Documents: Sen. Klobuchar took Ponzi schemer’s campaign contributions, didn’t prosecute
Documents obtained by The Daily Caller show that U.S. Senator Amy Klobuchar helped keep a multibillion-dollar Ponzi schemer out of prison in the late 1990s when she was the County Attorney in Hennepin County, Minnesota.
That financial criminal, Tom Petters, presided over companies whose employees gave Klobuchar $8,500 for her re-election campaign, and would later contribute more than $120,000 toward her U.S. Senate run.
One of those companies’ vice presidents was Ted Mondale, a former state senator and son of former U.S. Vice President Walter Mondale. Before taking office as Hennepin County Attorney, Klobuchar was a partner at the Minneapolis law firm of Dorsey & Whitney, where Walter Mondale has practiced law since 1987.
Perhaps because of the lure of Petters’ campaign cash or his deep connection to Minnesota Democratic politics, Klobuchar used the power of her office in 1999 to ensure Petters was not charged with financial crimes. And despite significant evidence against him, she cleared the way for Petters to build his multibillion-dollar illegal empire by prosecuting only his early co-conspirators.
One of those co-conspirators, Richard Hettler, told The Daily Caller that Klobuchar was aware of what Petters was doing, yet willingly accepted campaign donations from Petters’ company and its employees.
“She took Ponzi money to get elected,” he insisted.
Years later, after Klobuchar won a seat in the U.S. Senate and left Minnesota, a federal prosecutor would win convictions against Petters for 10 counts of wire fraud, three counts of mail fraud, five counts of money laundering, and one count each of conspiracy to commit mail and wire fraud and conspiracy to commit money laundering.
Petters is serving a 50-year sentence in the United States Penitentiary in Leavenworth, Kansas. But before he traded his pinstripes for prison jumpsuits, he was a persuasive charmer.
In 1994 — a year after federal prosecutors say Petters began his Ponzi scheme — he convinced Michael O. Freeman, Klobuchar’s predecessor in the Hennepin County attorney’s office, to help expunge his prior record of alleged financial crimes.
In an October 1989 arrest warrant, Colorado authorities had accused him of forgery and fraud related to a $75,000 swindle over nonexistent VCRs. In Minnesota, he made a financial restitution payment to sidestep a fugitive warrant. And with the help of Assistant County Attorney Nancy McLean, he succeeded in making the Colorado record vanish.
The expunged documents remained in the Hennepin County Attorney’s office, however. TheDC has obtained copies of them. They show authorities in the office Klobuchar inherited in 1999 knew years earlier that Petters had a dishonorable and criminal financial past.
The documents show that McLean represented the State of Minnesota in the push to have Petters’ record expunged. McLean served as Freeman’s assistant, and would continue in the job as Klobuchar’s assistant.
With his Colorado records expunged, Petters carried a clean legal slate into the early years of his Ponzi scheming.
Petters’ charmer instincts extended to his political largesse. Petters Group Worldwide, his legitimate business empire, was overall the third largest source of contributions to Klobuchar’s 2006 Senate run, with the company and its employees donating $75,800. After Petters was convicted in federal court, Klobuchar ultimately returned much of that money.
At the time it was uncovered, Tom Petters’ $3.65 billion Ponzi scheme was the biggest in history. Today it trails only the Bernie Madoff affair and the MF Global collapse in size and scope.
CNN reported that Petters and his business “defrauded billions of dollars and property by convincing investors to give the company money to purchase electronics to be sold to big-box retailers, such as Costco and Sam’s Club. Instead, Petters diverted the funds to make payments to other investors, fund his other businesses and finance his extravagant lifestyle.”
Documents obtained by The Daily Caller show that Sen. Klobuchar had enough evidence in 1999 to prosecute Petters years before the federal government unraveled his scheme, but chose not to. At the time, she was the chief prosecutor in the county where Petters lived.
The documents also show that Klobuchar exceeded the bounds of her jurisdiction as County Attorney to intervene in federal bankruptcy and other legal proceedings whose results helped Petters erase the earliest indications of his criminal activity.
In January 1999, evidence of what the St. Paul Pioneer Press called “early signs” of Petters’ Ponzi scheme crossed Klobuchar’s desk when officers from her Hennepin County Attorney’s Office raided the home Richard Hettler shared with Ruth Kahn, another Petters investor.
Documents retrieved in that raid, including those TheDC is publishing with this report, showed Hettler, Kahn and Petters engaged in a mutually beneficial and highly illegal financial scheme.
Klobuchar would ultimately prosecute Kahn and Hettler on the basis of this evidence, but not Petters.
“I mean, I know a prosecutor has discretion — and I don’t have anything against her, I didn’t know her and I don’t have any dog in the fight as far as that goes,” attorney Garrett Vail told TheDC. “But, it looks to me like he [Petters] had friends in high places. What I’m getting at is somebody was covering for him. The only way he ran a $3 billion Ponzi scheme was [that] he had politicians in his pocket.”
Vail was retained at the time by Premier Bank, one of many Minnesota financial institutions that loaned money to Petters investors who were eager to cash in on ultimately bogus high rates of return.
In any Ponzi scheme, constant inflows of cash are required to pay “profits” to past investors. Petters raised some of this money, documents show, by committing a secondary fraud: using phantom loans as collateral for legitimate ones, and then rolling the resulting cash back into the Ponzi scheme.
A promissory note obtained by TheDC, dated Nov. 19, 1997, shows Hettler loaned Petters $600,000 and promised to pay him $60,000 profit after just two months — a 120 percent annual interest rate that would have been a red flag for any financial crimes investigator.
In a second document TheDC obtained, Hettler legally assigned that promised $60,000 interest payment to Kahn on Jan. 5, 1998.
Kahn then used that assigned interest as collateral for a $1.2 million loan from Premier Bank.
Using the loan proceeds, Kahn then wrote a check for more than $1.3 million to Petters Companies, Inc., the Petters enterprise through which he conducted the Ponzi scheme. On March 28, 1998, Petters issued Hettler — not Kahn — a promissory note formalizing this second investment. It promised a 14 percent annual yield on the $1.3 million over two years.
There is no evidence Hettler’s initial $600,000 ever existed, or that Petters ever paid it back. Less than a year later, Hettler was bankrupt. By April 1999, Kahn followed him into bankruptcy.
More so than Hettler’s, Kahn’s bankruptcy exposed a vulnerability in Petters’ Ponzi scheme, connecting both of them to Petters through the promissory notes and the interest-assignment arrangement on the original $600,000 loan.
Kahn’s financial papers tied them all together, and her bankruptcy proceedings had the potential to turn Petters’ business arrangements into statewide or national news. But Klobuchar took an unconventional step that ensured the promissory notes would never see a courtroom outside her county. In May 1999 she initiated an unusual criminal prosecution — not against any particular person involved, but against the documents themselves.
Vail, the Minnesota lawyer who Premier Bank retained to try to get its money back from Kahn, filed a motion in court to learn more about what Kahn was up to. It seemed she had re-loaned Premier’s money, but the promissory note was written to Hettler — not to her.
“I applied for an order from [U.S. Bankruptcy Court] Judge [Nancy] Dreher for what’s called a ‘Rule 2004’ examination of Klobuchar and Petters,” Vail said. “I wanted to find out: Did she [Kahn] take our money and loan it to Petters?”
Kahn had already been asked that question in bankruptcy court, but pleaded the Fifth Amendment to avoid incriminating herself. Vail wanted to ask Petters the same question under oath. And he wanted to know what records Klobuchar had seized from Kahn’s and Hettler’s home in that January 1999 raid.
“We know that she had executed a search warrant, so she had proof and she had the records,” Vail said.
Judge Dreher denied Vail’s requests on a technicality, ruling that a bankruptcy trustee was the only party who should be asking those questions.
Vail told TheDC that deals were cut and settlements were reached in the bankruptcy matter. Petters was allowed to make a six-figure settlement payment, he said, and walk away.
“Ultimately, that lawsuit was settled, over the ownership of the [promissory] notes,” Vail said. “What happened was Petters paid in a lump sum — probably every nickel he stole from somebody — and then that money was distributed among Premier Bank and Ruth Kahn’s creditors, and the trustee for Ruth Kahn got about $50,000, and then all the victims of Hettler.”
Klobuchar criminally prosecuted Kahn for wire fraud; she pleaded guilty in 2001.
Vail recalled that as Kahn was accepting a plea agreement for wire fraud, “Klobuchar prosecuted her for aggravated forgery — which was a jolt because they were claiming that she somehow forged this assignment [of interest] from Hettler.” That interest “assignment” was the promised $60,000 payment Kahn had used as collateral for her Premier Bank loan.
“Klobuchar,” Vail said, “was taking the position that it wasn’t legitimate and that it was a forgery. It doesn’t make sense. You don’t forge your own signature. At any rate, Kahn entered into some kind of a plea bargain with Klobuchar in September 2000. She pled guilty to aggravated forgery and got probation or something.”
As for Hettler, Klobuchar pursued criminal charges against him for not paying child support — an outcome she bragged about as a success in April 1999 media reports. The Minneapolis Star Tribune reported that Hettler was sentenced to “nearly three years in prison and ordered to pay $130,000 in delinquent child support.”
In an interview with TheDC, Hettler accused Klobuchar of prosecuting him and Kahn, but not Petters, for political reasons.
Noting that Klobuchar passed on indicting Petters in 1999, Hettler said, “She would have, had she not been paid off. I mean, Petters paid her off, basically. He gave money to Klobuchar to do his bidding.”
When TheDC asked Hettler if Klobuchar ignored documents, like the promissory notes and the interest reassignment to Kahn, that were a sufficient basis to prosecute Petters in 1999, he said, “Yes. That’s true.”
“If something like this were to get out,” Hettler added, “her chances of continuing on the Senate Judiciary Committee would be very limited.”
Hettler added that some Minnesota Republicans were also tainted by Petters’ political donations. “He doled money out to both sides of the aisle, depending on whoever got elected,” Hettler said. Names he mentioned include former Minnesota Gov. Tim Pawlenty, Rep. Michele Bachmann and former Sen. Norm Coleman.
“There’s this lawsuit between Premier Bank and Kahn for the notes,” Vail said. “There were civil cases against Hettler. Klobuchar was pursuing Hettler on the notes and then there was this theft of collateral. So, there’s all kinds of dubious circumstances, and Klobuchar elects to prosecute Hettler, prosecute Kahn, but overlook Petters.”
“Petters had a criminal record that had been expunged, and it turns out that Ted Mondale is the vice president over there. Klobuchar is a Democrat, Klobuchar had worked at Dorsey & Whitney with Walter Mondale. And, then — surprise, surprise! — Petters turns out to be one of her largest contributors.”
Klobuchar, Vail added, took the position “that Kahn had committed a crime. She makes a plea bargain with Hettler, a plea bargain with Kahn — and Petters walks. And he’s the one with a financial criminal record.”
That’s the record that was expunged in 1994.
“When it’s expunged, that just means the public doesn’t have it,” Vail cautioned. “I think it’s fair to say Klobuchar could be charged with knowing what’s in that file there.”
Klobuchar’s Senate office originally tried to delay the publication of this report, and ultimately refused to comment on the record. A Hennepin County Attorney official did not return a request for comment. Through counsel, Kahn was also unavailable for comment.