Oct. 1: Petters inquiry reverberates globally

The potential financial implosion related to the government investigation of Minnetonka businessman Tom Petters and affiliated companies has gone international. It also has prompted its latest lawsuit.

Capital management funds in Switzerland and Canada this week warned clients about possible losses in their hedge funds that had invested with Petters. And a Minneapolis firm went to federal court in Minneapolis this week seeking to reclaim $60 million it had invested this spring with a Petters-related company. Gottex Fund Management of Lausanne, Switzerland, said in a statement that "the [fraud] allegations against Petters, if true, may result in a material negative impact" on the performance of some asset-based funds managed by Gottex.

Gottex -- which has $15.6 billion in assets under management -- has an estimated $300 million invested with Petters' retail-inventory financing companies.

A spokesman for the Swiss money management firm said it is too early to say where those investments stand. "We don't have sufficient detail," the spokesman said. "It's unclear if the allegations are true and what the outcome will be."

Meanwhile, Toronto-based Northwater Market has disclosed that some of its investments were involved in a potential fraud situation, which the Globe and Mail newspaper later identified as the Petters organization. It was unclear how much money was at stake.

Petters, together with Petters Co. Inc., Nationwide International Resources, Enchanted Family Holding Co. and several related companies and associates, are the subjects of a federal investigation into investment fraud. The government is pursuing allegations that Petters and his group raised funds from investors for the purchase and resale of electronic goods that actually didn't exist, then used the money for other purposes.

Petters, who resigned as chair and chief executive of Petters Group Worldwide, has maintained his innocence since federal agents raided his company and home and several other locations last week.

A federal lawsuit filed in New York six weeks before the raids on Petters' home and businesses exposed the first cracks in the Minnesota reseller's operations. Acorn Capital Group filed the lawsuit Aug. 14 saying Petters stiffed Acorn and its investors out of $273 million in loans that they had made to Petters and a company he controlled since 2004.

Connecticut-based Acorn said in the suit that Petters personally guaranteed $50 million of the outstanding loan.

Acorn said it had an agreement with a Petters company, PAC Funding, to repay Acorn with payments of $10 million on the first of each month, beginning June 1, 2008. Acorn said that it got the first two payments but that PAC Funding missed its August payment and went into default.

In a lawsuit made public Wednesday in Minneapolis, Interlachen Harriet Investments, a unit of Interlachen Capital Group, claims it lost $60 million by investing with Petters.

The deal was to involve the sale of high-end televisions to some of the nation's top retailers for $116 million, the suit says, but the sale never happened because the TVs were "imaginary."

Interlachen Capital, which is registered in the Cayman Islands, was established in 2005 as a hedge fund manager. The lawsuit on behalf of Interlachen Harriet Investments provides some of the clearest detail yet on how the Petters investment operation operated.

The lawsuit says Interlachen made a $60 million investment in Petters Co. Inc. on April 18. It says false documents were produced to "trick Interlachen into believing that the merchandise had been resold to major retailers and that the transaction was moving forward as planned."

"Instead," the suit alleges, "PCI took Interlachen's investment and used it to fund Petters' other business ventures, retire other debt, and personally enrich the owners and executives" of his myriad companies.

Attempts by Interlachen to inspect the TVs that were the object of the investment were rejected because the merchandise was contained in "secure facilities," the suit says.

In July, the Petters organization told Interlachen that the sales were progressing, the suit says. But in August, Interlachen was told that the retailers were running late on their payments "as a way to manage cash." Then last month, Interlachen was told that there was a high "return rate" on one of the models of televisions in the transaction.

Finally, as federal agents were quietly planning their raid on the Petters headquarters, Petters asked Interlachen not to contact any of the retailers who were supposedly selling the TVs.

According to the lawsuit, Petters cautioned Interlachen, "'I don't think you're going to get the satisfaction that you need to get,' with those contacts."

David Phelps • 612-673-7269