Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, November 9, 2011

SEC Charges Feeders To Petters Ponzi Scheme

The SEC charged two Minnesota-based hedge fund managers and their firm for facilitating a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters.  The SEC alleges that James N. Fry, Michelle W. Palm, and Fry’s firm Arrowhead Capital Management LLC invested more than $600 million in hedge fund assets with Petters while collecting more than $42 million in fees. Fry, Palm, and Arrowhead falsely assured investors and potential investors that the flow of their money would be safeguarded by the operation of certain collateral accounts when, in fact, the process did not exist as described. When Petters was unable to make payments on investments held by the funds they managed, Fry, Palm, and Arrowhead concealed Petters’s inability to pay by entering into secret note extensions with Petters.

This is the fourth enforcement action that the SEC has brought against hedge fund managers that collectively fed billions of dollars into the Petters fraud. The SEC previously charged Petters and froze the assets of an Illinois-based hedge fund manager who was a $2 billion feeder to his scheme, charged two Florida-based fund managers who facilitated the scheme, and blocked an attempt by a Connecticut-based hedge fund manager to divert funds from victims of the scheme.

Both Fry and Palm have been charged criminally in connection with the same misconduct. Palm pleaded guilty to one count of securities fraud and one count of making false statements to SEC staff during investigative testimony. Fry pleaded not guilty to multiple counts of securities fraud, wire fraud, and making false statements to SEC staff during investigative testimony.

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