GE Settles Ponzi Scheme Lawsuit for $49M

General Electric has agreed to pay $49 million to settle a lawsuit filed by two bankrupt Florida investment funds. The settlement will allow investors in the funds to recoup some of the losses they sustained as the result of a Ponzi scheme.

Ponzi Scheme

Thomas Petters, a Minnesota businessman, was arrested in 2008. He was charged with 20 federal crimes that related to fraud and money laundering. Petters was convicted in 2009 after a month-long trial. A federal judge sentenced him to 50 years in prison for a fraudulent scheme involving $3.65 billion.

Petters told investors that his company purchased consumer electronics items from wholesalers and resold them at a profit to big box retailers like Sam’s Club and Costco. Petters borrowed money from the investors and promised a high rate of return, using fake purchase orders and other fraudulent documents to make it appear that he was operating a legitimate business. Instead of using investors’ money for its intended purpose, Petters and his associates diverted most of the money for their own use, financing other businesses and extravagant lifestyles.

A Ponzi scheme depends on constantly attracting new investors and using the funds they invest to pay returns to older investors. Ponzi schemes are unsustainable because eventually there isn’t enough money to go around. Perhaps sensing that Petters’ scheme was ready to collapse, an associate who had been helping Petters for ten years reported his crime to law enforcement.

The Justice Department obtained forfeiture orders allowing it to seize assets belonging to Petters and his businesses. The scheme was so sizeable that the seized assets were insufficient to cover investors’ losses.

Claims Against GE

Hedge fund managers of the companies that operated Palm Beach Finance had earlier pled guilty to securities fraud for misleading investors about the nature of the investments the fund was making. The managers pocketed $58 million in fees and commissions while investors in the fund, which invested exclusively in Petters’ business, lost their investments after the fund filed for bankruptcy.

The bankruptcy trustee for Palm Beach Finance sued General Electric Capital, the financing arm of General Electric, alleging that it conspired with Petters to conceal his fraudulent scheme. GE Capital had loaned money to Petters.

According to the lawsuit, GE Capital learned in 2000 that Petters had generated fake invoices. The trustee for Palm Beach Finance alleged that GE Capital conspired with Petters to remain silent about Petters’ fraudulent activities so that Petters would continue making payments on the profitable loans.

The trustee argued that GE Capital’s failure to report Petters’ fraudulent scheme allowed Petters to dupe new investors. GE Capital denied any wrongdoing.

The bankruptcy judge presiding over the lawsuit dismissed some claims, but found that the trustee was entitled to move forward with the primary conspiracy claim. GE Capital settled the claim for $49 million rather than risking a judgment that might have exposed it to treble damages.

Another lender, the Bank of Montreal, settled a similar claim for $16 million in 2015. The lawsuits demonstrate that victims of investment fraud may be able to recoup some of their losses by investigating the relationship between the perpetrator of the fraud and businesses that may have been abetting illegal conduct.