Appeals court ruling in Petters case may upend effort to return millions to victims

In a ruling that deals a blow to the government's attempt to return hundreds of millions of dollars to people defrauded by Tom Petters, the Eighth Circuit Court of Appeals last week reversed the verdict of the only case that went to a jury.

In a 2-1 decision, the federal appeals court concluded that three people who collected millions of dollars in interest payments before Petters Company Inc. (PCI) collapsed may be entitled to the money if they acted in "good faith."

The ruling undercuts the central argument of the government, which won the cases by claiming that any profits earned through the $3.5 billion scam were illegally obtained through fraud, even if the investors were unwitting participants in the crime.

"Defendants received interest payments to which they were contractually entitled," the court ruled. "The fact that the interest was paid out of PCI's Ponzi churn was immaterial to the validity of the promissory notes."

Petters, who is serving a 50-year prison sentence, persuaded hundreds of people from 1994 to 2008 to lend him money to buy stereos and other electronic equipment at a steep discount and sell them to major retailers. But the government proved in 2009 that the vast majority of those deals were bogus, and that the money was primarily used to repay his lenders and keep the scheme afloat.

Trustee Doug Kelley, who has overseen the 12-year liquidation of Petters' bankrupt estate, has filed nearly 300 so-called "claw back" lawsuits aimed at recovering money paid to those who helped finance the scheme, which ranged from individual investors to large hedge funds. So far, Kelley has settled 280 of those cases, obtaining $297 million for Petters' victims.

Attorneys said this month's ruling will make it difficult for the government to squeeze more money out of those who profited from the scam. Though the vast majority of the cases have settled, Kelley is still seeking to recover about $350 million through pending litigation over what he calls "false profits."

"The people I feel bad for are the ones who settled," said North Dakota attorney Dan Frisk, who led the legal challenge on behalf of his client, Gus Boosalis, who was ordered to repay $6.4 million by a jury in 2018. "We were the only ones who stuck to our guns. But it is probably more of a moral victory than a real victory at this point because of the anguish my client has gone through."

Kelley said his legal team may challenge the ruling by seeking a review by all 11 judges of the Eighth Circuit, noting that the three-member panel that issued its findings last week were divided on some of the issues. He noted that such challenges have been successful in other jurisdictions.

"It's not over until it's over," Kelley said.

The Eighth Circuit also struck down a $6.9 million judgment against Ohio prosecutor Steve Papadimos and his wife, physician Chris Kanios, who were ordered to repay their profits plus interest after the jury verdict in the Boosalis case.

"The trustee himself recognized that our clients acted in good faith," said Minneapolis attorney Tom Boyd, who represented the married couple. "There is no evidence they were ever part of any fraud, any dishonesty or any wrongdoing. And yet they have been mired in this litigation for a decade or more."

Boosalis, a former floor trader on the Pacific Exchange, first heard about Petters in 1995 from a friend who was already lending money to the venture. After meeting Petters in San Francisco, Boosalis was convinced the business could be "even more successful than Costco," court records show. Boosalis' original investment of $50,000 grew to as much as $3.1 million, as he continuously "rolled" his unpaid principal amounts over after receiving his quarterly interest payments.

The court noted that Petters took great pains to convince Boosalis and other lenders that the business was legitimate by building several stores in the Twin Cities. Boosalis visited those stores and also received fake purchase orders and invoices that appeared to support the use of his money, the court noted.

But at trial, Kelley's legal team argued that Boosalis ignored "red flags" indicating the business was fake, such as receiving more than $3 million in bad checks in 2001. Instead of investigating, Boosalis invested another $500,000 into the scheme, court records show.

The appeals court ordered a new trial for Boosalis.

The appeals court unanimously struck down millions of dollars in interest charges that were tacked onto the government's awards, which nearly doubled the size of the judgment against Boosalis. The court ruled that the judges improperly used state instead of federal law when calculating the interest. For Boosalais, that amounted to 10 % annually from 2010, when the case against him was originally filed.

Frisk said the government's lawyers used the threat of prejudgement interest to persuade many people to settle their cases.

"We thought that was wrong," said Frisk, who represented about a dozen of Petters' lenders. "That interest was oppressive. People settled out and in some cases gave up their life savings and retirement. It was disheartening."

Frisk said other lenders may have kept fighting if the Eighth Circuit had acted sooner. Just one other claw back case went to trial, but the defendant settled that case before a verdict was rendered, Kelley said.

Kelley defended his tactics.

"I don't want to speculate on what would have happened" if the Eighth Circuit had ruled sooner, Kelley said. "But everyone was aware of these arguments, which were quite public at the time, and they decided to settle."

Jeffrey Meitrodt • 612-673-4132