The bankruptcy trustee for Petters Group Worldwide LLC, whose founder was convicted of fraud last year, sued a Minneapolis investment firm seeking to recoup at least $105 million for creditors.
The trustee’s complaint, filed yesterday in U.S. Bankruptcy Court in Minneapolis, alleges that Arrowhead Capital Management LLC and affiliated funds could be liable for as much as $5.1 billion transferred to them over more than 10 years.
Thomas Petters was convicted by a federal jury in St. Paul, Minnesota, of leading a $3.5 billion Ponzi scheme and sentenced to 50 years in prison in April. Arrowhead and its affiliates received money from Petters that had come from other investors, the trustee said.
“Defendants knew or should have known that they were benefiting from fraudulent activity or, at a minimum, failed to exercise reasonable due diligence with respect to Petters” and its affiliates, according to the complaint filed by Douglas Kelley, the trustee.
James Fry, Arrowhead’s founder, didn’t return a voicemail message left today at his office seeking comment. Kelley described Fry as a sophisticated investor who allegedly formed entities specifically for investing in Petters’s business.
The 154-page 17-count complaint cites Minnesota’s Fraudulent Transfer Act and corresponding federal laws as authority. The Chapter 11 estate can demand the return of funds transferred during the six years preceding discovery of the Petters’s fraud, according to Kelley. To recover money, the trustee said, he doesn’t need to prove Arrowhead was aware of the scheme.
Kelley has filed more than 200 other so-called clawback suits since Sept. 1, including 13 more cases today against individuals from whom he’s collectively seeking more than $8.4 million.
Many of the suits seek small amounts that Petters donated to charities or paid to individual investors. The Arrowhead lawsuit is the largest so far. The trustee yesterday sued a Houston investment firm, Ark Royal Capital LLC, seeking to recoup $1.2 million for the estate.
“All funds received by defendants were inextricably intertwined with the Ponzi scheme and were derived from monies fraudulently obtained,” according to the Arrowhead complaint.
The bankruptcy case is In Re Petters Co., 08-45257, and the lawsuit is Kelley v. Metro I LLC, 10-04328, U.S. Bankruptcy Court, District of Minnesota (Minneapolis).