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Tom Petters

Tom Petters

Tom Petters had a favorite anecdote he liked to tell to illustrate to potential investors and lenders how tough he was, how brazen, how imaginative, how successful. Back in 1997, Wal-Mart sounded him out about buying high-end General Electric refrigerators for Sam's Club, Wal-Mart's members-only chain of retail warehouses. GE would not sell to Wal-Mart directly because it had its own distributor network and also would not sell to a discount chain. GE's stance was typical—corporate distributors dislike cut-rate "diverters" such as Petters. Partly for that reason, their business is risky.

As always, Petters finagled a deal. He set up a general contracting company in Las Vegas and ordered a thousand GE refrigerators. Supposedly, they were headed straight into the new homes that the contracting company was building. Actually, Petters would ship the refrigerators to Sam's Club—he would "divert" them. "Murphy's Law"—if something can go wrong, it will—swiftly intervened. Truckers went on strike, halting the shipments. Fearing that the delay would allow GE to catch on to the scam, Petters took $25,000 in currency and drove around to local truck stops, offering idle truckers cash to break the strike. The implied message was clear: I am not even afraid of the Teamsters Union. That's how bold I will be in winning big profits for you and me alike.

And yet that was not the end of the story. GE eventually learned what Petters had done, he enjoyed recounting. Even so, in time he persuaded GE executives that they could work with him, especially when it came to close-outs and moving unsold products with which GE otherwise would be stuck. Whereupon GE gave him a line of credit. Listeners might have drawn one lesson from this tale: Petters is untrustworthy. Many drew a different lesson: This is a guy who can make things happen. As federal prosecutor John R. Marti put it, "If there is an individual out there who thinks they could not be conned by Tom Petters, then you are looking at a fool in the mirror."

Thane Ritchie, an investment-fund manager from Chicago, witnessed the Petters phantasmagoria one night at Manny's Steak House in Minneapolis. Petters was hosting his former business associate Ted Mondale, the son of the former vice president, along with Ritchie. "Tom got up and started visiting the other tables," Ritchie said. "He went up to three tables and bought their dinners for them. Then he came back and his chiropractor came up and adjusted him right there." Petters was such an overpowering presence that even his chief prosecutor, John Marti's colleague Joseph Dixon, was impressed. Dixon said, "You would sit down with him for ten minutes, and at the end of ten minutes you would think he was your best friend in the world."

Petters talked such a good game and promised such high profits that many people positively wanted to believe him. In retrospect, with his life laid bare by the courts, it is less the bluster than the fear that stands out in Petters' personality. He was afraid of failure and ruin and worse. He might have tempted teamsters to defy their union and drive scab shipments, but in the desperate, waning weeks of his empire, weeping and drinking and drugging, he confessed to his associates that he was afraid the Minneapolis mob would kill him. Like many crooks, it seems, Petters was a make-believe tough guy.

"Somebody Forgot to Quash the Warrant"
He was born in 1957 in St. Cloud, Minnesota, where his family had been prominent for four generations. They lived on the banks of the Mississippi River near its headwaters. Petters' great-grandfather was a tailor whose descendants sold furs and fabrics out of the Petters Building downtown. Tom was the fifth of Frederick and Rosemary Petters' eight children. When he was a teenager the Petters Building shut down in a story repeated throughout the country: A vintage downtown store was put out of business by a new shopping mall nearby. Undaunted, during his junior year at Cathedral High School, Tom started hustling stereo equipment to students at local colleges. The kid actually rented an office and recruited a sales force. He advertised by placing fliers on car windshields and under dorm-room doors until he borrowed and made a few thousand dollars, then he put up an ad on radio. His mother heard it on her car radio and, she said, nearly drove off the road. She and Frederick at once eliminated Tom's business and sent him back to school.

Even so, the essential hustle that Tom developed in high school eventually made him a billionaire: He was getting a good deal on overstocked or liquidated consumer goods that could be resold quickly for a healthy profit. He might need to borrow some short-term money to buy the stuff in the first place, but the collateral was sound and the payoffs were sensational. That was his pitch.

Indifferent to schooling, he dropped out of St. Cloud State after one quarter and started working for a Minnesota chain of electronics stores. Then he sold yellow-pages ads in Iowa, married, and moved with his bride to Colorado without a job and, he said, only $800 in his pocket. Within a few years he was regional manager of a liquidating company. The business went bankrupt and Petters was able to buy five of its stores for a song.

As early as 1983, he started getting in trouble with the law. He was accused of writing a $39.15 bad check in Colorado but the charge was dismissed that same year. More serious charges surfaced in 1989 when a Colorado businessman told police that he had paid Petters $75,000 to buy videocassette recorders but Petters and the money both had disappeared. Investigators soon found a former employee of Petters who said his boss had charged $6,300 to a credit card in the employee's name, then disappeared. Petters was charged with fraud, theft, deception, and forgery in El Paso County, Colorado, in October 1989. He was broke and had gone home to Minnesota, police were told. What Petters told friends in Colorado Springs was that he had a cocaine problem and was going into rehab. More likely, he went to seek money from his estranged wife for his legal defense. Petters was so broke that he moved in with his brother, Jon Petters.

In February 1990 Minnetonka police tried to serve a fugitive warrant on Petters at his office there but confronted only his brother, Jon. Tom was home in St. Cloud. After getting a call from Jon, Tom contacted a lawyer in Colorado and supposedly got the whole mess straightened out. He gloated about the incident many years later, not knowing that his words were being secretly recorded. He said that when the fraud charges were filed he hid out in Wisconsin for three or four weeks "until I got a deal with the people in Colorado, and then I came back and turned myself in."

In July 1990 he and Jamie Lynne Hagan were divorced after thirteen years of marriage. According to divorce records, Petters worked as a "liquidator trader" for Amicus Trade Group for $3,200 a month. His wife worked as a temp. Their household contents were "minimal" and the amount of any stocks, bonds, and checking accounts was "unknown." Jamie won custody of the children, John and Jennifer, and Petters was ordered to pay child support at 30 percent of commissions to a maximum of $1,200 a month.

Somehow the Colorado matter was still unresolved and in September 1991 Minnetonka police arrested Petters on a fugitive warrant. The whole thing was just a big misunderstanding, Petters said, and pretty much made his story stick. But in July 1993 he was arrested a second time on a fugitive warrant. "The warrant was quashed, but somebody forgot to quash the warrant," was Petters' explanation. This time he allegedly paid restitution to the victims and Colorado dropped the charges. But federal agents said later they could find no evidence that any restitution actually was paid.

Petters' first serious brush with the law was minor-league, but it would have profound consequences. In February 1994 he moved to expunge the records and within a month a Hennepin County judge, urged by the county prosecutor, did as asked. Indeed, local police were ordered to turn over to Petters his fingerprints, criminal history reports and all copies of those documents. In April 1995 the county court in Colorado likewise ordered the Petters case records sealed.

Because those records officially did not exist, investors and lenders conducting "due diligence" before trusting Petters with their money could not find out about them. Who knows how many fraudulent deals Petters could never have swung if his criminal record had been kept open? Nor was this the last time that Minnesota public officials would appear eager to sanitize the Petters image.

Under the firm that Petters founded, Amicus Trading, he developed the business of "diverting" or "supply chain management." In today's economy, big-box retailers don't want to keep a large inventory on hand—inventory adds overhead costs. Instead, they buy products as they have a need to sell. To keep prices down, rather than buying directly from the manufacturer, they reach out to middlemen who offer better prices. The middleman buys directly from the manufacturer in bulk at a discount, or from another middleman who needs to unload some goods. Then he keeps the merchandise in a warehouse until contracting with a retailer to sell it at a higher price. The trick for the middleman is to round up investors to finance the bulk purchases. If the middleman has sensitive nerves for timing the market correctly—as Petters said, the business "is not for the weak-hearted"—the transactions are positive for investors, the middleman, and the retailer alike.

Petters named Amicus Trading after the Greek word for friendliness or a handshake. As it happened, Amicus was also the name for a prison ministry group. When somebody asked Petters whether he was with that ministry, he changed his firm's name to Petters Company, Incorporated. He had no way of knowing it at the time, but the query about prison ministry was fraught with irony. An ex-con who had converted to Christianity in prison and later financed a prison ministry himself, Frank Vennes, became one of his closest confederates. Vennes also introduced Petters to a businesswoman named Ruth Kahn.

Petters bought and ran some legitimate businesses. Fingerhut Direct Marketing, a consumer catalog company based in Minneapolis, an employer of five thousand people, was about to go belly-up. With help from the state attorney general and other influential persons, Petters acquired Fingerhut from an Ohio-based department store chain in 2002. He turned it around, saved those jobs. With that move, Petters' stature in Minnesota business and political quarters shot up.

Already, though—in fact, dating back to the early or mid-1990s—his separate diverting business, Petters Company, Inc., had become nearly a total fraud. It had a single owner, Petters, and just two employees, Deanna Coleman and Robert White. Many of the purchase orders and accounts receivables that PCI showed investors were phony. They listed merchandise that did not exist. Petters could keep the merry-go-round going as long as he could entice new investors whose money would be used, not to buy merchandise as promised, but to pay off the earlier investors—a classic Ponzi scheme.

In retrospect, again, it seems amazing that Petters came so close and so often to getting caught but always got away. He relied on "feeders," people outside PCI who rounded up investors for him. One such feeder was Ruth Kahn, herself introduced to Petters by the feeder Frank Vennes. Kahn owned a manufacturing company called Deep Draw. As always in the Petters saga, sorting out her transactions with him will take some patience. She borrowed $700,000 from a local bank, putting up Deep Draw accounts receivable as security. They were fakes. Kahn also introduced her boyfriend, Richard Hettler, to Petters. Hettler started dealing with Petters in 1997, lending, for instance, $1.3 million on typical PCI ninety-day notes at high—14 percent—interest. Hettler had stolen the money from his late brother's estate. Then Kahn borrowed a million dollars from another local bank for Deep Draw, saying that Petters was good for some of the debt. Petters wrote Hettler two checks totaling $1.3 million, then stopped payment. As for Petters' three checks to Kahn, they all bounced.

The bank sued Deep Draw and Kahn for default. About this time, the FBI raided the Deep Draw factory and seized its business records. Soon after, Kahn put the company into Chapter 11 bankruptcy. (The bankruptcy trustee was John R. Stoebner, an attorney who will reappear in this narrative.) As the bankruptcy court sifted through the mess, about $2 million to $3 million in cash was not accounted for. A plausible explanation is that this money was shifted from Deep Draw to Kahn, who lent it to Petters.

Garrett Vail was the bankruptcy attorney for the bank that sued Kahn. He asked Kahn under oath whether she had handed off this money to Petters. She invoked the Fifth Amendment right against self-incrimination. Vail then tried to question Petters under oath, but a bankruptcy judge refused to enforce the subpoena. (Petters customarily received friendly treatment from the criminal justice system in Minnesota.) Kahn pleaded guilty to wire fraud and was sentenced to three years' probation and $99,000 in restitution. Possibly, she took the rap for Petters after he paid for her legal defense. Certainly, she and her boyfriend Hettler were unsavory characters. He went to jail for swindling his sister's money from their brother's estate and for failing to pay child support.

Senator Amy Klobuchar

Suspecting that Kahn and Hettler were fronts for Petters, Vail took his allegations to the Hennepin County prosecutor, Amy Klobuchar. She was the daughter of a longtime popular columnist for the Minneapolis Star-Tribune. When her father was arrested for drunken driving he was defended by a lawyer named Douglas Kelley. Anyway, after reviewing Vail's documents, Klobuchar decided to go after Hettler, not Petters. Deadbeat dads normally are prosecuted for contempt of court as a civil matter. Klobuchar charged Hettler criminally, thereby gaining favorable publicity as a fighting feminist. Criminal charges against a parent had not been brought in that county for more than thirty years, but Hettler, age sixty, pleaded guilty to the deadbeat dad charges and also to theft by swindling. Klobuchar was reelected as county attorney without opposition in 2002. Petters later helped to finance her campaign for the U.S. Senate.

Stymied at the county level, Garrett Vail took his allegations to federal agents in 1999. "I contacted the FBI, going through these documents, showing the notes, showing the assignments, talking about, you know, the transfers, and the misrepresentations and the convictions of Hettler and Ruth Kahn taking the Fifth. With all of these proceedings, Tom Petters is up to his neck in it. I drew them a roadmap, all the many complicated and questionable connections that Petters had to these two people, one who is in prison for theft by swindle, one who is in bankruptcy. And at the end of the four-hour interview the kid says to me, 'I got one question—what's a guaranty?' " (A "guaranty" in financial transactions has a technical meaning distinct from a guarantee or warranty on a product as understood by consumers—still, a federal agent supposedly would know such jargon.) "I never heard back from them," Vail continued. "Never heard back from the FBI, and it chills me to this day."

Hettler became a public nuisance after his release from prison, constantly charging in blogs and legal filings that Minnesota judges and attorneys are crooked. He was so outrageous that U.S. District Judge Ann Montgomery eventually forbade him from filing additional actions concerning the money that he said Petters owed him. (Montgomery, a law school classmate of Douglas Kelley, is yet another lawyer who figures in this story.) Unchastened, as late as November 2009 Hettler filed a brief in a Polaroid bankruptcy case accusing trustee John Stoebner (the former Deep Draw bankruptcy trustee) and the bankruptcy judge of criminal wrongdoing. As usual, Hettler's document was nearly incoherent.

The FBI had interviewed Deanna Coleman in the Kahn/Hettler matter and then again in 2003 in another case. She managed to keep her boss, Petters, out of trouble both times. Law enforcement officials seemed to have a curiously sluggish interest in Petters' activities. Maybe it is easy to say, in hindsight, that they should have been more on the ball. Or maybe, as some of Petters' victims later said, they really have no excuse.

Petters had reason to fear official investigations, however lax they were. Plus, he had corporate spies to worry about. The diverting business was cutthroat, as he said—people stuck with goods they could not sell were in trouble and maybe on the con. He hired a private security firm to sweep his business headquarters in Minnetonka for electronic bugs, including the offices of Coleman and other lieutenants. The private agents were thorough, removing outlet and switch covers, checking all telephones, planting audiotapes to activate any voice-operated bugs. No eavesdropping devices were found. The security firm did recommend moving a safe that was clearly visible through a window in Coleman's office, lest it "prove to be a temptation to the criminal element, or to teenagers looking for an opportunity."

"Elaborately Dressed Showgirls"
Petters' son John was diagnosed with malignant skin cancer at age eighteen, abnormally young for that malady. He was treated and had a favorable prognosis in March 2004 when he visited Florence, Italy, as a twenty-one-year-old college student. He was murdered there. At about 1:30 a.m. a tangled fracas erupted in a Florence park involving John Petters, a woman friend from Minnesota, an Italian woman he had just met, and the Italian woman's father. The father later was convicted of stabbing young Petters repeatedly. Apparently the Italian woman tried to pull her father off John; there were cuts on her hands. An ambulance came and medical personal treated the woman's wounds, not seeing John lying mortally stabbed in the dark. They returned in forty-five minutes and John was still alive, but he soon died.

Petters flew to Italy for the trial of his son's killer. His companions included Deanna Coleman, his friend and attorney John Koneck, his former father-in-law John Hagen, and others. During the Italian visit, Petters began a sexual relationship with Coleman. The trial recessed after a week and Petters flew home. While there his girlfriend, Tracy Mixon, gave birth to their son, Joseph. Returning to the trial, Petters told his son's killer that he forgave him, or so Petters testified later at his own trial. His lawyers openly tried to play on the jury's sympathy, but there is no doubt that Petters was emotionally devastated by John's death. He placed ice packs on his eyes in the morning to reduce the swelling from crying so that he might go to work looking somewhat normal. He told Coleman that he had made so much money he wanted to start giving it away.

A $400,000 party might not raise eyebrows in New York or Los Angeles, but in Minneapolis it was stunning. The first such gala for the John T. Petters Foundation was held in August 2006 as "A Night in Las Vegas" at a downtown hotel. Petters had set up the foundation to provide foreign exchange scholarships in his son's honor. "Four elaborately dressed showgirls helped guests feel like they had just stepped into a Las Vegas show," as a Petters corporate magazine declared. The actor David Spade and the Rat Pack Revue provided entertainment for guests including senatorial candidate Amy Klobuchar and Minnesota Governor Tim Pawlenty. The fete attracted more than eight hundred guests, raised $1.3 million, and established Petters as a Twin Cities titan. His friends in those years included former Vice President Walter Mondale, who later served as ambassador to Japan and "introduced me to a number of people in Korea and Japan for the business," as Petters said. Mondale's son, Ted, worked as an executive vice president for Petters for five years. With juice like that behind him, perhaps it is understandable that the criminal justice system was not eager to investigate Petters.

The "Night in Las Vegas" was followed in subsequent years by "nights in" Beijing and Barcelona and by a polo tournament in West Palm Beach, Florida. Petters gave away tens of millions of dollars under two foundations, the one named for his son and also the Thomas J. Petters Family Foundation. Unfortunately for the not-for-profit groups that received Petters' largesse, most of it was funny money and they were required to give at least some of it back. In the fall of 2008 Coleman asked Petters whether a certain corporation knew that his records were fake. "Fuck no," he said. "They don't know they're fake."