Circa 2008, the
FBI began investigating Petters for his role in a fraud scheme involving more than $100 million in investments. On September 24, 2008, federal investigators raided the Petters headquarters in Minnetonka and searched Tom Petters'
Wayzata home. Documents released by the FBI,
IRS, and other federal agencies noted that they were seeking evidence of a scheme to lure investors into funding a company based on tens of millions of dollars in purchases and sales that never occurred. The documents noted that a witness associated with Petters and his company came forward with documents and other information, and later wore a hidden microphone and recorded several conversations involving Petters and others who carried out the fraud. The affidavit alleges that Petters repeatedly admitted to the fraud scheme of providing false information to investors in the tapes; in addition, Petters admitted to falsifying his tax returns. On September 29, he resigned as the head of Petters Group Worldwide. On October 3, Petters was arrested at his home in Wayzata. He was denied
bail after prosecutors produced documents that alleged Petters had encouraged another person involved with the case to leave the country, that Petters had stated that he regretted turning over his
passport, and that he had previously spoken about fleeing the country if the fraudulent scheme were discovered. The
U.S. Attorney's Office charged him with
mail fraud,
wire fraud,
money laundering and
obstruction of justice. The U.S. Attorney staff noted that the government knew nothing about the scheme until Deanna Coleman, vice president of operations for Petters Co., approached them to confess and offered to help federal authorities investigate. This led to the prosecution of Robert Dean White, who admitted to being involved in creating false bank statements and other documents that were used to trick investors in what he described as a massive
Ponzi scheme. Both individuals made
plea bargains with federal prosecutors in exchange for providing the government information on how the scheme worked. Coleman and White related that, at the direction of Petters, they would fabricate documents for Petters and others to use in obtaining billions of dollars in loans. The phony records were used to show that Petters Co. was buying merchandise, generally electronic goods, from two suppliers (who were named as co-defendants). Petters Co. would tell lenders that it was selling the goods through
big-box stores and provided purchase orders to substantiate the deals, but the deals were phony and the documents were fakes. Most of the money lent to PCI was secured by
promissory notes and sometimes
security agreements; the lenders would wire the money to the two suppliers, which would pass it on to Petters Co., less a commission. As more lenders loaned to Petters Co., outstanding loans would be paid off or rolled into new loans from the same lender. Proceeds went to Petters Co. and to Petters himself, and were used to fund other Petters-owned companies, to pay others collaborating in the scheme and, according to court affidavits, for Petters' "extravagant lifestyle." Petters' legal troubles led to
Sun Country Airlines filing for bankruptcy; the airline had been relying on an operating loan from Petters, who owned all the voting shares of Sun Country, to help the low-fare carrier pay its bills during the months of October and November 2008. Metro Gem held 38 outstanding PCI notes with a total principal (face value) of $130.3 million The FBI Criminal Complaint identifies First Regional Bank, Los Angeles (Century City), California as the bank that moved more than 11 billion dollars through an account for Nationwide International Resources Inc. of Los Angeles. In a separate legal filing in February 2008, On December 2, 2009, Tom Petters was found guilty in the U.S. District Court in St. Paul, Minnesota on 20 counts of conspiracy, wire and mail fraud. Five other employees have pleaded guilty and are awaiting sentences. Among the largest victims of the Petters scheme were Palm Beach Finance Partners, L.P. and Palm Beach Finance II, L.P., two South Florida hedge funds managed by Bruce F. Prevost and David W. Harrold, who each pleaded guilty to securities fraud in May 2011 for misrepresenting the funds' exposure to Petters' notes. The funds were placed into Chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of Florida (Case No. 09-36379 ), with Barry Mukamal of Kapila Mukamal appointed as trustee. The liquidating trustee pursued extensive clawback and fraudulent transfer litigation, recovering a $49 million settlement from GE Capital and additional recoveries from financial institutions and intermediaries. Firms involved in the recovery litigation included Meland Budwick P.A., Greenberg Traurig LLP, Mark S. Roher, P.A. of South Florida, Genovese Joblove & Battista P.A., and Tabas Freedman, representing various creditor and investor interests throughout the proceedings. After more than three years of refusing to speak with the media, Petters spoke with
Twin Cities Business magazine Editor in Chief Dale Kurschner, who spent several hours inside Leavenworth prison interviewing him. In the interview, which was published in the magazine's May 2012 issue, Petters maintained his innocence. It remains Petters' only interview since his arrest. In May 2012, Petters also filed a petition asking the U.S. Supreme Court to review his conviction and sentence. Petters is incarcerated at
United States Penitentiary, Leavenworth in
Leavenworth, Kansas. His earliest possible release date is April 25, 2052, when he would be 94 years old. ==Philanthropy==