Illinois hedge fund fed $2 billion to Petters’ Ponzi scheme, SEC claims

The U.S. Securities and Exchange Commission sued an Illinois hedge-fund manager over claims he fed more than $2 billion in client assets to an alleged Ponzi scheme run by Minnesota businessman Thomas Petters.

Gregory Bell, of Highland Park, Ill., and Lancelot Investment Management LLC fueled the scam and “received millions of dollars in fraudulent fees at the expense of investors,” the SEC said Friday in a statement announcing its suit at U.S. District Court in Minneapolis. Federal Judge Ann Montgomery froze all assets of Bell and Lancelot, the SEC said.

Petters, 51, ran the Ponzi scheme through the sale of notes related to consumer electronics, the SEC said. As the fraud unraveled in 2008, Bell, 44, helped hide the fact that Petters owed more than $130 million to investors, the regulator said.

“Greg Bell portrayed himself as a helping hand to investors — avidly protecting their funds and verifying the legitimacy of Petters’s business,” SEC Enforcement Director Robert Khuzami said in the agency’s statement. “Behind their backs, he was handing over billions of dollars of his clients’ money to feed a fraud.”

Petters, who was named a defendant in the SEC’s suit, was arrested in October and accused by U.S. prosecutors of running a $2 billion fraud. His Minnetonka, Minnesota-based company sought Chapter 11 protection that month and its assets were frozen, according to court papers. He pleaded not guilty and is awaiting trial. The firm’s units, Sun Country Airlines and Polaroid Corp., blamed their bankruptcies on the fraud.

Trace Schmeltz, a Chicago attorney representing Bell and Lancelot, and Jon Hopeman, a Minneapolis lawyer for Petters, didn’t immediately return phone calls seeking comment.

For more than a decade, Petters claimed that his Petters Co. unit arranged to buy overstock consumer electronics and other merchandise for resale to retailers such as Wal-Mart Stores Inc. and Costco Wholesale Corp., the SEC said in its complaint. The firm sought investor money because it purportedly paid for inventory up front and couldn’t collect until delivery. It said transactions took about 180 days, according to the SEC.

In reality, there were no purchases or sales, and money raised by selling notes to investors was repaid by selling more notes, the SEC said. As of September, Petters Co. and its affiliates owed about $3.5 billion.

Bell formed Lancelot Investment Management in 2001 and had raised $2.62 billion from hundreds of investors, including pension plans and other hedge funds, by the time the Ponzi scheme collapsed, the SEC wrote in its complaint. “Virtually all” of the money had been steered to Petters Co., it said.

Though Bell learned in 2004 that Petters had prior criminal convictions, he made “no meaningful effort” to examine the business and deliberately hid information from investors, the agency wrote. Bell also didn’t take promised steps to track investor money through Petters Co.’s transactions, the SEC said.

As Petters began running short of cash to support the fraud in 2007, Bell engaged in bogus transactions to keep the failures concealed from investors, the SEC said. During the first six months of 2008, Bell and Lancelot also raised an additional $243 million, it said.

The SEC has asked courts to impose dozens of emergency requests to freeze assets involved in alleged investment scams, after Bernard Madoff’s record $65 billion Ponzi scheme increased skepticism about money managers who report consistently strong returns. Targets have included Texas billionaire R. Allen Stanford’s Caribbean bank, as well as fund managers catering to Catholic, Haitian, elderly and deaf investors. Stanford has denied the allegations.