Wednesday, November 18, 2009

Tom Petters' Ponzi Scheme: $3.65 Billion

It has been speculated that the Petters ponzi trial (and conspirator trials) are getting less attention from the media and financial community in light of contemporaneous ponzi schemes: Bernie at $50 Billion and Stanford at $7 Billion.

Here's a guy who has a dicey history - college drop-out, once worked at Radio Shack and had a number of failed businesses, and was treated in rehab for a cocaine habit - turn into a billionaire for the second half of his life. Americans love a good comeback story. At the height of his success, he ran Petters Worldwide, which was a larger financial conglomerate that owned over four dozen smaller companies. Smaller is misleading; among the companies included were Polaroid (which has since filed bankruptcy paperwork), Sun County Airlines (also on the bankruptcy train), and Fingerhut. Petters was under control of substantial assets. And to think: both his legitimate and illegitimate business endeavors began with a wholesale liquidation model.

The ponzi scheme? Petters duped creditors and investors by creating false documentation of transactional activity to evidence the purchase and sale of home electronics. Allegedly, Petters bought home electronics at liquidation prices, and then made a profit by selling the electronics to larger retailers at an inflated price. The scheme ran for over a decade, and involved a number of people close to Petters. This includes a close staff member (who ratted him out to the feds), an ill reputed lawyer who laundered money for Petters through a private bank account, and a hedge fund manager that represented to creditors and investors that he frequently cashed-out Petters transactions through his hedge fund.

Conspirator trials have largely been concluded, but Petters himself is on trial right now in the District Court for Minnesota. He faces numerous criminal charges that, if convicted, threaten a potential life sentence. Prosecution rested on Monday and defense is currently presenting its case. Petters himself was on the witness stand yesterday.

Always makes for good drama! FWIW, you can check it out via the AP, Bloomberg, or the WSJ.

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2 comments:

  1. investors never complained about the large returns on their investments in the early years. they screamed when they lost money in the end. i wonder how much of their losses were profit vs principal. i acknowledge that people did lose their entire savings. that was horrible. was that the many or the few?

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  2. Hi Anon (1254a)!

    Thanks for the comment.

    Although I have not done a lot of research on investor's role (culpability?) in these schemes, I politically trend towards the same thought: at some point, the earnings on all of the recent ponzi schemes could just not be justified. I am unsure how an investor - particularly those who were financially savvy - could rationalize the enormous returns they were seeing, dollar for dollar. Something should have smelled hinky (and there have been legal arguments in various other cases that such unexplainably high returns should have raised red flags for investors to do more due diligence).

    All of which, though, doesn't relieve Petters from committing actually committing fraud >> there were laws, he knowingly broke them.

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