Star witness admits stealing from Petters

The prosecution's star witness in the fraud trial of Minnesota businessman Tom Petters admitted she stole money from Petters and most of her work for him involved lying.

Deanna Coleman testified that by the middle of 2008, she no longer believed Petters' promises to find them a way out of what prosecutors say was massive Ponzi scheme, which by then was on the verge of collapse. Investors in Ponzi schemes are paid with others' investments instead of real profits. Coleman said pressure from investors was building as Petters Co. Inc. ran behind on payments and scrambled to find new money to pay them.

When Coleman and her lawyer went to authorities on Sept. 8, 2008, she brought a list showing that PCI owed investors more than $3.5 billion. The list showed that most of the money was owed to hedge funds, but some prominent Twin Cities businesspeople had invested money. Ted Deikel, the former chief executive of catalog and online retailer Fingerhut, was owed $10 million, and Twin Cities restaurateur Dean Vlahos and his wife, Michelle, were due $15.6 million.

Choking with emotion and fighting back tears, Coleman said she decided to go to federal investigators rather than quit or flee because she was too deeply involved in the quickly unraveling plot.

"I just wanted it to end," she said.

Coleman, 43, of Plymouth, who had been PCI's vice president of operations since Petters founded the company in 1994, also said she and Petters had an intimate relationship in 2005 and 2006. She cried as she recalled his repeated but unkept promises over the years to get them out of the scheme.

Petters, 52, of Wayzata, is charged with 20 fraud-related counts. His attorney, Jon Hopeman, told the jury last week that Petters is innocent and Coleman and others carried out the scheme without Petters' knowledge.

Defense attorney Paul Engh got Coleman to acknowledge Petters had conducted legitimate merchandise resale deals over the years with companies like Dayton's, Marshall Field's, Polaroid and Best Buy.

He also got her to admit in front of the jury that she had lied to investors and others or creating false documents almost every day she worked for PCI.

She also admitted writing two checks totaling $350,000 to herself in 2005 on the account of a shell company she said Petters had her to set up a few years earlier. She admitted she stole that money.

Engh suggested Coleman's testimony was also suspect because she might have faced 24 to 30 years in prison if she hadn't reached a plea deal that required her cooperation in prosecuting Petters. Instead, she faces no more than five years in prison, although she had to forfeit all her money and property. By the defense's count, she was paid $19 million from 2001 to 2008.

When Coleman returned to Petters headquarters after her first meeting with investigators, she carried two covert recording devices. Jurors heard a recording of one of her conversations with Petters in which he said he was still working on a plan to let them exit the scheme.

"I may not be able to get us out of this but I think I can," Petters told her Sept. 22, 2008, just two days before federal agents raided Petters Group Worldwide headquarters and his home. At one point in the conversation, Petters himself began to cry.

"Sorry. God. You're the only one here I sit and cry in front of," he told Coleman.

In another indication of his state of mind, Petters also expressed fear that two investors who stood to lose up to $19 million, and who he claimed had mob connections, would try to kill him. He identified them as Bob and Jon Sabes, who ran a Minneapolis financing company, Opportunity Finance LLC.

Coleman testified she was not afraid of the Sabeses.

Bob Sabes declined to comment on Petters' claims when the Star Tribune of Minneapolis reached him on his cell phone in Las Vegas, where he now lives.

"I think he's been watching 'The Sopranos' too much," Sabes told the newspaper. "I'm not going to say any more."