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Jury awards $3.5M in first Petters clawback trial.

Byline: Barbara L. Jones

It only took a few hours for a federal jury to hand down a verdict of more than $3.5 million in the first trial of a clawback case arising from the Tom Petters Ponzi scheme.

Petters' massive fraud caused over $3.5 billion in losses and resulted in a tsunami of civil actions to recover funds, as well as criminal prosecution of Petters and other associates. Petters is serving a 50-year sentence in the federal penitentiary in Leavenworth, Kansas. Petters and his co-conspirators sought investors funds to purchase electronic goods, although they actually used the funds of later investors to pay earlier investors.

The plaintiff is the liquidating trustee for the PCI Liquidating Trust, Minneapolis attorney Douglas A. Kelley, represented by a team from Dorsey & Whitney. The total verdict, including prejudgment interests, was $3,502,455, about $360,000 more than the complaint demanded.

Petters Co. Inc., filed for bankruptcy in 2008, and the clawback claims began as adversary proceedings in bankruptcy court, to recover profits that the early investors took out of the scheme and which were paid from fraud, said Dorsey attorney J Jackson. The recovered funds will be redistributed to the later investors, who received little or no return on their money.

The defendant is Gus Boosalis, an early investor who, the government says, was paid at least $3,134,590 in "purported interest" on promissory notes issued to him by Petters Co. Inc. The claim against Boosalis is that the payments violated the Minnesota Uniform Fraudulent Transfer Act, Minn. Stat. secs. 513.41-51, in that they were funded with stolen money, made with actual intent to defraud PCI's creditors, made when PCI was insolvent, and not given for an exchange of reasonably equivalent value.

According to court filings, the evidence showed that Boosalis engaged in at least 65 promissory note transactions with PCI with interest rates ranging from 38.7 percent to 70.8 percent on an annualized basis. The trustee did not seek any return of principal paid to Boosalis.

Transfer by transfer

Kelley presented direct evidence of Petters' fraud and also showed "a confluence of badges of fraud that compels a finding of fraudulent intent," according to a trial brief. Those badges included the existence of a Ponzi scheme, felony guilty pleas, irregularities in record keeping, and the transferor's insolvency.

The trial addressed the interaction of the MUFTA with the factual context of a Ponzi scheme, said Jackson. In 2015 in Finn v. Alliance Bank, the Minnesota Supreme Court rejected the application of a Ponzi scheme presumption to MUFTA claims, since there are situations where a Ponzi scheme involves a mixture of fraudulent and legitimate deals. Thus a plaintiff must prove its case on a transfer-by-transfer basis. "However, Judge [Susan Richard] Nelson made clear through her jury instructions that a plaintiff meets that burden if it shows that a particular transfer (here, a payment of interest to an investor) was made in furtherance of a fraud, enabled by a fraud, or paid on dishonestly-incurred debt," Jackson said in an email to Minnesota Lawyer.

Jackson told Minnesota Lawyer that Nelson rejected the defense argument that Finn requires two levels of proof. Under the defense's assertions, each transaction would have to be proven up, and then, if there were any legitimate transactions the plaintiff's case would collapse because the plaintiff could not prove actual fraud in the transactions.

What Nelson determined that Finn actually says is that while there is no Ponzi presumption, the plaintiff also does not need to exclude every possibility that there were legitimate transactions in the mix. "One good transfer doesn't undo the whole case," Jackson said.

"The jury will decided the disputed fact question of whether PCI used the promissory notes between PCI and Boosalis as part of a Ponzi scheme to defraud other investors and whether it repaid the notes with fraudulently-obtained funds. Defendant is free to present evidence showing that he provided value in exchange for the transfers," said Nelson in a Dec. 3, 2018, order.

The trustee's expert witness traced the money that went in from Boosalis and came out to Boosalis, Jackson said. "The possibility that some of Boosalis's money could be used for electricity or rent did not undermine the proof that we have," he said.

It's possible that Petters made some legitimate purchases to mislead investors, Jackson said. "That's called lulling because it's used to lull investors into believing [they were not involved in a fraud]," he said. In fact, Petters' associate, Deanna Coleman testified that some purchases were made to generate involces that later were altered, Jackson added.

Nelson's ruling on Ponzi presumption will affect future litigation, Jackson said. "Judge Nelson's rulings provide precedent for the clawback cases that remain. This is a significant, positive step in addressing recovery under the [MUFTA] as applied to Ponzi scheme fraud."

"Jury trials in clawback litigation, which begin as adversary proceedings in bankruptcy court, are rare. Hats go off to our jury for understanding the complex facts and grasping the law as instructed by Judge Nelson," Jackson wrote in an email to Minnesota Lawyer.

Clawback trials are scheduled in February and March 2019, and there are more to come. Jackson estimated that fraud victims will recover 15 to 20 percent of their losses.

Daniel Frisk of West Fargo, North Dakota, one of the defendant's lawyers, said he had no comment other than to say that the lawyers and Boosalis were considering their options.

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Publication:Minnesota Lawyer
Date:Dec 13, 2018
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