Governor, Commerce Silent on Ponzi-Scheme Lawsuits

August 28, 2013

Investigative Reports

Print Friendly, PDF & Email

Pyramid SchemeIn April 2010, Thomas Petters of Minnesota was sentenced to 50 years in federal prison for masterminding a $3.7 billion, 14-year Ponzi scheme – one of the largest scams in U.S. history.

Michael O’Shaughnessy, also from Minnesota, led several companies owned by Petters, including the Polaroid Corp., during the time federal authorities said Petters was operating the Ponzi scheme, records show. Although O’Shaughnessy faced no criminal charges, ongoing federal lawsuits against O’Shaughnessy allege that he improperly received nearly $9.4 million in bonuses and fees that were funded by defrauded investors. The suits seek reimbursement of the money to investors and creditors.

O’Shaughnessy’s legal problems weren’t mentioned during Thursday’s announcement by Gov. Nikki Haley and others that a Minnesota-based company led by O’Shaughnessy, known as Element Electronics, will open a plant in December in Fairfield County to manufacture flat-screen televisions.

The Nerve learned of the federal lawsuits and obtained copies of the documents after the announcement.

“Today’s announcement represents a big step for our company, and we are excited to locate our new operations in Fairfield County,” O’Shaughnessy said in a press release prepared by the S.C. Department of Commerce. “South Carolina provides an excellent business environment for our television manufacturing operations, and we look forward to doing great things here. We appreciate all the support we’ve received from state and local officials.”

Officials said the $7.5 million investment is expected to generate 500 jobs, about 250 of which would be created within the first year.

Neither O’Shaughnessy, who is listed in the Commerce press release as president of Element Electronics, nor his attorneys in the federal lawsuits responded to phone messages Tuesday from The Nerve seeking comment on the suits.

Fairfield County officials contacted Tuesday by The Nerve said they were unaware of O’Shaughnessy’s legal problems.

“Fairfield County has no knowledge of these things you mentioned,” said Milton Pope, the county’s interim administrator, though he added, “I will try to do some due diligence to communicate with the Department of Commerce about that.”

Asked whether the proposed television manufacturing plant would be affected – and whether taxpayers would be asked to contribute more toward the project – if O’Shaughnessy has to repay millions in the federal suits, Pope replied, “I would be totally presumptuous commenting on that at all.”

“The research on those types of things is not done by the county,” said Fairfield County Council Chairman David Ferguson. “They are done by the Department of Commerce and the Governor’s Office.”

“There are a lot of people who look at these projects before they get all the way down to the county level,” he added.

No Comment, Little Transparency

The Nerve on Tuesday sent written questions about the federal cases against O’Shaughnessy to Commerce Secretary Bobby Hitt, copying the questions to Karen Manning, Commerce’s chief lawyer, and agency spokeswoman Amy Love. None responded.

Haley spokesman Doug Mayer declined comment initially when contacted Tuesday by The Nerve,requesting questions in writing. He didn’t respond to the written questions, which included whether the federal cases would affect the state’s commitment to the Fairfield County project.

The Nerve on Monday reported that Commerce and local officials were being tight-lipped about details of the taxpayer-backed incentives for the project. Nothing new was revealed on Tuesday.

“We’ve been asked not to elaborate on this thing until it is put on paper,” Ferguson said, noting the request came from officials with Element Electronics, Wal-Mart, Commerce and Central SC, a regional economic development organization.

Pope said it likely would be a “couple more weeks until everything is closed and finalized.”

Officials said production operations that formerly were located in China would be moved to the former 315,000-square-foot Perry Ellis distribution building on U.S. 321 Bypass North in Winnsboro. The Perry Ellis center closed in 2008 along with Plastech, another large employer in the county, resulting in the loss of about 400 jobs.

A Detroit Free Press story in January 2012 reported that Element Electronics sold Chinese-made televisions to big-box stores such as Wal-Mart and Target, and that the company was planning to return TV manufacturing to America through a partnership with another company, Lotus International, to produce large, flat-screen televisions at a plant in Canton, Mich. That operation, which was scheduled to start in March 2012, was expected to involve 100 workers.

In last week’s announcement about the proposed Fairfield County plant, Bill Simon, Wal-Mart U.S. president and CEO, said the “partnership between South Carolina and Element Electronics came together in just a few short months, demonstrating that American renewal in manufacturing is working to create jobs, drive investment and produce quality American-made products for our customers,” according to the Commerce press release.

Minnesota Secretary of State records reviewed this week by The Nerve show that Element Electronics was registered in that state on Aug. 26, 2009, listing O’Shaughnessy as the company’s CEO and its office address in Eden Prairie, Minn. The registered agent for the company is O’Shaughnessy Holding Co., which, according to Minnesota records, was registered on Feb. 23, 2009; the records list O’Shaughnessy as the manager of the holding company and the address of the company’s executive office as the same one for Element Electronics.

Ponzi Scheme

Petters – O’Shaughnessy’s former boss – was arrested in October 2008 after agents from the FBI, Internal Revenue Service and U.S. Postal Inspection Service raided Petters’ company headquarters, his home and other locations, seizing numerous documents and other evidence, federal records show. The investigation began in September 2008 when a co-defendant told authorities that she had helped Petters run a multibillion-dollar Ponzi scheme over the previous 10 years; authorities alleged the scam began with the formation of one of Petters’ companies in 1994.

After a month-long trial, Petters was convicted in December 2009 on 10 federal counts of wire fraud, five counts of money laundering, three counts of mail fraud, and one count each of conspiracy to commit mail and wire fraud, and money laundering, records show. In April 2010, Petters, then 52, was sentenced to 50 years in federal prison; he is now seeking a reduced sentence, according to media reports.

The Ponzi scheme, which included several other co-defendants, all of whom eventually pleaded guilty, involved luring investors into lending Petters money to purportedly buy electronic goods for resale at a high profit to big-box retailers, including Costco and Sam’s Club, according to court records. But the purchases never took place, though investors were fooled otherwise through numerous fake purchase orders and bank statements; and investors were paid with other investors’ money, records show.

“To pull off this massive fraud, Petters created a public aura of financial success to ensure a ready supply of new investors and to allay any suspicions of established investors,” Minneapolis attorney Douglas Kelley, a court-appointed receiver of property owned by Petters and Thomas Petters Inc., said in a lawsuit filed on April 1 in U.S. District Court in Minnesota. “Petters gave lavishly from this pool of stolen money to universities and other charitable causes, and paid exorbitant sums of money to surround himself with executives, partners and friends who helped create the essential air of success and wealth required to sustain the fraud, as well as the expertise to maintain it.

“Defendant Michael O’Shaughnessy was one of these people.”

O’Shaughnessy was a key player in Petters’ portfolio of companies, including serving as CEO of the Polaroid Corp., vice-president and later CEO of Petters Consumer Brands LLC, and president of Petters Company LLC, according to Kelley’s suit.

“Petters considered O’Shaughnessy part of his close network of advisors and friends, and consequently, O’Shaughnessy possessed considerable control over Petters,” the suit said. “Hence, O’Shaughnessy had special knowledge or access to information regarding the Ponzi scheme … “O’Shaughnessy leveraged his position with Petters to receive massive amounts of money and gifts.”

The suit alleges that from 2003 through 2008, O’Shaughnessy received nearly $9.4 million in bonuses and fees, transfers that were “from the proceeds of the ongoing Ponzi scheme.”

“O’Shaughnessy knew of the fraud, or willingly ignored it, and accepted these substantial payments and gifts from the scheme,” the suit alleges.

As evidence, O’Shaughnessy’s listed salary in 2004 while working at one of Petters’ companies known as Petters Group Worldwide was $195,000, with a potential bonus equal to 50 percent of his salary, or $97,500, according to the suit. But O’Shaughnessy received more than $1.2 million from Petters personally and two other companies owned by Petters, the suit said, noting that the total payments equaled more than 650 percent of O’Shaughnessy’s stated salary for that year and more than 13 times his potential bonus.

From 2003 through 2008, about $6 million was paid to O’Shaughnessy through accounts with one of Petters’ companies known as Petters Company Inc., according to a separate lawsuit filed in 2010 in U.S. Bankruptcy Court in Minnesota by Kelley, who was appointed by the court as a bankruptcy trustee on behalf of Petters Group Worldwide LLC and Petters Company Inc.

In another suit filed in 2010 in the same court by another bankruptcy trustee on behalf of the Polaroid Corp. and other Polaroid companies, O’Shaughnessy was accused of receiving more than $2.7 million in “fraudulent transfers.” That case was settled with court approval on May 28 and dismissed on Monday “without an award of attorneys’ fees, costs, or disbursements to any party,” court records show.

O’Shaughnessy in court papers denied the allegations against him, contending, among other things, that simply “because you worked for a Petters-related entity and received a bonus, it was fraudulent.”

“The Complaint does not contain sufficient, plausible factual allegations that the identified transfers furthered the Ponzi scheme,” according to a motion to dismiss Kelley’s 2010 suit. “Employee-Defendant O’Shaughnessy is not alleged to have had any role with the Ponzi scheme. He is not alleged to have been ‘essential’ to the scheme, nor is there any allegation to suggest that his work at a legitimate business allowed the scheme to continue.”

Kelley declined to comment on either of his suits when contacted this week by The Nerve.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org. Follow him on Twitter @thenerve_rick. Follow The Nerve on Facebook and Twitter @thenervesc.

Comments are closed.