Petters lawsuits poised to move forward

A federal judge has helped clear the way for the trustee in the Tom Petters bankruptcy case to move forward with more than 70 lawsuits against lenders and individual investors that profited from the Ponzi scheme.

The ruling is good news for those who lost out in the largest pyramid scam in Minnesota history, but bad news for the Sabes family — a big Petters investor that had been hoping that a federal judge overseeing the bankruptcy would use a recent Supreme Court ruling to kill the lawsuits.

Instead, Robert W. Sabes and dozens of other investors must continue their court fight if they want to hold onto the money they earned by investing with Petters. The investment company headed up by Sabes, a former strip club owner and casino executive, cashed out early and pocketed $137 million, making it one of the biggest winners in Petters' Ponzi scheme, according to a Star Tribune review of court records.

Trustee Doug Kelley hopes to return that money to Petters victims, who so far have recovered $172 million from the liquidation of Petters' business empire. Altogether, Kelley is pursuing lawsuits that could squeeze nearly $700 million from lenders and investors who helped keep the Ponzi scheme running for more than 10 years.

"This is a significant victory in the saga of the Tom Petters case," said Kelley, referring to the recent bankruptcy court ruling. "Our clawback cases are alive and well."

But like many of the issues related to Petters' Ponzi scheme, the court ruling comes with an extra layer of drama and intrigue. It was issued on May 31 by federal Judge Gregory Kishel on the day he officially retired from the bench, and Kishel did not include an order that would make the decision binding on his successor. He also left without ruling on requests to dismiss the defendants' cases. So far, the ruling only affects the case involving the Sabes family.

That unusual development has given hope to the army of lawyers trying to stop the lawsuits. They hope to persuade Kishel's successor, Judge Kathleen Sanberg, to revisit the issues cited in Kishel's opinion at a hearing later this month.

"We're all kind of scratching our heads," said attorney David Mitchell, who represents the target of one of Kelley's lawsuits. "Does this ruling impact all of the adversarial proceedings?"

Kishel's ruling dealt with the legal fallout of a case decided in 2015 by the Minnesota Supreme Court, which rejected the legal foundation routinely used to pursue lenders who have made money off fraudulent business activity. The Alliance Bank decision seemed to strike a blow at Kelley's litigation, which relied on the same legal thinking.

But Kishel found significant differences between the two cases. Most importantly, he noted that the lenders in the Alliance Bank case began by financing "genuine real estate transactions" that later turned fraudulent. By contrast, Kelley has argued that all of the transactions in the Petters scheme were falsified, and Kishel concluded that money paid to Petters investors and lenders was essentially "stolen from other participants."

Allen Blair, a civil procedure expert at the Mitchell Hamline School of Law, said the new judge in Petters' bankruptcy case is not required to adopt Kishel's opinion when she deals with the defendants' ongoing requests to dismiss their suits. But Blair said it would violate "judicial decorum" for her to depart significantly from his ruling.

"I would be very surprised if she overtly set aside the work he has done here," Blair said. "This is a very thoughtful analysis."

If Sanberg does not dismiss the cases against the Sabes family and other investors, a painful day of reckoning could be coming for many people who wound up making money off the pyramid scheme. The trustee is pursuing cases against a wide variety of defendants, ranging from savvy, deep-pocketed investors like the Sabes family to a 90-year-old woman living in an assisted-living center in California.

While some of the investors earned millions off the Ponzi scheme, others walked away with less than $100,000 — including an Oregon man who is being sued for $8,367 in "false profits."

"I think there has been a troubling lack of discretion in these cases," said Minneapolis attorney Stephen Mertz, who represents several investors being pursued by Kelley. "A fair number of the defendants in these lawsuits are retired or at retirement age. If they were to have to pay back the amounts the trustee is seeking, it would mean financial ruin for many of them."

Kelley said he has dropped cases against some defendants for financial reasons, and he promised to continue working with investors who demonstrate they don't have the means to pay a court judgment.

Alan Charap said it's unfair for Kelley to pursue small investors like himself when the vast majority of the money will wind up going to two giant investment companies that took the biggest losses.

"If anybody should have known what was going on, it should have been the hedge funds that put in billions," said Charap, who doubled his money on his $910,000 investment. "I was doing this by the seat of my pants. We didn't have a legal department."

Charap was one of Petters' first investors. The California businessman said he personally visited Minneapolis to check out the operation. He said he liked the idea of buying electronic goods at a discount and reselling them to big-box retailers such as Costco and Best Buy.

"I looked at all of the goods in his warehouse," Charap said. "He had a whole office staff selling stuff. As far as we're concerned, this was a real business."

But according to Petters' former employees, who testified at his criminal trial, 99 percent of the deals were fake, even at the beginning in the mid-1990s. Employees said they helped Petters create false invoices to make it all look real. Petters is serving a 50-year prison sentence for engineering the scheme.

Sabes was one of the few investors to catch on before federal agents raided Petters' business empire in October 2008, according to testimony and Kelley's lawsuit filed against his company, Opportunity Finance.

In 2004, Jon Sabes confronted Petters' employees with his suspicions, asking why he couldn't go online and review the purchase history of Petters' major customers, such as Sam's Club, according to the testimony of Deanna Coleman, Petters' former business partner. Jon Sabes, who is Robert's son, was CEO of Opportunity Finance. Coleman testified she didn't want to address Sabes' question because there was "no reason why we weren't getting online documents."

Petters was afraid the Sabes family might "kill me" because they are "bad, bad people," according to a wiretapped conversation played in court.

Sabes, who sold Schiecks Palace Royale for $10 million in 2007 after owning the strip club for two decades, has also operated successful restaurants and a produce business. He now lives in Las Vegas.

Robert Sabes did not return calls seeking comment. Jon Sabes previously testified that he was unaware Petters might be running a criminal enterprise until he was charged with fraud. The family's attorneys also declined to comment for this story.

Whatever the reason, the Sabes family decided to start unwinding their investment in Petters' scheme after Jon Sabes met privately with Petters in December 2007, according to Kelley's lawsuit against the family. Kelley claims the Sabes family demanded to be repaid early because they realized the Ponzi scheme was on the brink of collapsing.

The lawsuit claims the family wound up making $137 million on its $2 billion investment in the Ponzi scheme.

Kelley said he is confident the Sabes family will be able to repay the full $137 million if he is successful in the lawsuit, but he hopes to collect far more by pursuing claims that the family's alleged knowledge of the Ponzi scheme entitles him to go after all of the money they received from Petters over 10 years, which could work out to hundreds of millions of dollars.

"The false profits in the Sabes case are just the tip of the iceberg," Kelley said.

Jeffrey Meitrodt • 612-673-4132