A recent Minnesota Supreme Court decision could affect the potential recovery of more than $1 billion from lenders who profited from relationships with convicted Wayzata businessman Tom Petters, a newspaper reported Sunday.
In an unrelated but similar case, the court ruled last month that Minnesota law doesn't include a key provision that makes it easier to recover, or clawback, so-called false profits from a Ponzi scheme of the type Petters was convicted of orchestrating.
Continue Reading Below
Attorneys on both sides are studying the case to assess its impact on recovery efforts in the $3.5 billion Petters scheme, the largest financial fraud in Minnesota history, the Star Tribune (http://strib.mn/1BGVIAd ) reported.
The ruling means clawback lawsuits will have to prove that lenders knew or should have known they were involved in a Ponzi scheme — not that they merely associated with a business venture that turned out to be fraudulent.
Under terms of a "Ponzi scheme presumption," financial transfers between lenders and the scheme operator are considered fraudulent on their face, and lenders cannot recover more than they invested with a debtor. That means that interest payments on the loan can be recovered.
In the Petters case, Petters and his main business entity, Petters Company Inc., took out loans to purportedly purchase consumer electronic goods at the wholesale level for resale to big-box retailers.
But the transactions were a sham, for the most part, and lenders were repaid principal and interest with funds provided by newer investors. The elaborate Ponzi scheme lasted for more than a decade until an insider revealed its existence to federal authorities in September 2008. Petters was convicted in 2009 and is serving a 50-year prison sentence.
The bankruptcy trustee for the Petters corporate entity, Doug Kelley, contends the Supreme Court ruling will have little if any impact on his clawback efforts because he can still prove his case by establishing "badges of fraud," or evidence that shows something was amiss that lenders should have seen.
"Whether I prove the Ponzi presumption or use badges of fraud, I can easily prove fraudulent intent," Kelley told the Star Tribune. "We have no dearth of direct evidence of fraud in this case."
Currently there are 105 clawback lawsuits active in the Petters bankruptcy, seeking more than $1 billion. The clawbacks range from small individual lenders to international banks.
Information from: Star Tribune, http://www.startribune.com