Nov. 10 (Bloomberg) -- The U.S. Securities and Exchange Commission sued Arrowhead Capital Management LLC and indicted principal James Fry, alleging they aided the fraud committed by Minnesota businessman Thomas Petters.
In 2009, Petters was found guilty of running a $3.5 billion investment fraud scheme in which he used his Petters Company Inc. to lure investors to give him money he had said would finance the purchase of consumer goods shipments. He was later sentenced to 50 years in prison.
Arrowhead and Fry earned more than $42 million from three funds they controlled that sent about $600 million in investor money to Petters, according to a complaint filed by the SEC yesterday at the U.S. court in St. Paul, Minnesota.
“From 1998 through 2008, the defendants funneled money into the Petters Ponzi scheme by selling interests in the funds to investors,” the regulator alleged.
Arrowhead and Fry misrepresented misrepresented material facts about the funds and how they interacted with Petters, the SEC claimed.
Also named as a defendant in the case is Michelle Palm, whom the enforcement agency said worked at Arrowhead Capital from September 2007 through August 2009, acting as Fry’s “second in command” from about February 2008 until the end of her employment.
Palm pleaded guilty in April to one count of securities fraud and one count of making a false statement. Her attorney, William Mauzy of Minneapolis, called his client “an honorable woman.”
He said she worked for Arrowhead for only the last 18 months of what is alleged to have been a 10-year scheme and had difficulty extricating herself from the firm.
She is cooperating with both the Justice Department and SEC and intends to settle the regulatory case, Mauzy said.
“She was not aware of the Ponzi scheme’s existence” for the first year she worked at Arrowhead, Mauzy said. When she spotted financial irregularities in the firm’s books, she brought them to management, which “dismissed her concerns,” he said.
Fry has been indicted for aiding and abetting securities fraud, aiding and abetting wire fraud and making false statements to the SEC. He has pleaded not guilty and is scheduled for trial in May.
“This case is immediately going to be put on hold,” Fry’s attorney, Joseph Friedberg, said today in a telephone interview, noting that the SEC case is assigned to U.S. District Judge Richard H. Kyle, who is also presiding over the criminal case.
Friedberg questioned why the SEC bothered to file a separate enforcement action against his client.
“If he gets convicted in the criminal matter, the SEC would be silly in spending the taxpayers’ money. There’s nothing they would achieve,” he said. “Same if he’s found not guilty.”
Friedberg said while the government claims his client and Arrowhead reaped $42 million, much of that money went toward firm employees’ compensation and firm overhead. Fry, he said, has no money.
The case is Securities and Exchange Commission v. Fry, 11-cv-3303, U.S. District Court, District of Minnesota (St. Paul).
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