Tom Petters — purchase orders for merchandise that never existed

In St. Paul, Minnesota, on December 2, 2009, a federal jury convicted Tom Petters, the Twin Cities entrepreneur whose holding company had owned brands as recognizable as Polaroid and Sun Country Airlines, of running one of the largest Ponzi schemes in American history. For more than a decade he had borrowed billions of dollars against purchase orders for consumer electronics that were supposed to be resold to big-box retailers. The merchandise did not exist. The purchase orders were forged. The money from new lenders paid the old ones, and the difference funded an empire.

The outcome was unambiguous. After a trial in the U.S. District Court for the District of Minnesota, the jury found Petters guilty on all twenty counts against him, comprising wire fraud, mail fraud, money laundering, and conspiracy. On April 8, 2010, U.S. District Judge Richard Kyle sentenced him to fifty years in federal prison, rejecting the defense’s plea for roughly four years and the prosecution’s invocation of a statutory maximum measured in centuries, and stating that he did not believe Petters had been unaware of the fraud carried out in his name. Petters, then in his early fifties, would not be eligible for release until he was in his nineties.

The scheme moved roughly $3.65 billion through Petters Company Inc., the financing vehicle at the center of the fraud, making it among the largest such cases the country had seen and by a wide margin the largest in Minnesota’s history. The money came through special-purpose investment funds, with names such as Lancelot, Palm Beach, and Arrowhead, that channeled the capital of hedge funds, wealthy individuals, pension money, and, in a recurring and painful pattern, religious and charitable investors into what they believed were short-term, asset-backed loans.

What distinguished the Petters fraud from a classic affinity Ponzi was its disguise as legitimate trade finance. Lenders thought they were financing real inventory secured by real orders from Costco, Sam’s Club, and BJ’s Wholesale Club, and the paperwork was elaborate, complete with forged bank records to corroborate the forged orders. The deception did not unravel through market forces or a missed payment; it ended because an insider walked into a federal office and confessed.