Years later, Petters' fraud case stirs new legal ripples

Nearly a decade after the collapse of a staggering $3.7 billion fraud scheme engineered by businessman Tom Petters, Minnesota lawmakers could rewrite rules governing who must fork over money to victims.

A measure contained in a wide-ranging state budget bill would limit the recovery of investment income earned by charitable or religious organizations that accepted gifts from Petters or his associates.

The law change is backed by some charitable foundations confronted by claims from a court-appointed receiver.

But the receiver, Minneapolis attorney and former white-collar prosecutor Doug Kelley, warns that it could take $35 million off the table.

"That would be borne not by the taxpayers, but by the victims of the Ponzi scheme," Kelley said Tuesday before a House-Senate conference committee hashing over differing public safety and judiciary budget plans.

Petters is serving a 50-year prison sentence after a multi-count fraud conviction in 2009. The scheme involving fake invoices and money laundering related to Petters' electronics retailing spanned 15 years and affected more than 250 victims.

The move to claw back some of that money has also been far-reaching. Businesses, investors and charities have been forced to turn over money they gained from the scheme.

A few have resisted the recovery effort and now hope the Legislature shields some of those assets by changing how certain donations are construed.

The law change would make clear that multiple kinds of donations can be protected once a certain time limit passes. Any profits earned on a security, such as a bond or stock, wouldn't be treated differently than cash.

Kelley has argued the investments shouldn't get special protection and that "false profits" are ripe for recovery.

Some charitable foundations or religious organizations received something other than cash from Petters or his associates. They got promissory notes that resulted in lucrative returns.

Among them is the Northwestern Foundation, which is affiliated with the University of Northwestern, a private Christian college in Roseville.

Board member Grover Sayre explained to lawmakers how a $2 million promissory note donated to the foundation by a Petters associate in 1999 eventually yielded $5.5 million. That money came in by 2001 and was later parceled back out — well before the Petters case came to light.

"So nearly eight years went by after the funds were received and gone before the foundation knew there was a fraud involved," Sayre said.

The foundation has been dealt some setbacks as it fights the claim before a bankruptcy judge. The legislation, which advocates say is merely a clarification to a 2012 law, could provide a lifeline to Northwestern and a couple of foundations like it.

"If gifts from a long time ago are reclaimed from foundations, you create a new set of victims, namely all of the folks that have donated money that will now be used to pay the old claim," Sayre said. "Because often the funds from old donations are long gone."

Kelley said he has recouped millions of dollars from similarly situated charities, religious orders and colleges.

"This is akin to if somebody went out and robbed a bank and got the money and then went across the street and put it into the collection plate of a church," Kelley said. "Everybody recognizes that money ought to go back to the original depositors in the bank."

Kelley said he has been clear from the outset he would be flexible in negotiating reduced settlements.

"That if a charity could not afford to pay back the money — it had an inability to pay — I wasn't in the business of trying to put anybody out of business," he said.

Meanwhile, lawmakers said they understood they are dealing with a complicated subject with big ramifications.

Sen. Jerry Relph, R-St. Cloud, warned against getting into a "deep rabbit hole" by dwelling on the facts of the case.

"If the intent here is to exempt charities who have in good faith acted, then that should be our intent," he said. "If our intent is to address a specific set of fact situations that may or may not extend to other areas, then we should clearly define that. That's the question I raise: What the policy here should be?"

Sen. Warren Limmer, R-Maple Grove and co-chair of the committee, also advised his colleagues on a House-Senate conference committee to keep a narrow scope.

No action was taken Tuesday to keep or remove the language from the bill. It won't be known for weeks which side prevails in the Legislature and will have the upper hand when the debate moves back to the courts.

"We are not a court and we can be tempted to make some moral judgments here," Limmer said. "We're trying to straighten out the law."