With the current financial meltdown and stories like the vacationing AIG executives or CEO’s being rewarded even after they drove their companies off the cliff, you may have missed another interesting story out of my hometown of Minneapolis. It hasn’t hit the national news yet.

Tom Petters was the Minnesota version of Horatio Alger; he was a smalltown boy made good. His company, Petters Worldwide, was worth billions (supposedly) and controlled a wide range of ventures from Sun Country Airlines to Polaroid. A college dropout and Radio Shack salesman, his road to the top was swift. But the true story is yet another example that if it looks too easy, chances are good it is.

Turns out, his hidden skill was in out-doing Charles Ponzi, the Boston Italian who convinced investors to buy international postal reply coupons for a 50% return in 45 days. By the time Ponzi got caught, he was making $425,00 per day in the early 1920’s. Money came in, and was quickly turned around to pay the interest. Families were mortgaging their homes to buy into what was soon called the Ponzi Scheme.

Not much has changed in eighty years. The way it worked at Petters Worldwide was one investor would give money, and Petters would pay interest out of that investment to past investors. Petters would take the excess and pay huge commissions to his agents, just like Ponzi did back in the day, when he had agents all over New England. In one case, Petters’ agent donated a large sum to a non-profit, and then convinced the non-profit to invest in Petters. And then Petters paid the agent a finders’ fee of the same amount. Petters ran the scheme for over a decade, taking several people down with him; I am guessing his rationale was that if he could just hit on a great company, its success would take him to financial heaven, and he could pay off everyone out of profits, not new investors. Didn’t happen.  {Ed. ‘allegedly’}

What Ponzi did, Petters out-did. He was able to attract….are you ready for this?….BILLIONS, over $3 billion with stories for investors that he was a big supplier of HItachi TVs, among other things, to companies like Costco and Sam’s. The story was that he needed cash to fund the purchase before he was paid by these companies. Hello? Smell test? Petters had people create fake PO’s, nevermind that Costco hasn’t used paper PO’s in years. Not one investor thought to call Costco or Sam’s…the return, reported to be 24% for a month or so, was too great. Investors, including some foundations and hedge funds, couldn’t write checks fast enough. One investment fund, Lancelot Investments out of Chicago, is now suing Petters to recoup their own $1 billion loss.  {Ed. ‘allegedly’}

Last Wednesday, October 8th, after a week of having FBI agents combing through the company and his homes, Peters appeared in court, “red-eyed” said one report, hoping to be released. But they had him on tape, saying how he could always ‘go away on vacation,’ and how HE knew how to go on the internet and get false ID papers. They also knew he was obsessed by the story of Marc Rich, who was able to stay out of the US for 18 years avoiding tax evasion charges until then-President Bill Clinton pardoned him in 2001. Petters would do the same thing, and maybe even start over and do it again, he allegedly told one co-conspirator. He was getting ready to run, they believe, because he had just gotten a $500,000 check from the company for ‘personal expenses.’ Thankfully, the judge knew better, so in jail he sits and if anyone deserves to be there, it’s him.  {Ed.’allegedly’}

US Magistrate Judge Jeffrey Keyes rightly called it “one of the greatest frauds in American history.” Alleged.

For years, I have been aware of, but never knew, Tom Petters. Apparently to many, he was a symbol of all that was good about entrepreneurs. He was giving keynote addresses and winning awards right and left. He had the ‘touch.’ Why else would he make a local TV sports reporter a top officer in his company, in charge of something called ”Interactive Media,” and who admitted to a friend of mine that he had no clue what that meant or what he should be doing, other than “playing office.” It would just ‘turn out ok’ because everything Petters touched turned to gold, even though he traded in liquidation-type merchandise.

Petters was developing into quite the philanthropist, giving other people’s money away to a variety of causes, like $10 million to the University of Miami and it didn’t stop there. Executives at Petters Worldwide were treated lavishly, some earned million dollar bonuses regularly at Christmas time.

He had his own private conglomerate….nearly twenty different entities, all tied together by the sheer skill and acumen of Tom Petters.

Like all Ponzi schemes, it unraveled a few weeks back when an insider realized that there were simply not enough future investors to ensure future debt payments. The whistle-blower, Deanna Coleman, told the feds and now her boss faces life behind bars, making little rocks out of big ones, as the saying goes. Deanna will be penniless the rest of her life, according to her own attorney, but will only get a maximum of five years.

What is particularly galling about this story, which you have not read about outside Minnesota, is that it is made even worse because many of the investors he bilked were non-profits. Non-frickin-profits! Two non-profits here in town are out $27 million! What were THEY thinking?  {Ed. ‘allegedly’}

Here is what flabbergasts me. Over the years, I have raised millions from local and national investors for startups. In each case, we did everything by the book. We hired lawyers, auditors and so forth. Most companies do it this way. Even so, raising money is always tough, I have found. There is NO easy way to do it…it takes persistence, a great story, belief in your ideas and products and so on. How he was able to raise hundreds of millions is unbelievable. For a $25,000 investment, I have had investors visit customers, sit in on our internal meetings, meet with people from our past and so on. I have yet to meet an angel investor who would be one to look at a fake invoice, say, from Sam’s Club for thousands of TVs, and buy the story about how the cash is only needed for a month or so until the invoice is paid.

It gets even worse. A national accounting firm were Petters’ auditors. To refresh your memory here, the way auditors work is they come into a company and do things like actually count inventory, call customers to see if the products were actually ordered, and ask them if the company’s invoice matches what they believe they owe. How they missed $3.5 billion in a Ponzi scheme is beyond belief.  {Ed. ‘allegedly’}

I do have a good friend who is involved now as part of the legal team. I hope he writes a book about it.

Because no matter how bad the greed is on Wall Street or in Washington, it can get pretty bad out here on Main Street, too. From investors who got all tingly about the loan shark-type returns, to the attorneys and auditors who wanted fees badly enough to turn a blind eye to what was happening, and to employees who knew it was wrong, but had never dreamed of being a lottery winner at work before.

Last point: this story is, of course, the exception to the rule. It just needs to be told. Nearly every top executive I have ever met sets unbelievably high standards for themselves, maybe just because they know down deep that if it is fuzzy in the pulpit it is foggy in the pews. Plus they just know right from wrong. I believe customers as well as employees can tell if a company is being built on the right ’stuff.’ When I hear stories like this one, it just disgusts me. Sorry.

No amount of regulation reform could have prevented this crook from doing what he did.  {Ed. “allegedly”}