GE Capital Pays $49 Million Over Petters Ponzi Scheme
March 26 2019 - 7:03PM
Dow Jones News
By Andrew Scurria
General Electric Co.'s finance unit agreed to pay $49 million to
settle allegations it covered up the $2 billion Ponzi scheme
perpetrated by convicted fraudster Thomas Petters.
General Electric Capital Corp. reached the deal with a
bankruptcy trustee who is digging up money for investors in two
Florida hedge funds that lost $650 million when the Ponzi scheme
collapsed in 2008, according to court papers entered Tuesday in the
U.S. District Court in West Palm Beach, Fla.
The trustee, Florida accountant Barry Mukamal, had accused GE
Capital of conspiring to commit fraud by keeping quiet in 2000 when
its employees allegedly discovered Mr. Petters was operating a
Ponzi scheme.
The hedge funds, Palm Beach Finance Partners LP and Palm Beach
Finance II LP, were the second-largest victims of the fraud. They
collapsed in 2009, after the U.S. government exposed Mr. Petters
for running the 15-year fraud that earned him a 50-year federal
prison sentence in 2010.
Starting in 1998, GE Capital was a lender to businesses
controlled by Mr. Petters, financing what he said were purchases of
merchandise for resale to Costco Wholesale Corp., according to
court papers. Mr. Mukamal alleged that by 2000, GE Capital had deep
misgivings about Mr. Petters and soon discovered its collateral was
nonexistent and its credit documents had been forged.
When the lender allegedly discovered the Ponzi scheme, Mr.
Mukamal said it struck a deal to be repaid and wrote a
recommendation letter that Mr. Petters and his colleagues used to
drum up additional investors and keep the Ponzi scheme going.
A GE spokeswoman declined to comment. But the unit fought the
lawsuit, arguing Mr. Mukamal didn't have legal standing to pursue
the conspiracy claim because the power to do so remained with the
bankruptcy trustee for Mr. Petters's bankrupt companies in
Minnesota.
A federal judge rejected that argument in 2017, and GE Capital
was appealing the ruling up until Tuesday's settlement.
"Our claim is not to recover for payments made to GE; our claim
is that if there is a fraudulent conspiracy, they become liable for
the damages, " the trustee's lawyer, Michael Budwick of Meland
Russin & Budwick PA, told WSJ Pro Bankruptcy.
The hedge funds already recovered roughly $170 million of what
they lost through distributions from the Minnesota bankruptcy
proceeding and settlements of other lawsuits brought by Mr.
Mukamal.
Mr. Petters, whose business empire once encompassed Polaroid
Corp. and Sun Country Airlines, told investors their money would
help his companies buy electronic goods, which would then be resold
to retail stores.
That money instead was used to fund Mr. Petters's extravagant
lifestyle and pay off other investors, creating the illusion of
profits. He was convicted of multiple counts of fraud and money
laundering in 2009.
Katy Stech Ferek contributed to this article
Write to Andrew Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
March 26, 2019 18:48 ET (22:48 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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