Hedge Funds May be Losers in $2B Alleged Fraud

Date: Thursday, October 2, 2008
Author: HFN Daily Report

On Sept. 24, the FBI raided the home of Minnesota businessman Tom Petters looking for evidence of what could be a $2 billion fraud that might hurt some asset-based lending funds.

A week after the raid, Swiss funds-of-funds firm Gottex Fund Management said it was suspending redemptions in asset-based lending funds that were exposed to Petters Group Worldwide until it could figure out what was going on. Gottex said that the Petters exposure was less than 2.5% of its gross assets.

In its affidavit for the search warrant, the FBI said that Petters and others furnished fake invoices for big ticket merchandise it said it was buying from wholesale merchandisers and selling to discount merchandisers like BJ's Wholesale Club and Sam's Club. The FBI claims Petters used the money raised for this venture for other business ventures and to support his extravagant lifestyle.

Another alleged co-conspirator, Larry Reynolds, estimated that the fraud might be more than $2 billion, the FBI claimed.

The FBI said it had identified more than 20 investors and investment groups that invested at least $100 million, and possibly much more, in Petters' activities.

On Tuesday, Robert Dean White, a consultant to Petters Group, was charged with mail fraud and illegal monetary transactions, according to the Star Tribune.

At least one other asset-based lending firm has gone to court against Petters. In August, Acorn Capital Group sued Petters personally on his guarantee of $50 million on $273 million worth of loans, according to court documents.

Asset-based lending usually is a stable, if prosaic strategy. The HFN Asset Based Lending Average is up 5.70% year-to-date at a time when other strategies are struggling.

Petters has resigned from his position as head of the company that he founded and could not be reached for comment. Petters Group did not return a phone call seeking comment. A spokesman for the FBI said the agency could not comment on ongoing investigations.