GE Capital to Pay $19 Million Settlement for Massive Ponzi Scheme

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GE Capital to Pay $19 Million Settlement for Massive Ponzi Scheme

On Wednesday, General Electric Corp. (NYSE:GE) agreed to repay $19 million in interest and principal from a $3.65 billion Ponzi scheme conducted by former Minnesota businessman Tom Petters.

The Star Tribune reported the story on its website and noted that the settlement represents the largest one from a numbers of lawsuits attempting to recaptures false profits from investors and others who conducted business with Petters. More than $284 million in assets has been compiled–most of it going to the victims for repayment.

The Petters Story

Here’s how the whole Petters story started.

At one point, GE was a principal lenders to both Petters and his business activities. In a 10-year scheme, the businessman took investment funds from individuals and groups to buy consumer electronic goods from manufacturers and then subsequently sell them to the big-box retailers.

But the transactions did not take place. Investors involved early on in the scheme had been paid lofty interest rates from the funds of later investors, according to David Phelps of The Star Tribune.

Sound familiar?

In U.S. Bankruptcy Court documents filed in St. Paul, GE denied “any and all liability,” but agreed to pay the $19 million settlement after a going through the mediation process with Petters bankruptcy trustee Doug Kelley.

Mediation came after GE and Kelley underwent a year of talks to “avoid uncertainty, substantial expense and distraction associated with protracted litigation.”

Kelley said in an interview that that GE settlement was “significant,” since its original legal position had been the statute of limitations had expired against the claims. He added, “This sends a message to others” with the same position and that, “This was not just false profits, either. It went well into the principal of the loan.”

GE Capital has not commented on the settlement.

Road to the Settlement

It has been a long process for Kelley and his team. Two years ago, they filed 201 clawback lawsuits in an effort to recover $17 billion for the scheme’s victims; only a small portion will probably be recovered.

The initial case against GE was a staggering $293.5 million.

The actual “phantom profits” Kelley requested are around $1 billion, but the trustee has maintained that all transferred funds between investors and Petters, including profits and principal, were corrupt if either the investor knew, or should have known, that the operation run by Petters was a fraud.

In Petters’ 2009 criminal trial, GE witnesses testified they incurred repeated loan payment issues with Petters Co. Inc., such as  delinquencies and bounced checks. Government prosecutors asserted that since 2000, GE knew that the Petters business was sending  false documents in an attempt to make it look as legitimate sales transactions occurred to big-box retailers, but it did not.

The settlement said that GE “knew or should have known of Petters’ fraudulent activity, or at a minimum failed to exercise reasonable due diligence” through its Petters relationship. It added, “The trustee further asserts that [GE] obtained approximately $60.5 million in loan repayments after it was alerted to facts that put it on notice that Petters was not operating a legitimate business enterprise.”

For GE, it said in the settlement that it after extending credit to Petters, it did receive repayment “in good faith” and that it was “an arm’s length institutional lender” using “customary loan documents.” GE ended its $50 million Petters line of credit in 2000 after his  company cleaned up its outstanding loans.

Petters now sits in a Leavenworth, Kan. federal prison on a 50-year sentence after being convicted on 20 counts of fraud, money laundering and conspiracy. He is appealing the verdict.

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