M&I Bank, now owned by BMO Harris Bank, faces a new lawsuit from Palm Beach Finance’s bankruptcy trustee, holding the bank responsible for helping convicted Ponzi scammer Tom Petters cheat investors out of $3.65 billion. The Chicago-based bank, however, disputes the lawsuit and vows to defend itself vigorously.
Tom Petters’ Ponzi scheme
In a 10-year scheme, former Minnesota businessman Tom Petters took investment funds from individuals and groups to buy consumer electronic goods from manufacturers and then subsequently sell them to big-box retailers such as Costco Wholesale Corporation (NASDAQ:COST) and BJ’s Wholesale Club Inc. As the transactions didn’t take place, investors involved early on in the scheme had been paid lofty interest rates from the funds of later investors.
A lawsuit was filed Thursday in a Florida bankruptcy court in connection with the bankruptcy case of Palm Beach Finance Partners LP, a major fund for Petters. The lawsuit claims “M&I was complicit in the scheme, serving as a critical lynchpin ‘legitimizing’ Petters’ plot and facilitating it. M&I had actual knowledge of Petters’ fraud and provided substantial assistance, helping it flourish.”
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring investors exit long-short hedge funds, the oil market is now "broken", and Haidar Capital surges 225%. Q2 2022 hedge fund letters, conferences and more
Tom Petters: Ponzi scheme through a single bank account
According to attorney Michael Budwick, who is representing the Palm Beach Finance bankruptcy trustee, the former Minnesota businessman banked with a Minnesota branch of M&I for about a decade. The attorney said: “The Ponzi scheme was literally operated through that single bank account through all those years. There were tens of billions of dollars that flowed in and out of that single bank account.”
Palm Beach Finance, which is liquidating in bankruptcy court, says it has the right to recover the funds that it and others invested with two specific Petters companies that were later transferred to M&I.
Barry Mukamal is a trustee liquidating two funds known as Palm Beach Finance. In his case, Mukamal said M&I knew the “astronomical” activity in Petters’ account bore no relationship to Petters’ alleged business and that Petters was involved in money laundering on an “unprecedented scale.” Moreover, he said the Milwaukee-based bank didn’t use good faith in handling money flows.
However, a spokeswoman for Bank of Montreal’s BMO Harris Bank unit contended that there is no merit to these claims and the bank will defend itself vigorously.
As reported in 2012, General Electric Company (NYSE:GE) agreed to repay $19 million in interest and principal from the $3.65 billion Ponzi scheme conducted by Tom Petters. The initial case against GE was a staggering $293.5 million. GE agreed to pay the $19 million settlement after going through the mediation process with Petters’ bankruptcy trustee, Doug Kelley. At one point, GE was a principal lender to both Tom Petters and his business activities.