ST. PAUL
The criminal prosecutions tied to the Tom Petters Ponzi scheme aren't finished yet.
On Friday, more than 30 months after the Petters business empire first was exposed as the largest white-collar fraud in Minnesota history, a former hedge fund executive pleaded guilty to charges of securities fraud and making false statements to investigators.
Michelle Webster Palm, 43, of Edina, previously worked for Arrowhead Capital Management, a Minnetonka-based hedge fund that prosecutors say did billions of dollars in business with Petters starting in 1999.
At an hourlong hearing Friday morning in federal court in St. Paul, Palm answered questions from Tim Rank, an assistant U.S. attorney prosecuting the case.
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Shortly after she started working at Arrowhead in the fall of 2007, she said Friday, she figured out that the firm's investors weren't being told the truth about how Petters Co. Inc. operated and about its repayment of the promissory notes held by Arrowhead.
"It was clear there was a misrepresentation," Palm told Rank.
Palm becomes the first employee of a Minnesota-based hedge fund that invested with Petters to face criminal prosecution. Her case indicates that the U.S. Securities and Exchange Commission and federal prosecutors are continuing to investigate the numerous hedge funds that invested in the Petters scam.
Acorn Capital Group, a Connecticut-based hedge fund that invested $273 million with Petters, became the target of a civil suit filed
by the SEC last month. That suit also targets Marlon Quan, Acorn Capital's founder.
Prosecutors recommended Friday that Palm be sentenced to 70 to 87 months in prison, based on federal sentencing guidelines, or about six to seven years. But because Palm entered her pleas as part of a deal with prosecutors and has agreed to assist with the prosecution of others related to her case, her sentence likely will be reduced.
She appeared on Friday before U.S. District Judge Richard Kyle, who handled the Tom Petters trial in 2009 and the sentencing of all of his co-defendants.
Tom Petters, the former CEO of Petters Group Worldwide, told hedge funds and other investors that he was using their money to buy and sell massive amounts of electronic goods to large retailers, such as Sam's Club. But that was actually a ruse to lure in more investors to feed a $3.5 billion Ponzi scheme run through Petters Group subsidiary Petters Co. Inc.
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Petters was convicted on 20 fraud counts and is serving a 50-year sentence.
Arrowhead Capital Management started investing with Petters in 1999, prosecutors said Friday. From 1999 until the Petters empire collapsed in 2008, Arrowhead received $5.1 billion in gross transfers from Petters, according to court filings.
Palm was hired at Arrowhead in the fall of 2007 as a vice president and later became managing director.
Petters Co. Inc. notes typically were short-term investments, and Arrowhead expected repayment within 90 days. But Petters Co. Inc. started missing payments in late 2007 and into 2008. That information was not communicated to investors, Palm said Friday.
Instead, Arrowhead investors were were told that the money to pay off the notes came directly from retailers, she said. In fact, the money came from Petters Co. Inc.
Under further questioning from Rank, Palm agreed that an unnamed employee of Arrowhead -- who was referred to as "individual A" in court Friday -- told Palm to not disclose that information to Arrowhead investors.
The fund's founder is James N. Fry of Orono. Last year, the trustee handling the Petters Co. Inc. bankruptcy case sued Arrowhead and Fry, seeking the return of $105.4 million in "false profits." A message left Friday at Arrowhead's offices for Fry was not returned.
The amount of new money invested with Arrowhead after Petters Co. Inc. started missing payments -- which is considered the loss to investors -- is estimated by the government at $20 million to $50 million.
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In December, in sworn testimony to the SEC, Palm said she believed the money that came back to Arrowhead from the Petters' investments came directly from retailers who were doing business with Petters.
Later, she went back to investigators and said that statement was false, and that she knew the money was coming from Petters Co. Inc. That's what led to the second charge of making false statements.
But Palm testified on Friday that she did not know about the Ponzi scheme until September 2008 -- when Petters' offices were raided and his business was exposed as a massive scam.
At the Friday hearing, Rank said Palm had a "minor role" in the scheme. Several family members were with her in court. She was released on a $100,000 unsecured bond and will be sentenced later.
Distributed by McClatchy-Tribune Information Services.
