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Author James L. Merriner
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Introduction to my forthcoming book:

Ponzi-Dot-Gov: How the Government Defrauds Innocent Citizens

Introduction: Ponzipalooza

Tom Petters
Tom Petters

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Friday morning, October 3, 2008: He knew why they would come and even when they would come, but even so, when the moment arrived he freaked out. Tom Petters, the con man who had hustled the first known multi-billion-dollar Ponzi fraud in history, was about to be arrested in his own home. His lawyer had warned him when they would show up, the men in navy blue jackets with yellow FBI letters on the back. Under a chandelier in his two-story vestibule, Petters watched the FBI agents ascend the driveway.

If Petters skied, he would be the kind of guy who skied the dangerous double-black-diamond routes on the back side of the mountain where the Ski Patrol hardly ever went. He had been zooming on the adrenaline rush of extreme risk since his high school days. He had it all, but “it all” was built on lying and cheating. This mansion atop a hillock overlooking Lake Minnetonka in Wayzata, Minnesota—he had built it just five years earlier, a gaudy symbol of his wealth and power in his home state. There were two deluxe residences in Florida and another at a Colorado ski resort as well, plus a separate house near Wayzata for his girlfriend.

He had to have known for at least the past nine days that FBI men would knock on his door, ever since they had raided this very house along with his nearby business offices on September 24. In the house, agents found $13,000 in cash, a Ruger 22 Standard pistol, four Rolexes, seven other expensive watches, and a wine cellar with thousands of bottles. The media made much of Petters' luxurious lifestyle, but in fact most of his wine was cheap—vintages such as 2005 Rodney Strong Pinot Noir, reflecting the tastes of a college dropout from St. Cloud, Minnesota.

At the time of the raids, Petters had been staying at a favorite hangout, the Bellagio resort in Las Vegas. The night before, he cashed a $10,000 check for cash and gambling chips. The check bounced. He told his longtime receptionist-turned-vice-president, his former lover, that he would rather just gamble, drink, and die. He did not know that the former lover, Deanna Coleman, had recently snitched to the FBI. Which had prompted the September 24 raids. An FBI agent confronted him at the Bellagio. Petters was not then charged with a crime, but his eventual indictment was inevitable.

Prosecutors going after white-collar crime sometimes ask: Where did it start? What was the initial scam that snowballed until corporate executives or employees or both commonly felt it was okay to cheat? Often, the first step on the path of dishonesty was a petty decision to falsify gas and meal money on travel expenses. In Petters' case it would be difficult to find a point of origin, at least a petty one. Let's say the Ponzi started in 1995 when Petters paid an accomplice $15,000 to create fake bank statements. By the time the FBI marched up Petters' driveway thirteen years later, the scheme had expanded to $3.65 billion. A $3.65-billion castle in the air that Petters feverishly tried to keep from crashing while all the credit markets were evaporating. That is when he told Deanna Coleman he just wanted to gamble, drink, and die.

Tom Petters
Tom Petters

In fact, Petters was drinking heavily and popping pills, both uppers and downers—Adderall for attention deficit hyperactivity disorder, Clonazepam for anxiety disorder, Zolpidem for insomnia. When Deanna Coleman and another accomplice secretly recorded his conversations for the government, Petters sounded barely coherent. The cracking of a major fraud ring often prompts people to ask, how did the crooks ever think they could get away with it for so long? Especially when the mastermind, Petters is this instance, was a drug-addled emotional basket case?

Part of the answer surely is that Petters lavishly rewarded his confederates and enablers with money and affection and other incentives to keep them loyal and silent. At a trivial level, Petters placed full-time masseurs on staff for his Petters Group Worldwide employees. More seriously, Coleman was a girl from Elbow Lake, Minnesota, who received $8 million in bonuses from Petters. She also heard constant heartfelt assurances that he would figure out a way to get them out of this mess. Another accomplice similarly rewarded was an ex-con with an assumed name under the federal witness protection program. Still another ex-con had become a Christian philanthropist who enticed clergymen and religious groups into investing with Petters. In the end, six of Petters' cohorts pleaded guilty and provided evidence against him in hopes of leniency in sentencing.

So on that October morning in 2008, Petters knew that his empire had crumbled and that somebody must have ratted him out but he was not sure who. He had been drinking and pill-popping. The FBI men on the semicircular driveway could see him inside through the enormous first-floor windows. Petters started running up the broad, elegantly curved staircase to the second floor. When the agents entered, Petters turned and faced them with his hands in his pockets. At once, as their training prescribed, the agents drew their guns and barked at Petters to remove his hands from his pockets. He complied half-way, withdrawing just one hand. Did Petters have a death wish, did he secretly somewhere in his viscera want the FBI to shoot him? We probably will never know. In any case, the multi-billion-dollar Ponzi man was arrested at gunpoint. He did not say much except, “You didn't have to do this.”

 

Douglas A. Kelley
Douglas A. Kelley
Joseph T. Dixon III
Joseph T. Dixon III

Six days earlier: Saturday morning, September 27, 2008: Joseph T. Dixon III, a federal prosecutor in Minneapolis, placed a call to a local lawyer, Douglas A. Kelley, to make a threat and give him a deadline. This happened only three days after the feds had raided Petters' home and businesses. Dixon was young and handsome, short and slender, with dark, basset-hound eyes and a personable, nice-guy manner. In the courtroom, though, he could be merciless. His call to Kelley was amazing in several respects.

After FBI agent Eileen Rice had confronted Petters at the Bellagio, he did what anybody would have done—he reached out to his friends for help. Among his friends were the United States senators from Minnesota, a Republican, Norm Coleman, and a Democrat, Amy Klobuchar. Petters was a generous contributor to their political funds. The senators' aides advised Petters to hire Doug Kelley, a politically connected lawyer. In fact, at the time of the FBI raids, Kelley was helping Norm Coleman prepare for a debate with his Democratic challenger in the upcoming election. Petters already had lots of lawyers on board for his corporations, of course—but right after the FBI raids, they bailed, leaving Petters without counsel.

On Thursday, the day after the raid, Petters retained Jon M. Hopeman as his criminal defense lawyer. Hopeman, like Kelley, was a former assistant U.S. attorney in the Twin Cities office. On Friday, Hopeman and Petters had lunch with Kelley. The next morning, assistant U.S. attorney Dixon called Kelley.

Dixon “said he had heard I was going to represent the Petters Entities,” Kelley recalled in a sworn statement. “He asked whether the Petters Entities were merely an alter ego of Mr. Petters. He stated that the federal government was prepared to exercise all its powers, but would consider holding off if I could assure them that I would have substantial control over the companies and assets. Essentially, without saying so, Mr. Dixon was implying that they would forfeit even the ongoing Petters Entities if they thought assets were going to be dissipated. AUSA Dixon said he needed a report from me that same day.”

“Forfeit” is legal shorthand meaning the government would seize Petters' property under asset-forfeiture laws that require criminals to give up their ill-gotten gains. Let us imagine how Kelley might have responded. “How are you going to forfeit it, Joe? Petters hasn't even been charged with a crime yet. And why are you calling me? I'm not even his lawyer. Call Jon Hopeman. You heard I was going to represent his corporations? How did you hear that?”

Instead, Kelley hung up the phone and raced to Petters' mansion on Lake Minnetonka to meet there with Petters and Hopeman. That evening, Hopeman assured the U.S. Attorney's office that Petters would surrender his passport so that he could not flee the country.

On Sunday, Kelley and Hopeman met Petters at his Petters Group Worldwide offices. Petters agreed to relinquish all control of his companies to Kelley and cleaned some personal effects out of his office. Kelley next went to Dixon's office to tell him, don't worry, Petters will resign his corporate offices Monday morning. Which he did, tearfully saying goodbye to his colleagues. When he was arrested at gunpoint four days later, he was a man with no assets.

Much later, Petters' defense lawyer told the jury in Minneapolis that Petters had lost everything he owned except the three suits he wore to his trial. That was lawyer-talk. Technically, it was correct. Petters had signed over control of his property to a cabal of government and private lawyers. Who had control of Petters' businesses was no mere technical point. The Ponzi engine was called Petters Companies Inc., but through another company, Petters Group Worldwide, Petters owned legitimate enterprises. These included Polaroid and Sun Country Airlines, worth hundreds of millions of dollars. Ideally, that money should go back to the victims and lenders whom Petters had cheated.

The government maintained that it had no inkling of Petters' crimes until his former lover Deanna Coleman blew the whistle to the FBI on September 8, 2008, but that is incorrect. A local bankruptcy lawyer had gone to the FBI in 1999 with chapter and verse about Petters' misdeeds. He was ignored. The bankruptcy lawyer next went to the county prosecutor, Amy Klobuchar. She filed no charges against Petters but put one of his debtors in jail. Later, Petters helped finance Klobuchar's Senate campaign. During this time, the guy who was Petters' chief money launderer was under the federal witness protection program.

If law enforcement was slow to act on allegations against Petters dating at least to 1999, officials gave Kelley the keys to Petters' castle with astonishing swiftness. Petters hired Kelley over the weekend of September 27, 2008. By Tuesday, a state judge in Illinois froze Petters' assets at the request of a group of his secured creditors. By Friday, on the evening after Petters was arrested, a federal judge secretly granted a motion by Hopeman and federal prosecutors that voided the Illinois court action. The judge, Ann Montgomery, was a former assistant U.S. attorney who had worked with Kelley and also had gone to law school with him at the University of Minnesota. On Sunday, Petters signed an irrevocable proxy granting all voting rights over his corporate shares to Steven Wolter—Kelley's law partner. On Monday, Judge Montgomery named Kelley as receiver over Petters' assets in an extraordinary ex parte proceeding, meaning that opposing voices were not heard. Kelley seemingly would be disqualified for conflicts of interest because he had represented Petters' corporations, but soon he was both the court-appointed receiver and the court-appointed bankruptcy trustee over the Petters empire.

A ring of professionals—lawyers, accountants, consultants—was conniving to loot Petters' millions. The professional fee frenzy grew so egregious that at one point a consulting firm billed the government $44,000 merely for the time it spent preparing the bill. At the end, the government, under asset-forfeiture laws, could seize anything left over and toss it into the Department of Justice's operating budget.

In effect, the government is running its own Ponzi schemes. They are not Ponzis in the traditional sense of luring new investors to cover the extravagant returns promised to earlier investors—a compounding folly that eventually must collapse. Instead, the government's operations mimic Ponzis in their avid efforts to choose favorites and then conceal where the money is going. The legal system seems to hand out privileges to selected insiders like candy. The government Ponzis also mimic the civilian ones—perhaps in this way most of all—in lavishly rewarding its confederates and enablers with money and other incentives to keep them loyal and silent.

Such public-sector Ponzis have been proliferating in recent decades under modern asset-forfeiture, racketeering, and bankruptcy laws. This story is much bigger than Tom Petters. Not all of his victims were wealthy hedge-fund managers deserving few of our tears. Many were “little old ladies” and Christian pastors swindled out of their life savings. The number of such victims has been expanding in asset-forfeiture and bankruptcy cases across the country. The criminal justice system seems to deny them a voice. This book is an effort to give them a megaphone because, under ponzi-dot-gov, nothing short of our constitutional right to due process of law is in jeopardy.


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All contents copyright James L. Merriner.