The collapse of the Petters empire

By: DAVID PHELPS and JON TEVLIN , Star Tribune staff writer/

It was a typical Tom Petters affair. Flamenco dancers swirled around the room. Actors dressed as matadors posed with Minnesota's rich and famous. Saturday Night Live alum Kevin Nealon told jokes, and NFL great Michael Strahan flew into town for the Aug. 9 party, a Petters fundraiser for his late son's foundation that cost almost $400,000.
A beaming Petters shmoozed and draped his arm around anyone who passed by. Corporate big hitters. Celebrities. Politicians.
A month later, one of Petters' closest associates betrayed him to federal authorities, accusing him of running a multibillion-dollar Ponzi scheme.
Petters, a high-profile Twin Cities entrepreneur whose holdings include Sun Country Airlines and Polaroid, was led from his Lake Minnetonka mansion to the Sherburne County jail. He faces federal charges of fraud, money laundering and obstruction of justice. Though Petters maintains he is innocent, four associates already have pleaded guilty for their roles in what may rank as one of the biggest investment fraud schemes in history.
Petters' stunning reversal of fortune has everyone who believed in him, from religious charities to international hedge fund managers, scrambling to assess the damage and wondering how they could have been fooled for so long. Joel Alsaker, Petters' boss in the 1970s when he was selling stereo equipment in St. Cloud, has one answer.
"He was so talented -- you can't overstate that fact," Alsaker said. "He could talk your wallet right out of your pocket."
Alsaker said he believed in Petters so much that, in 1989, he lent him $7,900. Petters had promised to repay the money in 19 days, but according to court documents gave multiple excuses for missing the payment, eventually claiming that he had filed for bankruptcy. When Alsaker discovered that the bankruptcy claim was a hoax, he reopened the case.

Court documents show that, before the next hearing, Petters called the court office and claimed the case was settled and should be removed from the court calendar. The ruse didn't work, though, so when Petters failed to show up in court, a judge found him in default.

Alsaker finally collected his money, but only after threatening to repossess Petters' car.

The shopkeeper's son

The Tom Petters who hobnobbed with the elite, drove a Bentley and reportedly dropped $10 million in gambling losses in Las Vegas contrasts sharply with his upbringing in St. Cloud.

Petters grew up with six siblings in a nice but hardly opulent cottage on the banks of the Mississippi River, just below "pill hill" where the doctors lived. The house was secluded behind a stand of trees and featured a domed greenhouse and gardens tended by his father, Fred, who owned a fur, fabric and tailoring shop downtown. The Petters Building had housed the family business for more than 100 years.

The Petterses live in Avon now, but still attend Catholic mass at the Newman Center on the campus of St. Cloud State and are active in peace and justice issues.

The Petterses are "very well respected for their integrity," said Michael D. Doyle, a friend of the family. "They are considerate, modest and gracious, and very much involved in the issues of the community."

In high school, Tom was gregarious, "a bit of a goofball, but nothing legendary," according to classmate Bill Kain.

"Tom was always very smart and very funny and very popular. He had lots of friends," said Jon Petters, Tom's older brother by four years. More >>