Defense in fraud trial highlights legitimate deals

AP News
Posted: Nov 16, 2009 8:06 PM

A cousin of Tom Petters testified in the Minnesota businessman's fraud trial Monday that they worked on a multitude of real deals involving real merchandise such as home entertainment systems, other electronics and clothing.

The defense called Karl Petters as one of its first witnesses in an attempt to show that Petters Co. Inc., the company prosecutors say was at the heart of a $3.65 billion Ponzi scheme, was a legitimate business _ at least in its early years.

Karl Petters, of Austin, Texas, testified he was involved in a 1996 deal in which PCI bought thousands of home entertainment systems from 3M Co., which was getting out of that business. Karl Petters, who is not charged with a crime, said PCI sold the majority of them to Sam's Club for about $5 million.

An IRS agent testifying for the prosecution told the jury earlier Monday that money flowed into PCI mostly from hedge funds plus some individual investors, including Minnesota business figures Ted Deikel and Dean Vlahos. Special Agent Kathy Klug said almost none of it from 2003 to 2008 went to buy electronic merchandise as the investors were told.

Instead, Klug said the vast majority of the more than $38 billion that flowed through PCI's accounts in those years went to pay off previous investments, while $83 million went into Petters' personal accounts and $315 million went to subsidize his other businesses, such as Polaroid and Sun Country Airlines.

The defense agrees that a Ponzi scheme existed, but claims it was carried out by other defendants close to Petters without his knowledge. His lawyers also claim Petters paid less attention to PCI because he was distracted after the murder of his son John, in Italy in 2005, and focused on his new acquisitions instead.

Tom Petters' father-in-law, John Hagen, testified that Petters was devastated by his son's death.

"He buried himself in his work," Hagen said. "I felt his pace picked up from an already-torrid pace to an even more torrid pace. That was Tom's way of dealing with it."

Hagen also said he served on an advisory board for one of Petters' companies, the online merchant Redtag. He said Petters was "very dynamic, very committed to the concept," but the business foundered along with hundreds of other companies in the early days of the Internet boom.

Karl Petters testified that he quit PCI after a couple years in the late 1990s because liquidation was "a horrible business," like being an undertaker for failed companies. He also said it was difficult working for his cousin.

"Quite honestly, I did not like working for my cousin. I loved the man, I hated the boss," he said, drawing a smile from Tom Petters.

Karl Petters said he also hated dealing with many of the people in the business, including Larry Reynolds, who has pleaded guilty to money laundering conspiracy in this case and faces up to 20 years in prison.

In one deal involving PCI and Reynolds' Los Angeles-based shoe business, Karl Petters recalled, a shipment of designer shoes being exported to Europe was seized by customs authorities in Amsterdam, Netherlands, because the shoes were not licensed for sale outside the United States.

He said Reynolds was furious.

"He said he was going to come and kill me," Karl Petters said.

The defense has depicted Reynolds, a disbarred lawyer with a string of felony convictions, as a mobster. His name was Larry Reservitz before he testified against one of his associates in an 1980s fraud case and entered the witness protection program.