Whistleblower recounts money problems at Petters

A longtime aide to a Minnesota businessman accused of operating a $3.65 billion Ponzi scheme said Monday that he was struggling to find new money and hold off nervous investors by the time she went to federal prosecutors to report the alleged scheme.

Deanna Coleman, 43, of Plymouth, was vice president of operations at Petters Co. Inc., a branch of Petters Group Worldwide, whose holdings included well-known and legitimate companies such as Polaroid and Sun Country Airlines before it collapsed last year. Prosecutors say PCI was at the heart of the fraud and the economic engine of Petters' corporate empire.

Coleman told jurors at Petters' trial Monday that she went to federal prosecutors on Sept. 8, 2008, to report longtime fraud and returned to corporate headquarters wearing a wire just hours later.

Recordings of Coleman's conversations with Petters and others portrayed an unraveling business that was running behind on payments to creditors and had several investors demanding proof their money was safe. The reality, Coleman testified, was that the electronics goods investors thought were backing their investments didn't even exist.

In one of the recordings, Petters can be heard beginning to cry.

"Sorry you ever had to meet me," Petters told Coleman, as his voice choked with emotion.

Petters then wanted to hug Coleman, who had been one of his closest lieutenants since he hired her as an office manager in 1993 and made her a vice president when he founded PCI in 1994.

Jurors heard Coleman tell Petters, "No hugs," claiming she had a sore back from all the stress. When Assistant U.S. Attorney Joe Dixon asked her the real reason, she replied, "I had a recording device in my back."

Petters, 52, of Wayzata, is charged with 20 counts that could put him in prison for life, including wire fraud, mail fraud, money laundering and conspiracy. Defense attorney Jon Hopeman has said Petters is innocent and that Coleman and others carried out the Ponzi scheme without his knowledge.

U.S. District Judge Richard Kyle informed the jury that Coleman has a plea deal with prosecutors, who will recommend a reduced sentence for one count of fraud conspiracy in exchange for her cooperation. The maximum sentence on the count would be five years in prison. Kyle said jurors could use that information in deciding how much weight to give Coleman's testimony.

Federal authorities have said they had no idea what was taking place inside Minnetonka-based Petters Group Worldwide until Coleman and her attorney approached prosecutors. They gave her two recording devices, one that fit on her key chain and another that went in her pocket, and sent her back to work, Coleman testified.

Going over documents from several deals over the years, Coleman described for the jury how the alleged scheme would work. She said she would draft fake purchase orders for televisions and other electronic goods PCI claimed to be buying from various suppliers and reselling at a profit to discount retailers Costco, Sam's Club and BJ's Wholesale Club.

PCI would present the falsified documents to investors - primarily hedge funds - and pledge the merchandise as collateral for high-interest short-term loans to finance the deals. But the merchandise never existed, she said, and in most of those years PCI never did any business with the retailers.

Instead, she said, the money would be used to pay off other investors and cover operational costs of Petters' other companies, which generally lost money. Dixon asked her how long they operated that way.

"Basically since day one," she replied.

Jurors heard one recording in which Petters said it had been "nothing short of a ... miracle" that the scheme hadn't already collapsed. He also described some deals he had in the works to try to stave off disaster, included one to sell a half interest in Polaroid, which Petters bought in 2005.

"We'll get a couple hundred million dollars," Petters said. "Not enough to do what we need to do."