Fraud Experts Decry Federal Self-Dealing After Ponzi

$3.6 Billion Aftermath

Corporate turn-around expert William Procida and hedge fund founder Thane Ritchie were DC Update guests Sept. 2 on the My Technology Lawyer Radio network as they provided first-hand accounts of federal court irregularities in Minnesota that they claim victimize lenders and investors in one of the largest Ponzi schemes in U.S. history.

During the show, they told co-hosts from the Justice Integrity Project and network founder Scott Draughon about why they’re speaking out against federally orchestrated injustices hurting the fraud victims of Minnesota businessman Thomas J. Petters. The latter’s Ponzi scheme discovered in 2008 caused estimated damages of $3.65 billion ─ including to lenders and investors in such Petters-controlled companies as Polaroid, Sun Country Airlines and the distributor Fingerhut. Ritchie claims more than $220 million in loans and interest at serious risk.

“I’ve never seen a criminal’s attorney be a receiver,” Procida says of disputed court orders that made former Petters defense attorney Douglas Kelley receiver and also the U.S. trustee.  The court also gave Kelley “judicial immunity,” thereby limiting victim oversight of his controversial decisions.

These experiences are featured in The Second Fraud, a documentary about the case that premiered last week in Minneapolis. The film described how Kelley and federal authorities used the uncertainties of the largest Ponzi in U.S. history (until Bernard Madoff’s) for self-dealing at the expense of Petters victims.  “This is,” concludes Procida, left on a CNBC file photo, “probably the biggest misuse of justice I’ve ever seen.”

Today’s one-hour DC Update is available nationwide in archive here, as well as on selected local stations and via archive. Procida, president of a company under his name and an experienced cable news commentator on business matters portrayed on CNBC, was elected as receiver in 2008 by secured creditors led by Ritchie. Creditors say they are owed some $2 billion from the fraud, primarily from secured lending to such companies such as Polaroid that had substantial assets.

However, Minnesota U.S. District Judge Ann Montgomery promptly replaced Procida as receiver in 2008. Instead, she selected the regional powerbroker Kelley, who days earlier been hired by Petters to defend his Petters companies from criminal charges. The judge gave Kelley immunity without requiring the kind of freedom from financial conflicts of interests courts normally require of actual judges.

Kelley then embarked on a series of controversial decisions selling assets at fire-sale prices, vindicating from liability a key Petters employee who helped  him, forfeiting $20 million to federal prosecutors ─ and spending some $30 million (at last count early this year) on fees for his firm and the other bankruptcy professionals he picked to administer the case.

As Update’s co-host, I've authored two recent articles about the case on the Huffington Post and the Daily Censored. Also, I spoke (as did Procida and Ritchie) at a panel discussion Aug. 25 at the film premiere at the 800-seat Uptown Theater. Kelley and other authorities declined to comment for the articles or appear on the panel.

A spokeswoman for Minnesota U.S. Attorney Todd Jones, at right, whose office received the $20 million forfeiture from the Petters estate in a deal with Kelley announced last week, said he could not appear on Update or otherwise comment on a pending case. She did say that federal authorities are “working diligently” to help victims.  But she did not respond to the question of how much of the $20 million her office will keep for itself, and how much it will return to victims.

The radio show included a report about the dramatic developments in federal court, where former Petters conspirator Deanna Coleman, below, was sentenced to a year and a day in prison. She is a former Petters receptionist, lover and vice president who received $8 million from him in bonuses alone. But authorities urged leniency for her, calling her one of the nation’s greatest federal witnesses of all time. In fear that Petters would blame her for the then-impending collapse of his empire in 2008, she provided officials with their first inside tip after outsider’s tips were ignored. Petters, 53, is now serving a 50-year term.

Ritchie said the sentence does not do justice to remaining mysteries and to her key role in creating such massive fraud over many years. He notes that fraud against funds hurts state pension funds that invest. But Coleman’s sentencing judge forbade the Ritchie Capital fund’s lawyer from speaking in court.   

Minnesota’s courts and major news organizations have been reluctant to address victim complaints. Kelley is influential with senators, judges and others in both parties, and with other federal authorities. The Minneapolis Star-Tribune, for example, refused to publish ads by victims willing to pay $62,500 to document what they regard as “the second fraud” by authorities. The state’s largest paper was itself under federal supervision in bankruptcy court until recently. Four major TV affiliates in the Twin Cities also declined to run a one-hour treatment of the documentary as paid programming.

Raising questions, however, is University of Minnesota Law School Professor Richard Painter, right, an expert on legal ethics and also a former chief White House ethics counsel.  As a panelist at the film premiere and in a blog on the Legal Ethics Forum about the “Wild West” aspects of the Petters case, he listed a half dozen issues comprising what he called “fascinating material for a professional responsibility course.”

-- Andrew Kreig. Contact author: Andrew (at) Justice-Integrity (dot) org

Radio Show Participants

About William Procida, Inc.
William Procida, Inc. has completed more than $2 billion worth of turn-around projects. It now concentrates on development, construction and finance activities for select middle-market clients. Details.


About Ritchie Capital
Ritchie Capital Management, L.L.C. is an alternative asset management firm with interests in private equity, venture capital, real estate, energy, and insurance.  Listener advisory: Mac listeners need “Parallels.” Details.

About Scott Draughon and My Technology Lawyer Radio Show
Scott Draughon, an author and attorney, is host and producer of the My Technology Lawyer Radio Show, an affiliated of the on-demand legal service Details.

About Andrew Kreig & Justice Integrity Project
Andrew Kreig, an attorney, is executive director of the Justice Integrity Project. Earlier, he led the Wireless Communications Association International as CEO from 1996 to 2008. Details


Petters Research Resources

Government Proceedings
Minnesota U.S. Attorney’s Office Petters Website

B. Todd Jones, U.S. Attorney, 600 U. S. Courthouse, 300 South Fourth Street, Minneapolis, MN 55415

  • U.S. Attorney’s Office Press Release, Deanna Coleman sentenced for her role
    in the Tom Petters Ponzi scheme
    , Sept. 2, 2010

Minnesota Federal Court Proceedings
Civil Forfeiture:  U.S. v. Petters et al. before U.S. District Judge Ann D. Montgomery, Civ. No. 08-cv-5348-ADM/JSM
Criminal Action:  U.S. v. Petters before U.S. District Judge Richard H. Kyle, Crim. No. 08-364-RHK/AJB.
Bankruptcy: In re Petters Company, Inc., et al. before Senior U.S. Bankruptcy Judge Gregory F. Kishel, Court File No. 08-45257

Research Websites of Critics
Justice Integrity Project
Author and investigative reporter James Merriner
Forthcoming book, Ponzi-dot-gov
Act4Justice (American Citizens Together): Petters Fraud
The Second Fraud Documentary
Ryan James Frost, Hillside Productions
About the Film
Aug. 27, 2010 Press Release
Photos: Minneapolis Uptown Theater Lines 1 and 2 and panelists


Selected News & Opinion Columns
New: Legal Schnauzer, Stench Becomes Overwhelming in U.S. Justice System, Roger Shuler, Sept. 12, 2010
Minneapolis Star Tribune, Informant gets year in Petters case: From a key place in the scam, Deanna Coleman brought it down, David Phelps and Dan Browning, Sept. 2, 2010
Huffington Post, Victims Of $3.6 Billion Petters Ponzi Fraud Protest Court Process, Andrew Kreig, Aug. 25, 2010
OpEd News, Victims Of $3.6 Billion Petters Ponzi Fraud Protest Court Process, Andrew Kreig, Aug. 24, 2010
Daily Censored, Film Alleges Fed ‘Fraud’ Against Victims of $3.65 Billion Ponzi Scam, Andrew Kreig, Aug. 24, 2010
Minneapolis Star Tribune, Legal Deal Could Speed Victim Repayments in Petters Case, David Phelps, Aug. 18, 2010
Minneapolis Star Tribune, Divorce among Petters’ cronies complicates Kelley’s job, David Phelps, July 25, 2010
Associated Press/New York Times, Minnesota Man Gets 50 Years in $3.7 Billion Ponzi Scheme, April 9,  2010
Associated Press/Huffington Post, Tom Petters Sentence: Prosecutors Ask For 335 Years In Prison For Minnesota Ponzi Schemer, Steve Karnowski, April 8, 2010
Wall Street Journal/Law Blog, Oh Fer Geez! Minn. Prosecutors Keep Lid On Petters Allegations, Amir Efrati, July 9, 2009
Reuters, Tom Petters found guilty of Ponzi scheme fraud, Art Hughes, Dec. 2, 2009
Selected Legal, Academic and Policy Commentary
Legal Ethics Forum, Is This the Wild West of Ponzi Scheme Wind Down? Prof. Richard Painter, right, Aug. 28, 2010
American Bankruptcy Institute, When a Pig Becomes a Hog it is Slaughtered: Retention and Payment of Professionals in Bankruptcy Cases, July, 2010, Honorable Colleen Brown, Dennis J. Drebsky, Michael Farquahr, John Fitzgerald, Kathleen Stapleton
Reason Magazine, The Forfeiture Racket: Police and prosecutors won't give up their license to steal, Radley Balko, February 2010
The Tyranny of Good Intentions: How Prosecutors and Law Enforcement Are Trampling the Constitution in the Name of Justice, Paul Craig Roberts and Lawrence M. Stratton (Three Rivers Press, 2010)
Three Felonies A Day: How the feds Target the Innocent, Harvey A. Silverglate (Encounter Books 2009)