Nov. 2 (Bloomberg) -- Petters Group Worldwide LLC founder Thomas Petters, charged with overseeing a $3.5 billion Ponzi scheme, relied on phony shipments of electronic equipment from “day one” to build his business empire, his ex-secretary said.

Petters’s staff made up fake purchase orders for shipments of TVs and DVD players and phony wire-transfer receipts to fool investors that Petters’s deals were legitimate, Deanna Coleman, the defendant’s secretary and office manager, testified today in the businessman’s fraud trial. Prosecutors contend Petters, 52, duped hedge funds into funding fictitious shipments of consumer electronics for more than a decade.

“We didn’t have any real deals at Petters” that would generate revenue to repay investors, Coleman told jurors in federal court in St. Paul, Minnesota.

Petters, whose bankrupt business empire once included Sun Country Airlines Inc. and Polaroid Corp., pleaded not guilty to a 20-count indictment accusing him of mail and wire fraud, money laundering and conspiracy.

Petters resigned from the company he founded in 1994 after Federal Bureau of Investigation agents raided his headquarters in Minnetonka, Minnesota, in September 2008. Investigators said they had evidence that hedge funds invested in phantom bulk orders of electronics for retailers including Wal-Mart Stores Inc.’s Sam’s Club warehouse stores and Costco Wholesale Corp.

Funds Victimized

The funds included Interlachen, Dallas-based Apriven Partners LP and Ritchie Capital Management LLC in Lisle, Illinois, according to court documents filed in federal court in Minnesota.

Prosecutors allege Petters and his team created fake documents about electronics purchases to lure hedge funds into financing the purported deals. He used money raised from later deals to pay returns to earlier investors, the government alleges.

FBI officials only learned about the Ponzi scheme after Coleman, who had served as Petters’s office manager since 1993, tipped them off in September 2008. Investigators sent Coleman back to the firm equipped with a wire to record conversations with her boss. Prosecutors said in opening statements that Coleman and Petters dated at one time.

Coleman, 43, told jurors today she had one of the recording devices on her key ring and another in her pocket when she walked into Petters’s office on Sept. 8, 2008, after meeting with prosecutors.

She recorded Petters telling her that he had a plan to get “out of the crime.” On the recording, Petters added that, if “worst came to worst, you wouldn’t go to jail. I would.”

‘Can’t Do It Anymore’

In another tape-recorded conversation, Coleman tells Petters she’s tired of creating phony paperwork to document nonexistent shipments of electronics.

“I can’t do it anymore,” Coleman said on the tape. “I can’t even think of what to sell them anymore.”

Petters, who audibly bursts into tears during the conversation, then attempts to hug Coleman, according to the tape. The secretary is forced to fend Petters off so he won’t discover the recording device taped to her back, Coleman told jurors.

When Assistant U.S. Attorney Joe Dixon asked how long Petters had been using phony paperwork to trick investors, Coleman responded: “Since Day One.”

The trial, before U.S. District Judge Richard Kyle, is slated to last six weeks, according to court filings.

The case is U.S. v. Thomas Joseph Petters, 08-00364, U.S. District Court, District of Minnesota (St. Paul).

To contact the reporters on this story: Jef Feeley in St. Paul, Minnesota, at jfeeley@bloomberg.net; Beth Hawkins in St. Paul, Minnesota, at hawkins@visi.com.

Last Updated: November 2, 2009 16:55 EST