Ritchie Capital Files RICO Lawsuit Against Two Former Petters Executives and Identifies Attorney Douglas A. Kelley and Others as Co-Conspirators

Nov 18, 2009, 14:10 ET from Ritchie Capital Management, L.L.C.

CHICAGO, Nov. 18 /PRNewswire/ -- Ritchie Capital Management, L.L.C., on behalf of itself and as administrative agent for a group of affiliated lenders whose investors include individuals, charities and pension funds (collectively, "Ritchie"), today filed a lawsuit in the U.S. District Court in Chicago alleging violations of the Racketeering Influenced and Corrupt Organizations (RICO) Act and fraud by Mary J. Jeffries, former President and Chief Operating Officer of Petters Group Worldwide, LLC ("PGW") and former Chief Operating Officer of Petters Company, Inc. ("PCI"), and Camille Chee-Awai, former CEO of Petters Capital, LLC. Each of these companies was part of the business empire owned by Thomas J. Petters ("Petters"), who is currently standing trial in Minneapolis on fraud and other charges related to the massive Ponzi scheme carried out through PCI.

The lawsuit also identifies Minneapolis Attorney Douglas A. Kelley ("Kelley") as a co-conspirator. Prior to Petters' arrest, Kelley was retained by Petters as counsel to certain of his companies. Shortly after Petters' arrest in early October 2008, notwithstanding his prior engagement as Petters' corporate counsel, Kelley was appointed Receiver for all Petters-owned companies, and he was later named Trustee for PGW and PCI in related bankruptcy cases. Kelley's law partner, Steven E. Wolter, was also identified as a co-conspirator. Shortly after his arrest, Petters granted to Wolter an irrevocable proxy over the equity capital of all companies owned by Petters.

The lawsuit alleges that Jeffries made repeated intentional misrepresentations to Ritchie during negotiations concerning loans Ritchie made to PGW for the benefit of Polaroid Corporation, a PGW subsidiary, and that she continued to make false statements, under oath, to the U.S. Bankruptcy Court regarding the purpose of Ritchie's loans to PGW. The lawsuit alleges that her false statements caused serious financial harm to Ritchie by preventing Ritchie from realizing the benefit of liens on highly valuable Polaroid assets that had been granted to Ritchie as collateral security for its loans to PGW.

"It has become very clear before and during the Petters trial that Polaroid constituted the most valuable asset in the entire Petters business empire. Liens on certain of Polaroid's assets were granted to Ritchie in return for loans that were intended to enable Polaroid to repay a loan that was in danger of being in default. This lawsuit is about the ongoing efforts of the defendants and the co-conspirators to deny Ritchie its right to get its loans repaid," said Thomas C. Cronin, the Chicago attorney representing Ritchie in this case.

"In sum, the lawsuit alleges that the defendants conspired to keep Ritchie from realizing the benefit of its Polaroid collateral, which would have enabled Ritchie to get back at least some of the money loaned to PGW to benefit Polaroid. Once the PCI Ponzi scheme was exposed, the defendants conspired with Kelley to obstruct Ritchie's right to valuable Polaroid assets, because those assets represented the only source of funds available to pay Kelley and his army of professionals," Mr. Cronin said.

According to the lawsuit, Jeffries "falsely stated under oath in the bankruptcy proceeding that Plaintiffs' loans to PGW had been made solely to benefit and aid PCI's fraudulent activities rather than being made to benefit PGW and Polaroid." As a result of her testimony, "the bankruptcy court refused to recognize Plaintiff's security interests in Polaroid and allowed the Polaroid bankruptcy estate to sell Polaroid's assets in a fire sale inevitably at a fraction of their true value."

"This lawsuit details numerous issues and questions surrounding Kelley's actions as Receiver and Trustee," Mr. Cronin said. According to the lawsuit, these issues and questions include:

  • In the weeks after being named Receiver by the U.S. District Court in Minneapolis, Kelley "established complete control over the Petters empire, including all of the valuable assets in Polaroid. In his control position, Kelley has been able to hire and enrich legions of attorneys, accountants and other professionals in the Minneapolis, Minnesota area. Among those professionals is his law partner, Steven Wolter," the lawsuit states.
  • Kelley engineered his appointment as receiver for all the Petters companies, "without Kelley having disclosed that the Cook County Court had already appointed a receiver," the complaint says.
  • "The entire process of Kelley's October 6, 2008 appointment as Receiver was highly irregular and denied PGW the benefit of any independent counsel," the complaint says. "Rather than fulfilling his fiduciary obligations to the Petters companies he represented as attorney or his fiduciary obligations to PGW's creditors as its bankruptcy Trustee, Kelley cooperated with the Government's forfeiture plans. This cooperation, coupled with the apparent secrecy of the court proceedings, dictates the inference that Kelley has multiple conflicts of interest that have harmed PGW creditors like Plaintiffs," the complaint says.
  • "Kelley has ignored the fraud alleged in the complaint and has apparently protected Jeffries and Chee-Awai and disregarded the harm they have caused to Plaintiffs," the lawsuit states.
  • Petters "purchased the concurrence and connivance" of executives "by, among other things, paying Defendants and their co-conspirators millions of dollars in bonuses to ensure their continued cooperation," the lawsuit states. "In his position as bankruptcy trustee, Kelley should presumably claw back these bonuses. Jeffries, however, in exchange for her cooperation with Kelley's plans to forfeit PGW's assets to the Government, has received undeserved praise from Kelley and has been allowed by Kelley to retain the multi-million dollar bonuses she received from Petters," the lawsuit continues, notwithstanding the fact that Jeffries was Chief Operating Officer of PCI at a time when the only business conducted by PCI was a massive Ponzi scheme.
  • "Kelley's cooperation with the threatened forfeiture of legitimate PGW assets raises multiple conflicts of interest arising from Kelley's conflicting obligations as PCI's and PGW's attorney, as PCI's and PGW's Bankruptcy Trustee, and as Receiver for Petters, PCI, PGW and others including Deanna Coleman, who testified at Petters's trial that she received millions of dollars from Petters's fraud scheme," the lawsuit states. "Kelley cannot fulfill his duty as Receiver to ensure that PGW's assets are available for forfeiture and simultaneously fulfill his statutory and fiduciary duties as Trustee for PGW to oppose forfeiture on behalf of PGW's creditors. Moreover, by acting as PCI's Receiver and attempting to remove assets from the PGW estate to benefit victims of the fraud at PCI (most of which victims are not otherwise legitimate creditors of PGW, as are Plaintiffs), Kelly cannot at the same time faithfully fulfill his statutory and fiduciary duties to PGW's creditors in his capacity as PGW's Trustee."
  • Kelley falsely stated in the bankruptcy proceedings that Ritchie's loans were made to PCI, rather than to PGW, the parent company of Polaroid in the Petters business empire, "in essence, implying that [Ritchie] and its funds had willingly supported the PCI Ponzi scheme," the lawsuit states. Kelley's false statements triggered actions by a substantial lender to Ritchie that have caused million of dollars in damages to Ritchie, the lawsuit states.

"The crux of this case is how the defendants, assisted by others including Kelley, deprived the plaintiffs of the benefits of the security interests in Polaroid for which they bargained," said Mr. Cronin. "Jeffries falsely testified under oath that Ritchie loans were made to PCI, not PGW. This gave Kelley the excuse to auction off Polaroid's assets at fire sale prices, creating the pot of gold from which Kelley could continue to pay himself, his partner, and a host of local accounting, legal, consulting and other professionals."

"Serious questions must be answered regarding why and how Kelley, who by his own admission has no business background, was placed in charge of managing the complex Petters business empire. His lack of experience shows in many ways, including the imprudent sale of Polaroid assets at a small fraction of their real value, at the worst time in U.S. financial history since the Great Depression. The record also shows that Kelley has paid out of receivership assets many millions of dollars in professional fees and has recovered only negligible amounts for victims and creditors. The millions of dollars spent by Kelley to enrich local professionals simply means that there will be less value available for recovery by creditors. If this cozy little game within the Minneapolis professional and legal community is allowed to continue unchecked, there will be little or nothing left for creditors," Mr. Cronin said.

"What is perhaps most offensive is that by Doug Kelley's order, funds that should have been returned to secured and unsecured creditors are being used to pay the legal expenses of the defendants, whose wrongful conduct made it possible for Kelley and others to wrest control of the Polaroid assets away from Ritchie," Mr. Cronin said.

About Ritchie Capital Management, L.L.C.

Ritchie Capital Management, L.L.C. is a diversified alternative asset management firm established in 1997 with interests in hedge funds, private equity, venture capital, insurance, energy and real estate and with offices in Lisle, IL, New York, NY and Menlo Park, CA.

SOURCE Ritchie Capital Management, L.L.C.