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Massive Investment Fraud
Thursday - October 02, 2008 01:12 PM in
by Peter Leppik
At the same time Wall Street is playing out a slow-motion train wreck, we're watching our own old-fashioned investment fraud play out here in the Twin Cities.
Just down the street from my home is the gleaming new headquarters building of The Petters Group. Petters Group, run until a few days ago by Tom Petters, has grown to local prominence over the past decade by buying troubled companies out of bankruptcy and turning them around. Petters is the parent company of Fingerhut, Polaroid, and Sun Country Airlines, among others.
Petters himself has made a name for himself as a local business hero and philanthropist, generously supporting a number of local charities and funding a foundation named for his son (who died while studying abroad).
The problem is that this whole edifice turns out to be a fraud. Last week the feds raided the Petters Group headquarters, sending all employees home for the day, and searched Tom Petters' home. According to newspaper articles, the government alleges that Petters Group raised money from investors by forging purchase orders and claiming nonexistent inventory in order to make its finances look better than they were.
This has apparently been going on for years, since before Petters Group's first high-profile acquisition, and amounts to something like $2 billion. That's approaching Enron-scale fraud, and would undoubtably be national news were it not for the election and banking crisis which happen to be going on now.
A lot of questions are still unanswered: top of my mind is how Petters Group was able to convince so many (presumably sophisticated) investors to invest so much money without ever being audited. At least I assume they were never audited, since none of the media reports mention any auditors, and fake inventory and fake orders are covered in Accounting Fraud 101. A five-minute phone call to one of the supposed buyers of that fake inventory would have exposed the scheme any time in the past decade.
All this would be interesting gossip were it not for the thousands of employees of the very real companies Petters Group had acquired and was propping up. Sun Country Airlines is cutting paychecks by 50% across the board in an effort to conserve cash. I don't know the state or fate of any of the other Petters companies, but it's a safe bet that they will have to survive on their own for the time being. Some won't make it.
So best wishes to anyone stuck in that mess. With any luck the criminals will go to jail, consistent with all due process, but that's cold comfort to Fingerhut or Sun Country employees wondering how they're going to make it through Christmas.
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