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Friday, December 11, 2009

THE WHITE ALBUM


I doubt that you have ever heard of Robert Dean White, but he sings very well. Federal prosecutors have an extensive library of his tunes. My personal favorite from the "White album" is the “cut” when he describes the corporation he worked for, “The Petters Group Worldwide”, as “…a Ponzi scheme.” It has been the Musak of every Bush-era Neo-con hedge-fund dead-end investment club in from Greenwich, Connecticut to Moscow. But even before it was set music it was the punch line to one of the oldest jokes in the world.

Charles Ponzi (AKA Charles Ponei, AKA Charles P. Bianchi) was far from the first to invent this dance tune. He just put his name on it. He was an Italian immigrant who stumbled upon the International Postal Reply Coupon, a now defunct system of international postage. The price of IPRC stamps varied from nation to nation, and Ponzi convinced investors that by buying the stamps cheaply in Italy, in huge bulk, and selling them for a profit in America, he could offer a 400% profit. He was such a good salesman that victims actually paid him to take their money. Ponzi went from a penniless ex-con in 1919 to a millionaire in 1920: in July alone he made $420,000. And that was in 1920. Today's equivilent would be over $4 million - in one month!

Then in August "The Boston Post" newspaper asked the U.S. Post Office how many IPRC’s Ponzi had actually exchanged and found out that the number was zero. Ponzi, it seemed, was using new investments to pay off old investors, after pocketing a substantial profit. By September of 1920 Ponzi was in jail. The vast majority of his investors lost everything. A team of accountants searched valiantly for months but were never able to reconstruct where all the money had disappeared to. After serving his sentence and being deported, Ponzi told an Italian reporter not to feel sorry for his victims. “Even if they never got anything for it, it was cheap at that price,” he said. “It was easily worth fifteen million bucks to watch me put the thing over.”

I wonder what Tom Petters thought he was worth? Tom dropped out of high school after founding his first company when he was just sixteen. He leased an office in downtown St. Cloud, Minnesota, out of which he sold stereo equipment to college students. When his father found out about the venture he forced the budding entrepreneur to close it all down. But Tom was getting started.

In 1988 Tom had formed "The Petters Group World Wide", a self described $2.3 billion investment group, which billed itself as “Partnership Defined”,  with 3,200 employees. In June of 2002 PGWW and a partner bought the name and inventory of “Fingerhut” from Federated Department Stores. A year later he bought s"eBid.com".

Two years later he shelled out $246 million for "Polaroid". In October 2006 he joined with Whitebox Advisors to buy "Sun Country Airlines". In February 2007 he bought the marketing company "Juice Media Worldwide", and in November he became sole owner of "Sun Country".

In 2008 his acquisitions accelerated. He bought "EducAsian" in January, the magazine conglomerate "Metropolitan Media Group" in July and the charter airline "Southwest Aviation" and "Enable Holdings, Inc.", both in August. Then in September of 2008 the F.B.I. raided John’s offices, his home, and the home of Mr. Robert Dean White. Tom’s entire house of cards folded like…well, like a house of cards.

The companies Tom had bought were all real with real assets, but they were all in trouble. And Tom fixed them. How did Tom, the financial wizard, fix them? Corporate Vice President Michael Catain explained later, "Tom Petters had me set up a company that acted as though it bought merchandise. ... I was supposed to be the middle man providing the inventory in case an investor called....We'd get an e-mail of what deposits (meaning investments) were coming in. We would do the wires. Deanna (Colman, corporate accountant) handled the other end."

According to Robert White, he was urged to help Tom out of a short term money crunch. "I came up with some phony bank statements to make it look like money was spent the way it was supposed to." After committing this fraud, it dawned on Robert
that some of the other corporate paperwork might have been faked as well. White asked
Deanna Coleman which of the companies' promissory notes were real. White said,
"She laughed at me and said there are no good notes there." And why did Ms. Coleman go along with this scheme? "Tom promised me over and over again that he'd get us out of this." Then in September of 2008 the F.B.I. raided John’s offices, his home, and the home of Mr. Robert Dean White. Tom’s entire house of cards folded like…well, like a house of cards. (Its happened before, you see.)

Just a month prior to his personal Goetterdaemerung, Tom explained to the fawning students of the Carlson School of Management, “You’ve got to figure out how to leverage and move things forward and not backwards. Sometimes sideways and left and not always how you had anticipated.” The budding business garduates were enthralled. But evidently Tom did anticipate what was coming because he is heard on one of the F.B.I tapes admitting that he cheated on his taxes, and used an employee to create false documents for investors, but that he “didn’t know what choice” he had. I guess honesty was not a viable choice.

The Feds alleged that for ten years Tom has been showing investors purchase orders to prove he was selling merchandise to Walmart. But when one investor finally checked with Walmart, the discount chain said the P.O. numbers were fake and they had never bought anything from any of Tom’s many, many companies. This revelation led to a Federal audit of PGWW which showed $1.9 billion in the “in” drawer and $3.5 billion in bills, meaning the “out” drawer. And since the Feds lack the imagination of the Wall Street types, owing more than you own equals bankruptcy. Ah, if they only had the imagination of Tom Petters, or of Charles Ponzi, they would know that being in debt was just another opportunity to buy stuff. Have you ever noticed that none of these wise guys have any interest in history? To me that explains a lot.

Tom's explination to the jury during his 18 day long trial, was that three of his junior officers had tricked him.  But the tapes, the testimony of his junior officers (all of whom went to jail) and according to the jury, the prolific e-mails Tom sent, told a different story. After thirty-one hours of deliberations they convicted Tom, on December 2, 2009, of 20 counts of wire fraud, mail fraud, conspiracy and money laundering.

It all reminds me of the joke about the traveling salesman who stopped at a farmhouse, seeking a drink of water. As he stood at the kitchen sink he saw a chicken outside wearing a pinned-up pair of blue jeans. The farmer explained, "We had a tornado about two months ago. Killed all my other birds. She and our rooster were the only ones who survived. But it plucked every feather off that poor chicken. My wife felt so sorry for her, she sewed her up that pair of pants." The salesman can't stop laughing, until the farmer put a hand on his shoulder and confided, "If you think that's funny, you ought to see that rooster trying to hold that chicken down with one leg, and get those pants off with the other."

A Ponzi Scheme is all about getting the investor's pants off. And that dance has been going around since before the chicken or the egg.

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