Petters Lawsuit – Non-Profit and Charitable Groups Seek Recovery of Investments

In October 2008, investors from the Twin Cities community including non-profit organizations, founders and managers of charitable organizations, pastors and faith-based schools filed a lawsuit against Petters Group Worldwide, Petters Company Inc., and certain of its officers (collectively “Petters”). Zimmerman Reed filed the class action on behalf of two investment groups – AI Plus and IOC – because of the financial losses of their 110 members and on behalf of all other individuals and non-profits who invested in their transactions using Metro Gem, Inc. as its broker. The plaintiff-investors allege that Petters perpetrated a fraudulent scheme by creating fictitious documents, provided to current and potential investors as evidence that the company was buying and selling substantial goods and merchandise for a profit. These goods, however, never existed. The complaint also alleges that defendants fraudulently pledged the non-existent goods and merchandise as security for the investments, so that investors believed their investments were secured.

Most of these individuals have served their community for decades. The investors and their families have suffered devastating financial losses as a result of this illegal scheme to defraud; many have lost their life savings. The complaint alleges that Petters targeted these investors and illegally obtained their money by using brokers and agents who were trusted and known to the charities and non-profit community. The plaintiffs seek to recover damages and other remedies under federal, state, and common law. Zimmerman Reed, has extensive experience in prosecuting investor actions involving financial fraud.

Background & Civil Litigation Update

In 2008, the FBI and IRS began investigating Twin Cities’ businessman Tom Petters after co-conspirator/employee Deanna Coleman told officials that she had been aiding Petters in a multi-billion-dollar Ponzi scheme for ten years. Petters and his business partners at Petters Company defrauded billions of dollars and property by convincing investors to give the company money to purchase electronics to be sold to big-box retailers. Instead, the Petters co-conspirators worked to divert the funds to make payments to other investors, fund additional businesses, and finance Petters’ extravagant lifestyle. Tom Petters was arrested, tried by a jury who found him guilty on all 20 federal criminal counts, and sentenced in April 2010 to spend 50 years in prison for his part in the $3.65 billion Ponzi scheme. Federal prosecutors estimate more than 500 victims were affected by the scheme. Most of Petters’ co-conspirators have plead guilty for their roles in the scheme and will also be serving time in prison for their criminal behavior – though most will serve 10 years or less.

Once federal fraud charges against Petters and others became inevitable, the two parent companies involved in financing the scheme – Petters Company Inc. and Petters Group Worldwide – filed for bankruptcy protection in October 2008 against an onslaught of investors seeking to recoup their losses/debt. The cases were consolidated in U.S. Bankruptcy Court in Minnesota, and assigned to Trustee/Receiver Doug Kelley. The receiver’s job is to locate, manage, and protect the assets of the bankrupt entity so that when the bankruptcy judge finally reaches a decision as to which debtors who filed claims should get restitution and how much they should get, the maximum amount of recovered assets will be available to fund that restitution.

Recently, after locating only about 10% of the total $2 billion plus in claims made by bankruptcy claimants, the receiver began filing the first of an estimated 200 “clawback” lawsuits to be brought against various “net winners” investors, banks and former Petters’ employees to try to recoup assets from those entities and individuals to increase the final amount of restitution available to those claimants who were the losers in the unraveled scheme.

Next Step

Petters’ guilty verdict closed one chapter in this fraud – but it provided minimal comfort to our clients, the faith-based organizations and investors who are no closer to recovering their collective estimated $26 million in losses and no closer to stabilizing financially. Zimmerman Reed is continuing to monitor the bankruptcy action and will work diligently to try to recover whatever restitution might become available for these clients.