The court-appointed trustee overseeing recovery efforts for victims of Thomas Petters' $3.65 billion Ponzi scheme announced a $322 million settlement with two hedge funds accused of receiving hundreds of millions in so-called "false profits" derived from the scheme. The trustee, Doug Kelley, reached the settlement last week with hedge funds Westford Investment Management LLC and Epsilon Investment Management LLC (collectively, the "Hedge Funds"), which allegedly received more than $322 million in "net profits" from their investment with Petters' scheme. In a twist, Kelley does not expect to receive a check anytime soon from the funds; the settlement includes an agreement that Kelley would not start collection efforts until at least 2020.
Petters was arrested in October 2008 after prosecutors alleged that his company, Petters Company, Inc., was not the successful and highly-profitable business that touted handsome returns through the purported purchase and resale of consumer electronics to big-box retail stores. Rather, Petters was accused of operating a massive Ponzi scheme that duped victims out of billions of dollars that ranks as one of the largest in history. Instead of using investor funds as promised, Petters built up an elaborate business empire by purchasing legitimate companies such as Polaroid and Sun Country Airlines. However, when the fraud was uncovered in late 2008, those once-legitimate companies imploded along with the rest of Petters' empire. Petters was eventually sentenced to serve fifty years in prison for the fraud.
The Hedge Funds first began investing with Petters in 2001, ultimately entering into over 300 transactions in which approximately $2.9 billion was invested. The Hedge Funds stopped investing with Petters in 2007, and ultimately recouped not only their entire $2.9 billion investment but also approximately $324 million in net profits. Eighteen months after the Hedge Funds withdrew their investments, Petters' fraud collapsed.
In a lawsuit filed in a Minnesota bankruptcy court, Kelley alleged that the Hedge Funds were one of the largest investors in Petters' Ponzi scheme through a complex master-feeder fund structure. The complaint alleged that the Hedge Funds received significant amounts of false profits derived from Petters' scheme, which were used to make fund founder and owner Steven Stevanovich "exceptionally wealthy" based on management and performance fees. Kelley's complaint sought not only the $323 million in false profits, but also the entire $3.2 billion realized from the scheme under the theory that the Hedge Funds did not give reasonably equivalent value for and take the transfers in good faith.
Kelley reached the settlement with the Hedge Funds after a series of mediation hearings before a former Judge. The settlement calls for the entry of a judgment in an amount of $322 million that represent an agreed-to total amount of "false profits" realized by the Hedge Funds. However, under the terms of the settlement, Kelley agreed that he will refrain from initiating any efforts to collect on the judgment for six years, or the end of 2020. This condition arises from the Hedge Funds' delicate financial status, and will allow the Hedge Funds to manage the investments over the next six years with the goal of completely satisfying the judgment when due. In return for waiting to collect on the judgment, Kelley will receive a security interest in the entirety of the Hedge Funds' remaining assets.
The settlement must ultimately be approved by the U.S. Bankruptcy Judge overseeing Kelley's efforts. A hearing has been scheduled on the settlement for October 28.
To date, Kelley has recovered approximately $110 million to be eventually distributed to victims. Recently, Kelley received court approval to file a series of clawback suits targeting international investors that collectively reaped more than $100 million in false profits. The Minneapolis Star Tribune has estimated that victims can expect a total recovery ranging from 17% to 25% of their approved loss.
A copy of the complaint against the Hedge Funds is below: