Category: Criminal law

by Brenda Grantland 1-2-2011, updated 1-26-2011

(c) 2011, Brenda Grantland, Esq.

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The opinions stated in this blog are the opinions of the author, and do not necessarily reflect the views of any other associate of, or client represented by, the Law Office of Brenda Grantland.

The Thomas Petters fraud scheme litigation has been a big story in the Minnesota press for the past two years, providing almost daily fodder for the local news media. The Petters Receivership and related bankruptcy cases are big money-makers for Minneapolis-St. Paul area law firms, a boon to the local economy during the recession, especially after Petters empire imploded, losing many local jobs. Quite understandably, the Petters Receivers and Trustees and prosecutors were treated as heroes by the local media. Petters’ victims (most of whom were from out of state) did not fare so well – in the courts or in the local media. The local press rarely covered the travails of the victims and creditors who sought (and were denied) relief from the receivership litigation stay, or who tried to assert their statutory rights as crime victims in the criminal litigation and were rebuffed at every turn.

For the past year and a half years I have represented Ritchie Capital Management (“Ritchie”), a Petters victim, in the receivership and criminal restitution litigation. I was generally disappointed with the coverage (or lack thereof) of victims’ issues by the Minnesota press, but its recent coverage of Ritchie’s restitution litigation really showed the local media’s true colors.

On December 1, 2010 Ritchie filed a certiorari petition to the United States Supreme Court, Ritchie Special Credit Investments, Ltd., et al., Petitioners v. Thomas Petters, et al., # 10-738, seeking review of the Petters’ criminal judge’s orders denying restitution to victims, and the Eighth Circuit’s dismissal, without written opinions or any statement of reasons, of Ritchie’s mandamus petitions. The certiorari petition was the culmination of months of litigation under the Crime Victims Rights Act of 2004 and the Mandatory Victim Restitution Act of 1996, two statutes which gave victims actual enforceable rights in the criminal process that they never had before. In Petters’ criminal case when the criminal judge denied victims their CVRA and MVRA rights, Ritchie filed four petitions for mandamus [1/] in the federal Court of Appeals for the Eighth Circuit.  Without even requiring the government to respond on the merits to Ritchie’s claims of CVRA and MVRA violations, the Eighth Circuit dismissed every one of Ritchie’s mandamus petitions, without a written opinion or any statement of reasons. That in itself is a violation of the CVRA, which specificially requires a written opinion detailing the reasons if the court of appeals denies the victim’s petition.  The press did not cover Ritchie’s CVRA and MVRA litigation in the district court or Eighth Circuit.

Ritchie’s filing of the certiorari petition spontaneously began generating press coverage. Ritchie decided to put out a press release explaining what our certiorari petition was all about, with a link to the petition itself. The press release was picked up and distributed on the PR Newswire. A few days later I got a call from John Welbes, a reporter at St. Paul, Minnesota’s  Pioneer Press. Though disappointed in the past by the local media coverage, I took the call and answered his questions.  I was on the phone with Welbes  for quite some time, explaining at length the issues raised in our petition.  I explained that the Mandatory Victim Restitution Act requires a criminal court judge, when sentencing a criminal defendant convicted of fraud, to enter restitution judgments against the defendants in favor of all “direct and proximate” victims in the full amount of their losses. The narrow exception [2/] the criminal judge cited, the “complexity exception,” allows criminal judges to avoid determining restitution if the court finds, from facts in the record, that the burden on the sentencing process of determining restitution outweighs the harm to victims of denying restitution. I pointed out that the reason the judge stated in denying restitution — that victims had other remedies they could pursue — was not a reason listed in the MVRA’s  “complexity exception”.  In fact, the judge’s reliance on the availability of other remedies conflicted with a provision of the MVRA’s procedural statute, which prohibits the court from considering the victim’s entitlement to compensation from other sources in determining the amount of restitution. Currently the courts are split on whether the availability of other remedies may be considered in weighing the factors of the complexity exception.

When the article, “Ritchie Capital Goes To High Court“, appeared in the St. Paul, Minnesota, Pioneer Press on 12/16/2010, it made no mention of the Mandatory Victim Restitution Act. Instead of explaining that Ritchie’s petition involved litigation under a criminal statute, the article made it appear that this was just some argument Ritchie had made up in a bankruptcy case.  The article even went so far as to quote a “bankruptcy expert” who pooh-poohed Ritchie’s certiorari petition:
Ritchie’s “chances are slim,” said David Leibowitz, a Chicago attorney and bankruptcy expert who hasn’t worked on the Petters case. He said there isn’t a “big split” in rulings from various courts of appeals around the country on restitution cases and that Ritchie could appear to be asking for an unequal distribution of assets, favoring itself over other creditors.”I don’t think this (Supreme Court case) is going to get them anywhere,” he said.
Dismayed by the reporter’s mangled description of our case and his expert’s criticism of our argument, I emailed David Leibowitz to see what his qualifications were regarding the MVRA:
Mr. Leibowitz –

I saw your quote in a news article, and I was wondering what your experience is in criminal restitution matters?  Have you represented victims in criminal cases when they file claims under the Mandatory Victims Restitution Act?

Brenda Grantland

He promptly responded with this email:
Thanks for your inquiry. I have little to no experience with criminal restitution. If you want, I’ll try to find someone for you who does. Where do you live?

Kind regards,
David Leibowitz

I then wrote him back to ask why he thought he had sufficient expertise on criminal restitution under the MVRA to criticize our certiorari petition (which did not involve bankruptcy law at all) and why he made the unkind (and untrue) suggestion that Ritchie was trying to get an unequal share of the assets.  (Read entire message here.)

Leibowitz immediately wrote me back:
I am a bankruptcy expert and my opinion is rendered in that context.
Best wishes

David LeibowitzLakelaw
Waukegan – Chicago – Kenosha
www.lakelaw.com
Sent from my iPhone
There was no bankruptcy context.  Our certiorari petition and all the litigation that led up to it all happened in criminal court, under crime victims’ rights statutes in the criminal code (title 18 U.S.Code).  Leibowitz was stating an opinion on something he admittedly knew nothing about.  And he never explained the basis for his gratuitous slur that Ritchie appeared to be trying to gain an advantage over other creditors.

I cc’d John Welbes but he never responded to my email. Apparently he sees nothing wrong with attacking those who criticize the “home team” by calling in “experts” with no expertise on the subject matter on which they render opinions.  I recommend that all readers of his articles take everything Welbes says with a grain of salt, especially when he quotes “experts.”

#  #  #

Not to be outdone by the Pioneer Press, Twin Cities Business Magazine reporter Jake Anderson wrote a similarly skewed and mangled piece of journalism — “Petters Investor Petitions Supreme Court” — without speaking to anyone representing Ritchie, and apparently without bothering to read our certiorari petition.  The Twin Cities Business article begins with a subtitle in bold proclaiming:

Ritchie Capital Management says that it and other victims of Tom Petters’ Ponzi scheme have been denied restitution by the courts.   A local expert said that there are “sufficient mechanisms” in place for creditors to recover valid claims.”

Ritchie “says it and other victims… were denied restitution?”

It’s not a matter of interpretation.  Judge Kyle issued orders denying restitution on June 3, June 4 and July 2.  You can download them above, along with a copy of the transcript in which Judge Kyle orally denied our motion to vacate his orders denying restitution.

The Twin Cities article completely botches the issues in Ritchie’s certiorari petition:

Ritchie claims that the Mandatory Victim Restitution Act of 1996 dictates that it should be awarded restitution for its losses by suing Petters’ companies directly, …

Completely wrong.  The MVRA dictates that the sentencing judge award restitution to fraud victims without requiring victims to sue the defendant.

… but the courts ruled that victims must recover funds through other means—namely, by filing claims in the Petters bankruptcy case and receiving assets when they are doled out by Doug Kelley, the receiver in the case.

That is not correct either.  The criminal judge declined to award MVRA restitution against Petters and his codefendants, citing the complexity exception, but relying on a reason not included in the complexity exception — the fact that victims might qualify for some compensation from the pending bankruptcy cases of Petters’ companies.  The article fails to explain that there are several pools of assets that were seized from the defendants.  The bankruptcy cases only involve some of Petters’ companies.  None of the individual defendants declared personal bankruptcy (nor could they be forced into bankruptcy by victims or creditors, because the receivership litigation stay prohibited all lawsuits against the defendants).  All of the personal assets of the co-defendants, totalling $10 – $50 million, are in the hands of the receiver Douglas Kelley. This money would have been be distributed pro rata to the victims as part of the sentencing process in the criminal cases (see Doc. 393 p. 3), but the judge denied restitution to the victims.

Mertz is also wrong in his suggestion that Receiver Doug Kelley will be doling out funds to victims. There is no statutory mechanism in 18 U.S.C. § 1345 which allows the Receiver to dole out anything to victims. If the orders denying restitution are upheld, those funds held by the receiver will be forfeited to the federal government. Judge Kyle said victims were free to ask the federal government to give them some of the assets through the DOJ remission program, but that is a completely discretionary remedy, decided by the Chief of the Asset Forfeiture and Money Laundering Division of the DOJ, without a hearing, without a judge, and with victims having no right to appeal to any court if the Asset Forfeiture Chief turns them down.  The Chief of AFMLS has already indicated that they intend to distribute the “net proceeds” to “qualified victims” — obviously meaning what’s left after law enforcement agencies are paid. Regulations governing the remission process do not have the same standards for “qualified victims” as the MVRA standards defining “victims” as those “directly and proximately” harmed by the crimes for which each defendant is convicted.

Once again, the local press brought in “a local expert” to contradict Ritchie’s arguments. Like the Pioneer Press’s expert, Mertz also appears to be a bankruptcy lawyer, since he says there are sufficient mechanisms in place for “creditors” — a term used in bankruptcy cases, but not in criminal restitution cases.  Although there is some overlap, creditors of the various corporate bankruptcy cases are not the same group of folks as the “direct and proximate” victims of Petters’ and his codefendants’ crimes — who are entitled to criminal restitution under the MVRA. The rights of bankruptcy creditors and crime victims are very different, and they are enforced in different courts.  Ritchie will hopefully receive some compensation some day from the bankruptcy cases as creditors of some of the Petters’ companies, but that’s not the same thing as criminal restitution judgments. [3/]  Defendants convicted of fraud are personally liable under the MVRA for the full amount of their victims’ losses “directly and proximately” caused by the fraud, and MVRA restitution judgments are enforceable for 20 years, against assets the defendants obtain in the future.

Mertz … said that, in his opinion, there are “sufficient mechanisms” put in place for creditors of the various Petters entities to recover valid claims from the bankruptcy case and the receivership. “It’s whether claims are valid” that will be difficult to determine, and Kelley has previously objected to some of Ritchie’s claims, he added.

True, there are the regular bankruptcy mechanisms that victims of Petters’ fraud can pursue in a bankruptcy cases if they are creditors of one of the bankrupt companies.  But Mertz is wrong in suggesting there is a mechanism by which victims can file claims with Receiver Doug Kelley and get compensation from the $10 – $50 million in personal assets of the defendants held by Kelley’s receivership.  The receivership case was brought under a criminal statute — 18 U.S.C. § 1345 — which only empowers the Receiver, Doug Kelley to “hold assets in place” (see Order, PCI bankruptcy Doc. 153 p. 22) until they are distributed by order of the criminal judge in restitution and/or forfeiture.  Section 1345 does not allow the Receiver to decide claims or distribute the assets to fraud victims.  When Mertz says Kelley has objected to some of Ritchie’s claims, he is probably referring to the Polaroid bankruptcy case, where Kelley objected to Ritchie’s claim as a secured creditor of Polaroid, as opposed to an unsecured creditor — because Ritchie’s liens were perfected less than 90 days before Polaroid declared bankruptcy.  This avoidance action brought in the Polaroid bankruptcy case has nothing to do with Ritchie’s right to restitution under the MVRA.  There is no dispute that Ritchie’s restitution claims are valid. The government recognized Ritchie as a victim of the fraud and correctly stated Ritchie’s losses in its Final Proposed Restitution Order, Exhibit 1. PricewaterhouseCoopers’ report (p. 11) came up with the same figure for Ritchie’s net losses as the government’s figure  (see Doc. 456-1 p. 10) — $165,294,491.

And who is this “local expert”?  The article says Steve Mertz is “a partner in Faegre & Benson’s finance and restructuring practice” … “whose firm represents some creditors and defendants in clawback suits related to the Petters case.” Mertz and his firm, Faegre & Benson, played prominent roles in the Polaroid bankruptcy case, first as counsel to the Committee of Unsecured Creditors, when Polaroid was in chapter 11 bankruptcy.  After it was converted to chapter 7 bankruptcy and John Stoebner was appointed trustee for Polaroid, Stoebner had Faegre & Benson appointed special counsel to the Trustee.  Steve Mertz served in that capacity when the Trustee helped negotiate the coordination agreement, which funnelled the assets held by the Petters receivership to the federal government while carving out the bankruptcy estates of the Petters companies to be separately administered by the bankruptcy courts. Ritchie objected to the coordination agreement.

Steve Mertz ranked near the top of the List of High Billers in the Polaroid Bankruptcy case for 2009, billing the Polaroid bankruptcy estate $605 per hour for his services to the committee for unsecured creditors. His 2010 rates went up to $625 per hour.  Faegre & Benson has been paid a total of $ 288,012.81 so far from the Polaroid bankruptcy estate.  (No creditors have been paid anything yet.)

Faegre & Benson also represents Frank Vennes, who was implicated as a co-conspirator in the Petters fraud scheme (see Rice affidavit p. 10, 14-16), but was never indicted.  His assets and the assets of his companies — including Metro Gem and Metro Gold — were restrained in the same § 1345 civil injunction and receivership action as Petters’ assets (only with a different Receiver, Gary Hansen).  Like Petters (see p. 18), Vennes and Metro Gem were given a litigation stay (see p. 13) preventing victims and creditors from suing them.  Frank Vennes’ investment funds netted profits from the Petters scheme, according to the government’s Final Proposed Restitution Order (see p. 6), and they are now the target of a clawback suit brought by Doug Kelley (in his role as PCI-PGW bankruptcy trustee) seeking $2,348,317,000 ($2.3 billion).  Under a settlement plan proposed by Vennes and his Receiver, Gary Hansen, and supported by the federal government (go figure!), Vennes proposed to distribute ALL of the restrained assets held by the Metro Gem Receiver to Metro Gem’s own investors — some of whom netted profits from Metro Gem — with nary a penny to Petters’ direct victims whose money was funnelled to Metro Gem.  PCI bankruptcy trustee Doug Kelley objected to the Vennes’ plan, saying the Vennes defendants are the second or third largest winner from the Petters scheme, having raked in “$204 million [in] false profits and commissions,” and that some of the Metro Gem assets should be clawed back to the PCI/PGW bankruptcy estates. See objection p. 3. [Update: On January 26, Judge Montgomery approved the proposed settlement, but withheld 20% of the assets pending resolution of the clawback claims.]

The article says Faegre & Benson represents “some creditors and defendants in clawback suits” in the related bankruptcy cases, but doesn’t say who they are.  We found a few.  In addition to Frank Vennes/Metro Gem (both clawback defendants in the PCI/PGW bankruptcy) Steve Mertz/Faegre & Benson also represent General Electric Capital, in a PCI clawback suit seeking $293,464,000.  The complaint in the GE Capital clawback suit alleges on page 14 that “[t]estimony of GE Capital employees, Jack F. Morrone and Paul Feehan, from the criminal trial of Petters shows that GE Capital had actual knowledge regarding the fraudulent scheme and wrongdoing, prior to the transfer of more than $48,000,000 to GE Capital, including knowledge of forged and fraudulent purchase orders and checks by PCI and Petters Capital, Inc.”

Steve Mertz/Faegre & Benson also represent Sun Minnesota Foreign Holdings, LLC, Sun Minnesota Domestic Holdings, LLC, Sun Credit, LLC and Whitebox Advisors LLC in a $ 4,047,000 clawback suit brought by the Committee for Unsecured Creditors in the Sun Country Airlines bankruptcy case.  The clawback complaint alleges “the Defendants were a large investor group who exerted substantial influence over Petters and his companies in order to extract value from the Debtor and MN Holdings in an exit from the Defendants’ investments in the Debtor.”  (See clawback complaint p. 5).

As entities that netted profits from Petters’ fraud scheme, the Vennes defendants, GE Capital and the Sun Minnesota/ Whitebox entities are natural adversaries of Petters’ direct victims who sought MVRA restitution and filed bankruptcy claims to recoup some of their net losses.

So it is easy to see the reason for his bias, but what exactly is Steve Mertz’s expertise that qualifies him as an expert in crime victims rights and restitution?  “He practices in the areas of bankruptcy, business reorganization and commercial finance,” according to the Faegre & Benson’s website. Apparently, he is no more an expert on criminal restitution or crime victims rights than Leibowitz was.

Brenda

_____________________

1/  Mandamus is an ancient but rarely used “writ” to command a public official to do his duties as the law commands.  When Congress enacted the CVRA, it made the new rights enforceable by victims by including a provision allowing crime victims to obtain appellate review of decisions denying victims their rights under the statute by filing petitions for writ of mandamus.  We had to file four separate petitions for mandamus because CVRA requires them to be filed within 14 days after the order is entered denying the right protected by the CVRA (in our case, the right to “full and timely restitution”), and Judge Kyle issued four separate orders.  See Mandamus #1, #2, #3, #4.

2/  There are two exceptions to the MVRA, allowing the judge to decline to award mandatory restitution: (1) when the number of identifiable victims is too numerous and (2) under the “complexity exception” balancing test which Judge Kyle cited.  Courts have imposed MVRA restitution in cases involving 10,000 victims, so the handful of direct victims here would not qualify under the first exception.

3/  The MVRA prohibits a sentencing judge from taking into consideration a victim’s entitlement to compensation from “any other source” in setting the amount of restitution.  But after a restitution judgment is entered, the defendant is entitled to credits against a restitution judgment for any amounts recovered by the victims for the same losses from civil litigation, which would include bankruptcy payments to victims.