SEC Charges Two Minnesota-Based Fund Managers With Facilitating Petters Ponzi Scheme

November 9, 2011

The SEC charged two Minnesota-based hedge fund managers and their firm with fraudulently funneling more than half a billion dollars of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters. This is the fourth case that the Commission has brought against hedge fund managers for facilitating the Petters fraud.


The SEC alleges that James N. Fry and Michelle W. Palm falsely assured their investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets.  When Petters was unable to make payments on investments held by the funds they managed, Fry, Palm, and their firm concealed it from investors by secretly executing note extensions with Petters.  The SEC previously charged Petters and froze the assets of an Illinois-based hedge fund manager who was a $2 billion feeder to his scheme, charged two Florida-based fund managers who facilitated the scheme, and blocked an attempt by a Connecticut-based hedge fund manager to divert funds from victims of the scheme.

The SEC’s complaint alleges that Fry, Palm, and Fry’s firm, Arrowhead Capital Management LLC (“Arrowhead”) invested more than $600 million in hedge fund assets with Petters while Arrowhead collected more than $42 million in fees.  Petters promised investors that their money would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to such “Big Box” retailers as Wal-Mart and Costco. In reality, Petters’s “purchase order inventory financing” business was merely a Ponzi scheme. There were no inventory transactions. Petters sold promissory notes to a number of hedge funds like those controlled by Fry, Palm, and Arrowhead and used some of the note proceeds to pay returns to earlier investors, diverting the rest of the cash to Fry’s own purposes.

The SEC’s investigation is continuing.

Click here to access this press release.


Categories

Enforcement Actions, Investment Advisers