Eighth Circuit Rejects Challenges to Convictions for Running a Ponzi Scheme

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Raphael Rosenblatt | Bloomberg Law United States v. Petters, No. 10-CR-01843, 2011 BL 310598 (8th Cir. Dec. 9, 2011) Although a primary witness at defendant's trial was a convicted felon involved in the U.S. Marshals Service's Witness Security Program (WITSEC), the U.S. Court of Appeals for the Eighth Circuit found no error in limiting the evidence from the witness's WITSEC file on cross-examination. The Eighth Circuit rejected defendant's additional challenges to his convictions and sentence.

Ponzi Scheme

Thomas Petters was a Minneapolis, Minnesota businessman who owned various businesses, including Petters Group Worldwide LLC, Sun Country Airlines, Polaroid Corporation, Fingerhut, and Petters Company, Inc. (PCI). Petters solicited investments in PCI by advising investors that their money would be used to purchase electronic goods that were then sold for a profit to large retailers such as Sam's Club and Costco. In fact, there were no such purchases. Instead, "[g]overnment agents located counterfeit purchase orders purporting to show that PCI was owed over $3 billion by Costco, Sam's Club and other retailers." Larry Reynolds, a business associate from California, owned Nationwide International Resources, Inc. (NIR) which would receive money from PCI, generate false purchase orders, arrange for warehouse space under the pretense that it was being used by PCI, provide assurances to customers, extract a "commission," and then return the remaining money to PCI. Reynolds agreed to become a cooperating witness against Petters, and during pretrial discovery, Petters discovered that Reynolds was in WITSEC. At trial, Petters was not permitted to introduce the WITSEC file into evidence.


At trial, Petters argued that although he was aware of the fraud, he was not aware of its extent and was not responsible for committing the fraud. After five days of deliberations, the jury convicted Petters on 10 counts of wire fraud in violation of 18 U.S.C. §§ 1341 and 2, one count of conspiracy to commit mail fraud in violation of 18 U.S.C. § 371, one count of conspiracy to commit money laundering in violation of 18 U.S.C. § 1956(h), and five counts of money laundering in violation of 18 U.S.C. §§ 1957 and 2.


The Eighth Circuit found no error in the district court's order precluding introduction of Reynolds's WITSEC file at trial. Although Petters claimed the file was essential to establish that "Reynolds was the mastermind of the PCI fraud and that Petters himself was fooled and defrauded," the Eighth Circuit noted that during trial, Petters admitted that he was a disbarred attorney that had defrauded insurance companies and fled to Europe to avoid extradition, he participated in a scheme to sell large quantities of marijuana, and he joined a scheme to steal money from a bank account and divert the proceeds to purchase jewelry. Additionally, Reynolds testified that when the scheme was discovered, he cooperated with the government and wore a wire in order to implicate the ringleader. It was then that he entered WITSEC after he learned that a contract had been put out on his life. The Eighth Circuit explained: "[t]he information contained in the file was collateral to the crimes alleged in the indictment, and admitting it would have risked confusing the issues presented to the jury at trial." Additionally, Petters already was able to impeach Reynolds's credibility by "establishing that he had participated in multiple other fraud schemes and cooperated with the government in an effort to receive leniency in punishment." As a result, Petters was not denied his ability to present a complete defense.

Prior Criminal History

There also was no error when the district court precluded evidence of some of Reynolds's past criminal history, including evidence that he had ties to organized crime. Although the Confrontation Clause of the Sixth Amendment to the U.S. Constitution provides that an accused has the right to "be confronted with the witnesses against him," a violation of the Confrontation Clause will occur only if the defendant can establish that "a reasonable jury might have received a significantly different impression of a witness's credibility had counsel been permitted to pursue the proposed line of cross-examination." (emphasis supplied). The Eighth Circuit explained that this did not occur because Petters was able to cross-examine Reynolds about his criminal past and his agreement to cooperate with the government. Thus, Petters was not able to show that cross-examining Reynolds on additional criminal schemes would have given the jury a significantly different view of him or his testimony.

Closed Proceeding

Petters argued that sealing the WITSEC file and limiting reference to Reynolds during a pretrial hearing effectively deprived him of a right to public trial under the Sixth Amendment. The Eighth Circuit explained that prior precedent has held that "where the trial court orders only a partial disclosure, there need only be a showing of 'substantial reason' for the partial closure," rather than an "overriding interest" by the party seeking the partial closure. According to the Eighth Circuit, the government established its substantial reason: maintaining the integrity of the WITSEC program and protecting Reynolds and his family.

No Additional Errors

The Eighth Circuit found no additional errors by the trial court. First, the district court's "bare bones" jury instruction—although limited in scope as compared to the instruction requested by Petters—adequately conveyed Petters's defensive posture that he was an unwitting participant in the Ponzi scheme. Likewise, the district court's refusal to issue an "advice of counsel" jury instruction was not an error. In order to warrant the instruction, Petters would have to have proved that he (1) fully disclosed all material facts to his attorney before seeking advice, and (2) actually relied on the attorney's advice in the good faith belief that his conduct was legal. The Eighth Circuit determined that Petters did not claim "that he fully informed his counsel of his actions and then relied upon counsel's advice that his actions were legal." Venue was proper, notwithstanding extensive media coverage of Petters's arrest and subsequent pretrial matters. Using a two-tiered analysis, the Eighth Circuit first considered whether the pretrial publicity was so extensive that unfairness of a constitutional magnitude must be presumed. If not, the second tier requires a determination whether the voir dire testimony of those who became jurors showed such actual prejudice that it was an abuse of discretion to deny the request to change venue. The Eighth Circuit agreed with the district court that, although there was a fair amount of pretrial coverage, it was not so inflammatory and accusatory that a presumption of prejudice was required. Lastly, the Eighth Circuit affirmed Petters's sentence, finding that the district court properly considered the facts set forth in 18 U.S.C. § 3553(a). DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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