider’s perspective—it seems Petters should have noticed something was wrong at PCI. Federal prosecutors would later persuade a jury that he did know, not only because of how he talked during secretly recorded conversations in 2008, but because of other records, especially those revealing his actions in 2000 regarding GE Capital.
While the FBI and forensic accountants today say there was never any real business taking place at PCI, Petters says the $50 million line of credit from GE proved there was actual business taking place. GE Capital does thorough due diligence before financing anybody, he says, and it continued to run periodic checks on PCI—including visits to warehouses to check on inventory backed by its line of credit. GE did believe that everything was fine at PCI until payments started to come in late in mid-2000, according to court records. When that occurred and GE asked PCI about it, it was told by Petters’ associates that the delays were because Costco was late paying what it owed PCI. But GE Capital contacted Costco directly to inquire why it was late, and was told by Costco that there were no outstanding orders with PCI.
Petters says he was then brought into the situation and, based on what his team told him, he wrote Costco, apologizing for the confusion, and said he would let GE Capital know that there had been a mistake at PCI. However, in his phone conversations with GE Capital, he continued to blame Costco, according to court records. He continued to assure payment would be made soon, only to then give additional reasons for further delays that stretched things out by months. Toward the end, checks sent to pay what was owed bounced, records show. The prosecution during his criminal trial said this sequence of events proves he knew fraud was taking place in 2000.
Though Petters concedes that much of what occurred was messy and included checks bouncing, he continues to insist that he acted on what his PCI leadership team was telling him. “This raised [red] flags to me but I found it conceivable that the list of receivables involving Costco really was a mistake on our part. I hit the problem head-on and called them, said it was a mistake and we’ll take care of it right away, which we did,” he says. The line of credit in question was paid off. And his relationship with GE Capital continued to be good, he adds, citing as evidence that it provided his organization with $55 million in additional financing for the RedTagBiz operation that same year.
There also were other incidents that Petters now realizes he should have looked into.
In about 2002, he received a call from Coleman saying the FBI wanted to talk with him about a company PCI was doing business with. “She told me the bank accounts were closed and it had wired money to PCI. Then I heard the FBI wanted to talk with us. From what they told us at the time, I figured we should simply not do business with that company anymore, and that’s what I told the FBI, and that’s what we did.
“I can’t tell you how many times I wake up wishing that at that meeting, I would have asked more. It’s a shame [the FBI] didn’t look further,” he says. “I told them exactly what it was: I received a call from Deanna saying we’re having a problem [with a vendor], and that the FBI is coming out. I said, ‘OK, let’s call Fredrikson to have an attorney there.’ I told them what I knew. I told them what Deanna told me. The essence of that investigation would have benefited us—they were looking at bank accounts” of the vendor.
PCI also had an inquiry from the Minnesota Department of Finance at about that time, Petters says, but nothing came of it.
While the prosecution would later use these and other events as proof of his knowledge of the fraud at PCI, Petters says he viewed them as the opposite: The finance department found nothing wrong; the FBI went away; GE Capital had previously audited and found everything fine except for that one mistake Petters had cleared up. Over the years and through 2007, he was told by his team at PCI that audits were done by accounting firms Virchow Krause, Eide Bailly, and others. And then, he says, there were the hedge funds with which PCI was doing business. They, too, audited the company before investing in it. “They hired Arthur Andersen in 2000 to audit PCI,” he says. “Everything looked fine, given there were all those audits.”
Petters didn’t review the audits, however. “Generally speaking, in a business with 51 companies, the CEO is not in them auditing the books,” he says. Instead, he was busy building PGW and helping establish licensing agreements for Polaroid. He says he believed PCI was continuing to really move inventory and make money from it, and trusted Coleman, White, Reynolds, and others as they told him it was operating as expected—as a finance company that used equity and buying power and made a spread. Indeed, several e-mails from Reynolds and between Coleman and others through early 2008 show them discussing details on major merchandise transactions.
As for the times Coleman would call him in to help with a problem, such as with GE, “if you only get called to a scene when there was an accident, you never see how many cars really go through the intersection,” Petters says.
Continuing with the metaphor, he says he believed legitimate traffic was otherwise extremely heavy when, in fact, it was becoming lighter as PCI began to generate false documents telling investors their money was supporting diverting sales; in reality, they were paying off other investors, as well as financing the growth of PGW.
Meanwhile, PCI had been originally set up so only two people had access to its bank accounts—Coleman and Petters. Over the years, Petters called Coleman when something needed to be done with the account, but he let her have complete control. Even his accountant could not access the account; only Coleman could. There is no paper evidence showing Petters conducted PCI bank transactions, only witness statements saying he would sometimes call a bank to request transfers. It’s also unknown where such funds may have gone—Petters often used his personal accounts to purchase assets for his companies, invest in other businesses, and donate to charities.
Compounding matters was the fact that the relationship between Petters and Coleman turned sexual in 2005, then ended a year later. Thereafter, things seemed to change at PCI, and Petters seemed too busy to realize it, longtime associate Johnson says.
“I worked with all three of them for nearly eight years,” Johnson says about Petters, Coleman, and White. “Back in the beginning, the three of us were the closest because we spent a lot of time together. Deanna was one of the guys, like us.
“But around 2005 or 2006, Deanna really became very distant whenever I called or tried to talk with Tom. She’d always say he was out of town and she wouldn’t give him my messages,” Johnson adds. “Bob White also in the same way started acting distant, and I couldn’t figure that out. Things got fuzzier, and it seemed like the four of them [White, Coleman, Reynolds, and Catain] had their own ballgame going, and Tom wasn’t involved anymore. It seemed like something was up.”
Johnson says this led him to stop working with PCI in 2006, and because his main contact over the years—Petters—was no longer available. And it was Petters he trusted.
“Tom was always great at getting stuff going, but he rarely finished it—he’d turn it over to someone else to finish,” Johnson says. “He never rode it out to the end. Maybe he didn’t fully grasp what was going on as a result.”
