Northbrook firm loaned about $1 billion to Petters affiliates
Lancelot Investment Management LLC, a hedge-fund firm in Northbrook loaned about $1 billion to a company whose former chief executive officer has been arrested amid allegations he ran a fraudulent investment scheme.
The loans to Petters Group Worldwide and affiliates represented ``nearly all'' of the assets managed by Lancelot, Gregory Bell, the firm's president, said Sept. 30 in an e-mail to investors. While the e-mail didn't disclose the amount, three people with knowledge of the firm said it was about $1 billion.
At least 20 investors may have been victimized by a lending scam run by Thomas Petters, founder of closely held Petters Group, according to the U.S. Federal Bureau of Investigation. Officials at one of Petters Group's units allegedly used fake documents to entice them into phony deals, the FBI said in court papers. Damages from the transactions may exceed $2 billion, FBI agent Dan Harris said in an Oct. 1 affidavit filed in U.S. District Court in Minneapolis.
Today a Lancelot limited partner, Ellerbrock Family Trust LLC, sued accounting firm McGladrey & Pullen LLP claiming it failed to verify the legitimacy and accuracy of Petters Group's financial statements.
``Had it done its job, the partners of those funds would not be in the financial straits they find themselves in today,'' lawyers for Ellerbrock said in the complaint filed in federal court in Minneapolis.
U.S. District Judge Ann Montgomery in Minneapolis today froze assets, up to $3 billion, of Petters Group, its subsidiaries and founder Petters.
``There is probable cause to believe that immediate and irreparable harm will result from certain of the defendants' ongoing violation of federal mail, wire and banking-fraud laws absent entry of this preliminary injunction and order,'' Montgomery said in her ruling.
Petters, 51, had been running the scheme since at least the mid-1990s, siphoning off money for his own use, according to a separate affidavit by FBI Special Agent Timothy Bisswurm. Petters told investors their money would be used to buy merchandise that would then be resold to retailers including Costco Wholesale Corp. and Sam's Clubs, a unit of Wal-Mart Stores Inc.
Lancelot was ``one of many lenders to Petters Group Worldwide and its affiliates, providing them with liquidity in advance of payments for goods with major retailers across the country,'' according to Bell's e-mail. Bell declined to comment.
Petters resigned as CEO on Sept. 29 after the FBI raided the company's Minnetonka, Minnesota, headquarters. He was arrested Oct. 3 on charges of mail fraud, wire fraud and money laundering.
Petters Group owns or holds stakes in companies including digital-camera maker Polaroid Corp., Sun County Airlines Inc. and Fingerhut Direct Marketing Inc., a catalog retailer. Those and other companies owned by the firm aren't a target of the investigation, Andrea Miller, a Petters Group spokeswoman, said in a Sept. 24 statement.
Minneapolis-based Fingerhut, in which Petters Group owns a minority stake, said Sept. 25 that it had completed a new round of financing, receiving more than $50 million from controlling investors Bain Capital LLC and Battery Ventures.
Sun Country filed today for bankruptcy protection for the second time in seven years. Chief Executive Officer Stan Gadek said the company was forced to file because of ``recent events'' at the parent company. The carrier listed both debt and assets of $50 million to $100 million on a Chapter 11 petition in U.S. Bankruptcy Court in St. Paul, Minnesota, where the company is based.
Petters made an initial appearance Oct. 3 in federal court in Minneapolis without entering a plea. He was sent back to jail pending a detention hearing on Oct. 7. His lawyer, Jon Hopeman said, said Petters ``maintains his innocence.''
Lancelot is working with other lenders to recover assets and cooperating with federal authorities investigating the alleged fraud, according to its e-mail.
``At this juncture, it is impossible to determine the extent to which any assets will be recovered,'' he wrote.
The Ellerbrock Trust, which began investing in Lancelot in November 2003, is seeking more than $5 million in damages from McGladrey & Pullen. The trust wants to represent all investors who became limited partners in Lancelot and Colossus Capital Fund LP from their inception. Bell said Sept. 28 that about 15 percent of assets in Colossus, a fund he started in 2005, were ``exposed'' to Petters, lawyers for Ellerbrock said in the complaint.
Lancelot and Colossus had assets of $238.4 million and $55.8 million, respectively, at the end of 2007, according to the complaint.
Investors who have about $30 million invested in Palm Beach Finance Holdings Inc., another hedge fund that invested in the Petters scheme, have hired Sadis & Goldberg to investigate whether the fund has engaged in any wrongdoing, said Doug Hirsch, a partner at the New York-based law firm.
Bruce Prevost and David Harrold, principles of Palm Beach Finance, which is based in Incline Village, Nevada, didn't return calls seeking comment.
Palm Beach managed $1.6 billion according to a May 2008 report sent to investors. A Palm Beach client, who asked not to be identified because the fund is private, estimates that the firm had lent $1.1 billion to Petters.
The Palm Beach Finance Partners LP averaged returns of about 1 percent a month since 2003 with no down months, according to the investor report.