Fargo businessman targeted in lawsuits to recover money in Petters fraud case
Mike Mullin, president of St. Cloud (Minn.) Cathedral High School, received a letter earlier this year asking the school to return a $252,000 gift it received four years ago from convicted businessman Tom Petters.
If the bankruptcy trustee who made the request wants the money, Mullin suggested that he take the school's elevator. After all, he noted, that's where the money was spent.
"It's a hard asset rather than a liquid one," Mullin said.
The elevator illustrates one of the daunting hurdles facing trustee Doug Kelley as he attempts to "claw back" upward of $1 billion in funds distributed to investors or donated to various groups during the life of Petters' decade-long, $3.65 billion fraud - an effort that includes a $36 million lawsuit filed against Fargo businessman Michael J. Hofer.
Many investors and institutions took the money in good faith and spent it, despite what Kelley believes were red flags that they should have heeded. Now Kelley is trying to get the money back to repay other investors who suffered real losses as well as creditors to the Petters corporate estate.
"It hasn't been a lot of fun," Kelley said. "I've had to sue charities. I have investors who feel they've now been victimized twice. But the fundamental law in a Ponzi scheme is that the money was not Tom Petters' to give away."
In the bankruptcy lawsuits, attorneys for Kelley are seeking return of funds under the Minnesota fraudulent transfer act. They allege that investors knew, or should have known, that their investments were suspicious, particularly given the huge return they were promised, including interest rates far in excess of marketplace norms.
Petters Company Inc. "promised, and produced, returns that were too good to be true, reflecting a pattern of abnormally consistent and significant profitability that was not credible," says one of the lawsuits.
The lawsuit filed Sept. 15 against Hofer, for instance, alleges that payments made by Petters' firm to companies affiliated with the Fargo investor drew annualized interest rates ranging from 18 to 51 percent.
Eight companies linked to Hofer, 61, a native of Hope, N.D., are named in the suit, including Imaging Solutions, a medical-imaging company named 2004's Business of the Year by the Fargo-Moorhead Chamber of Commerce.
In 2001, Hofer was honored as one of the University of North Dakota's Center for Innovation's Business Innovators of the Year. He is the former chief executive officer of Fargo-based Global Electric MotorCars and former president of Diagnostic Medical Services Inc.
Hofer is also one of the investors in the group that owns The Flag and The Eagle, two Fargo radio stations that were run by Scott Hennen until he was dismissed last month.
Hennen said there's no link between Hofer's dealings with Petters and his own firing.
"I hope people don't read into that," Hennen said. "I know Mike to be a person of great integrity."
Phone messages left late Thursday for Hofer were not returned.
Kelley said his attorneys are seeking "false profits" in most cases but may seek the principal invested if it is determined the investor knew of the scheme.
Among the largest recovery cases involves Twin Cities restaurateur and Petters' former best friend Dean Vlahos and his then-wife Michelle Vlahos Alton. The receiver is seeking a total of $39.5 million that was transferred to them between 2001 and 2008, including "false profits" of $23.9 million.
In the Hofer lawsuit, the total sum of $36.3 million being sought includes a suspected $11.9 million in false profits. The payments occurred from 2001 through 2005, according to records filed with the lawsuit.
Other significant suits include Chanhassen businessman Paul Taunton at $29.8 million and Texas businessman Don Aron at $56 million.
"The trustee believes it is the responsibility of these folks to pay back the money regardless of any knowledge they had or good faith in their investment," said Jim Lodoen, one of the attorneys coordinating the co-called clawback attempt.
Lodoen said the first phase of clawback lawsuits involves more than 100 individual investors. The total amount being sought to date is approximately $300 million. Clawback actions have or will commence with Petters' strategic partners, charities, employee bonuses and hedge funds. Some amounts could be significant.
But the road will be difficult, Lodoen acknowledged.
"These numbers are astronomical, but the other issue is collectability," he said. "A number (of people) claim they don't have the money anymore."
In a separate action Wednesday, Petters' corporate empire pleaded guilty to charges of conspiracy and fraud related to the now-infamous Ponzi scheme.
The guilty pleas, before U.S. District Judge Richard Kyle, were entered by Kelley on behalf of Petters Company Inc. and Petters Group Worldwide as part of a plea agreement with federal prosecutors.
No fine or restitution was part of the plea agreements on the grounds that remaining corporate assets would be used to reimburse investors and creditors who lost money in the scheme.
"This was the biggest corporate crime in the history of Minnesota," Dixon said. "The companies need to be held accountable for the actions of (their) agents."
Petters was found guilty last year on 20 counts of wire and mail fraud and in April was sentenced to 50 years in prison.
These eight companies, all affiliated with Michael J. Hofer of Fargo, are subjects of a lawsuit seeking repayment of more than $36 million in connection with the $3.65 billion Ponzi scheme run by convicted businessman Tom Petters:
* CHW LLC
* HGH LLC
* Hofer Financial Service LLC
* Hofer Financial Ventures LLC
* Mikarhof Corp.
* Imaging Solutions Inc.
* ISMS Capital LLC
* Quality Growth Inc.