UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA ) UNITED STATES OF AMERICA,

Transcription

1 0 UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA ) UNITED STATES OF AMERICA, Plaintiff, vs. PETTERS COMPANY, INC., () and PETTERS GROUP WORLDWIDE, LLC, (), Defendants. ) ) ) ) ) ) ) ) ) ) ) File No. 0-()&() (RHK/AJB) Saint Paul, Minnesota September, 00 0:00 a.m BEFORE THE HONORABLE RICHARD H. KYLE UNITED STATES DISTRICT COURT JUDGE (CHANGE OF PLEA HEARING AND SENTENCE HEARING) 0 APPEARANCES For the Plaintiff: For the Defendants: For Douglas A. Kelley: For Ritchie Capital: UNITED STATES ATTORNEY JOSEPH T. DIXON, III, AUSA JOHN R. MARTI, AUSA TIMOTHY RANK, AUSA 00 South Fourth Street Suite 00 Minneapolis, Minnesota KELLEY & WOLTER, PA DOUGLAS A. KELLEY, ESQ. S. th Street Suite 0 Minneapolis, Minnesota KEVIN J. SHORT, ESQ. 0 South Fifth Street Suite 0 Minneapolis, Minnesota 0 GARRETT VAIL, ESQ. Wildwood Bay Drive Mahtomedi, MN CARLA R. BEBAULT, CRR, FCRR () -0

2 Court Reporter: CARLA R. BEBAULT, CRR, FCRR Federal Building North Robert Street Saint Paul, Minnesota 0 Proceedings recorded by mechanical stenography; transcript produced by computer. 0 0 () -0

3 0 0 I N D E X DOUGLAS A. KELLEY Direct Examination by Mr. Dixon EXHIBITS Exhibits - PAGE 0 REC'D CARLA R. BEBAULT, CRR, FCRR () -0

4 P R O C E E D I N G S IN OPEN COURT 0 0 THE COURT: We're here on two matters this morning, United States of America versus Petters Group Worldwide, LLC, which is criminal file number 0-. And United States of America versus Petters Company, Inc., criminal file number 0--. I think my understanding is the appearances will be the same in both cases, but let's get them noted for the record. Mr. Dixon. MR. DIXON: Your Honor, for the United States, Joe Dixon, Tim Rank and John Marti. Thank you. THE COURT: You're representing the United States in both cases? MR. DIXON: That's correct. THE COURT: And for Petters Group Worldwide, Inc. and Petters Company, Inc.? MR. SHORT: Kevin Short as counsel for both corporations, your Honor. And Douglas Kelley is here as well. THE COURT: Mr. Kelley. Good morning to both of you. And who else is at counsel table? MR. VAIL: Garrett Vail on behalf of Ritchie Capital Management and its affiliates. THE COURT: Good morning to you, sir. () -0

5 0 0 MR. VAIL: Good morning. THE COURT: We are here for a proposed change of plea. We're here to hear those two matters. The Court -- before we get to those, the Court received I think earlier this morning, it may have been filed yesterday, a document entitled Ritchie's Written Objection to the Guilty Plea of Petters Group Worldwide, LLC, pursuant to the Crime Victims' Rights Act. I gather that's the case in which you are appearing on? MR. VAIL: That's correct, your Honor. THE COURT: I just have the one document. Is this an objection to the guilty plea of only Petters Group Worldwide or both guilty pleas? MR. VAIL: Yes, your Honor, and also to the procedure. THE COURT: But I mean -- MR. VAIL: Yes, it's an objection in both cases. THE COURT: In both cases, okay. Now, do you want to be heard on that now? MR. VAIL: Yes, I would, your Honor. THE COURT: Okay. Let's hear you. MR. VAIL: Good morning, your Honor. May it please the Court, my name is Garrett Vail. I'm appearing on behalf of Ritchie Capital Management, LLC. It's undisputed that Ritchie Capital Management, () -0

6 0 0 LLC is a victim of the crimes of Thomas Petters and PCI and PGW, if any. The Government's final proposed restitution order filed on May th at Exhibit A, number, lists Ritchie Capital Management as a victim with a claim in the amount of $,,. Ritchie Capital Management struggles to be heard in this case and it -- for some reason the clerk is not accepting motions and pleadings filed with the court. I delivered a pleading this morning and was not informed -- I was told that they wouldn't accept it for filing without instructions from the Court. THE COURT: Which document? Is that the objections? MR. VAIL: The objections that you just referred to on the record. I couldn't confirm that it had been filed. THE COURT: Well, I can't confirm it either. It says that it has been received but it will be filed. MR. VAIL: There are a number of other pleadings that we delivered to court that weren't filed. I just wanted to make sure that that item does get filed with the court. I'd also like the record to reflect that I hand delivered a copy to counsel for the Government and counsel for PGW and PCI, Mr. Short. () -0

7 0 0 The matter before the Court here is the Plea Agreement and it's Ritchie's position that the notice of this proceeding was unreasonable and untimely within the meaning of the Crime Victims' Rights Act. We received approximately two days notice of this matter, and this case has been lingering for almost two years. We've met a couple of times with the Government to talk about restitution but we have been excluded from this process of the Plea Agreement and we feel that that's improper. It also feels a violation of the Crime Victims' Rights Act. THE COURT: Well, you don't have a right to be in on the Plea Agreement itself. You have a right to appear at the hearing when the Plea Agreement is being accepted. But you don't get to participate with the Defendant and the Government in reaching the Plea Agreement, as I understand it. Is that your position that you do have that right? MR. VAIL: Well, your Honor, the Crime Victims' Rights Act enumerates at least eight different rights of crime victims and among them it says the right not to be excluded from any public proceedings, the right to timely and accurate notice. There's a number of reported cases, your Honor, and one of them is the case of In re: Dean, F.d. It talks about -- it says the victims have the right to be informed of the plea negotiating process by conferring with prosecutors before the Plea Agreement is () -0

8 0 0 reached. And we weren't able to do that, your Honor. And we tried to take Mr. Kelley's deposition on that and he refused to testify about his pre-receivership agreement with the Government. He stated that he was an informal receiver before he was an actual court-appointed receiver and that he exercised some privilege not to discuss that. So I would just like the record to reflect that we feel that we have been excluded unfairly by that and that leads to my second point, your Honor, is that obviously this Plea Agreement is brought before the Court to exercise its discretion to accept or reject the plea. I'd like the Court to note that in a recent case in this court, Judge Frank in the case of United States versus Guidant, it was an April th, 00 decision. THE COURT: Is that Guidant? MR. VAIL: Guidant, I'm sorry. 0 US District Lexis 0. The Court denied or refused to accept the Plea Agreement between the Government and Guidant, and Mr. Kelley was the attorney there. And the Court concluded in that case that the Plea Agreement was -- did not serve the best interests of justice. It simply didn't comply with justice, your Honor. And one of the things that the Court mentioned in that case was that the decision of the Justice Department to charge somebody, and the decision of the Justice Department to enter into a plea and under what terms, () -0

9 0 0 obviously an executive decision, but the Court's exercise of its discretion in accepting that plea is a judicial decision. And obviously this Court is the arbiter, at least at the outset, of how much process is due. How much due process the parties are entitled to. Also whether the process is fundamentally fair because the Victims' Rights Act says that victims have the right to be treated with fairness. They have a right to full and fair restitution and a right to be heard. Finally, your Honor, I believe that it's implicit in any exercise of the Court's discretion to always keep an eye on the extent to which the agreement promotes the integrity of the judicial system. I believe that's a real issue in this case, your Honor, because the Plea Agreement purports to have what's called a factual basis, but it's undisputed that Mr. Kelley has no personal knowledge of these facts. He's not competent to testify to any of these facts. Most of these facts were not the subject of any testimony in the criminal case in this court. And also many of the facts are just plain wrong and they have no evidentiary support. Again, Ritchie Capital tried to depose Mr. Kelley and he was instructed not to answer about that. So we believe that these statements are unreliable hearsay. They () -0

10 0 0 0 are offered apparently for the truth of the matter asserted there, and we believe improperly. But the clearest example of a problem with the facts, your Honor, is that in the section regarding the parties' agreement on the number of victims, it states that the victims are more than 0. The only evidence of the number of victims in the criminal case was Exhibit that the Government offered in Mr. Petters' trial, and that has people listed on it and that's the document that was the basis for this $. billion number that's been tossed around as the purported loss. There really was no reliable evidence of that $. billion number, and that's the same number that was the subject of the restitution controversy in this Court that the Court refused to consider the amount of losses of victims or the number of victims because the Court concluded that the Government failed to produce any reliable evidence about who was the victim, how many victims there were, and what the loss was. This $. billion number that's talked about on page 0 of the agreement under item C, the Government contends that the base of the fine is at least $. million because of a loss of $ billion. There's no evidence in any of these cases that there really was a loss of $ billion. And if there had been such a loss, it would have been the () -0

11 0 0 sum total of the losses of each of the victims. And this Court refused to consider if there was any victims, what the definition of a victim was, how many victims there were, or what the total loss was. So the agreement that the parties have reached here that there's 0 victims and there's $. billion loss, that has no basis in the record of any kind. I also would like to call your attention to a number of other things, your Honor. There's a statement of purported fact that's offered, I believe, for the truth of the matter asserted. It says on page that, and I'm quoting here, "On April th, Petters completed the purchase of Polaroid." The term "Petters" as defined in there, there's no definition of "Petters". It's just simply not defined. The truth of the matter, your Honor, is that no one purchased Polaroid. Petters Consumer Brands, LLC, purchased the stock of a publicly-traded company called Polaroid Holding Company. But Petters Consumer Brands, LLC, was never charged, was never indicted, is not in bankruptcy. And so these facts here have no basis in the record or anywhere else. There's also a number of statements in here on paragraph or page. It talks about someone identified as T.R. wiring money and what the money was used for. There was no testimony in the criminal trial or in the bankruptcy trial or anywhere else that will support a finding of what () -0

12 0 0 money was wired, where it was wired, and what it was used for. Particularly what it was used for. And the other thing is on this also on paragraph or page -- I'm sorry, page, there's a reference to something called Petters Capital and it says, and I'll quote, "From December 00 through April 00, PCI and PCI investors transferred at least $0 million to Petters Capital." There is no indication in this agreement what they mean by "Petters Capital". There's no evidence that there is such an entity or if that's an entity or some kind of a fictitious assumed name for Mr. Petters or someone else. And there's no evidence at trial or anywhere else regarding Petters Capital, Inc. or what they transferred or where they got the money. And what's happened in this case, your Honor, is that the record has been manufactured by uncontested statements; and then in the other proceedings, the receivership and the bankruptcy, these same people make the argument that, oh, this was decided in the criminal case or that was decided in the bankruptcy case. I would like the Court to take judicial notice of the evidence that was submitted in connection with the Coordination Agreement approved by the joint hearing of Judge Montgomery and Judge Kishel last week. And in that () -0

13 0 0 record there was -- obviously there was the entire deposition of Mr. Kelley where he was instructed not to answer questions about his agreements with Mr. Dixon as informal receiver. And we weren't able to get a definition of what an "informal receiver" is. A receiver, of course, is an Officer of the Court. And I don't know how you can be an informal Officer of the Court. In the Bankruptcy Court there was -- I would also like to ask the Court to take judicial notice of a verified statement of Mr. Kelley filed on December, 00 in the bankruptcy cases of PCI and PGW as Document Number. And he says in that affidavit, paragraph B: "On Saturday morning, September th, I received a telephone call from Assistant United States Attorney Joe Dixon. AUSA Dixon said he had heard I was going to represent the Petters entities. He asked whether the Petters entities were merely an alterego of Mr. Petters. He said that the Federal Government was prepared to exercise all its powers, but would consider holding off if I could assure them that I would have substantial control over the companies' assets." This is September th, at least a week before the Court appointed Mr. Kelley as receiver. Later Mr. Kelley says: "That same day I informed Mr. Petters that the only way he could avoid forfeiture was to relinquish control of the Petters entities and do so very quickly." () -0

14 0 0 Well, he subsequently -- he did not avoid forfeiture. Everything he had was forfeited. The Government got a $. billion forfeiture judgment with really no evidence of the number, where it came from. It was completely uncontested. THE COURT: What do you want me to do about that? MR. VAIL: I want you to deny this motion and send it back and have it done right and have them take out the false statements of fact in here and require them to come forward with somebody with personal knowledge. Mary Jeffries was the president of PGW. Mark Laumann was the comptroller of PGW. He controlled where the money was wired. Those two people were not indicted. They were not charged. They were the officers of PGW. If anybody could testify to these facts or come forward with these facts, it would be them. When we examined Mary Jeffries and tried to take her deposition, she refused to answer whether she had made agreements with Mr. Kelley or Mr. Dixon for some kind of benefit in exchange for cooperating. And so we have a bunch of facts that we have been refused cross-examination on, and instead of having Mary Jeffries plead guilty as the president of PGW, we have a bunch of these stray facts. And, your Honor, that gets me back to the executive decision thing here. We have an individual, () -0

15 0 0 Mr. Kelley, who is a former United States Attorney installed by Mr. Dixon as an informal receiver for a week, and he's working with Mary Jeffries and Mark Laumann who were subpoenaed to testify at the Grand Jury on October th. And somehow they don't get indicted. They don't have to give their bonuses back. And Mr. Kelley gets installed as -- first as an attorney for PGW -- THE COURT: Where are you going with this? MR. VAIL: I'm talking about the integrity of the judicial system, your Honor. THE COURT: Let me worry about the integrity of the judicial system. MR. VAIL: I want to make sure -- THE COURT: Wait a minute. Haven't you made the exact same arguments in front of Judge Kishel and Judge Montgomery and they have been basically rejected? MR. VAIL: No, absolutely not, your Honor. THE COURT: Weren't they made when she accepted the Plea Agreements and said they were okay? What is she doing? Is she buying into what you're saying right now? MR. VAIL: She was not -- we were not allowed to go into the Plea Agreement. It wasn't before her. Okay. THE COURT: Well, she approved it, didn't she? MR. VAIL: No, they approved the trustee. They authorized him to enter into discussions for the Plea () -0

16 Agreement. 0 0 But what we're talking about here is in the context of the criminal case and whether, like Judge Frank said in the Guidant case, was does this agreement serve the best interests of justice. THE COURT: That's my decision just like it was Judge Frank's. MR. VAIL: Right. And you should do it based on the record; not made-up facts with no basis in the record. If you make a decision on a completely incorrect, erroneous assessment of evidence and erroneous view of the law, that's an abuse of discretion. And I'm just trying to -- THE COURT: I suppose it is. But I'm not taking your word that that's what happened here. MR. VAIL: I'm not expecting you to take my word, your Honor. I just want to make sure -- THE COURT: Calm down. You don't start yelling here in the courtroom. MR. VAIL: I'm not yelling. THE COURT: You're getting close to it. What else do you have to say? MR. VAIL: I would just like to say, your Honor, that in connection with your evaluation of whether this agreement serves the best interests of justice, I think that you should consider the entire record and ask yourself if () -0

17 0 0 these statements that are included in the factual basis of the Plea Agreement actually have any basis in the record anywhere. If these two parties, who have been working together since before the receivership, agree on a set of facts that have no basis in evidence, that there's no witness to say that there's evidence, there's no document, especially 0 victims when the only evidence you've seen is victims in Exhibit, so where does the 0 come from? THE COURT: What's your view? There's only one victim and that's your client? MR. VAIL: No. Your Honor, I would go with the evidence that you accepted at court that there's up to victims on Exhibit. But a victim is defined in the In Re Chalupnik case as somebody who suffered a loss. Many of those victims -- THE COURT: Well, the problem is your company suffered a big loss and you're somehow trying to get it back any way you can. You have been involved in these proceedings, you have been showing up, you have been arguing, you have been objecting all the way along the line. And I think the time has come to stop it. MR. VAIL: Well, your Honor, I appreciate that. If I could make one more comment? I would like to refer your Honor to the case of United States versus Bigeleisen. It's F.d 0. It's an Eighth Circuit decision from () -0

18 In that case the Eighth Circuit reversed a conviction because of prosecutorial misconduct, including the failure to correct false testimony about agreements that were made with cooperating witnesses. And we believe that there were agreements with cooperating witnesses that weren't disclosed. We've asked about them. They were instructed not to answer, and there can only be -- that's the only basis for the -- if there's a factual basis for the allegations in this Plea Agreement, which I contend there isn't, it would have to come from these individuals who have received agreements and were promised something in exchange for cooperating. And we weren't allowed to inquire of that, we weren't allowed to inquire of Mr. Kelley's communications with the Government before, during, and after he became receiver. For those reasons, your Honor, we believe that this agreement, in addition to violating procedural due process -- THE COURT: What's the procedural due process that's violated? MR. VAIL: First of all, we were not given reasonable or timely notice. THE COURT: What would you have done if you had been noticed a week ago or two weeks ago that you haven't just done in the last minutes? MR. VAIL: I would have put documentary evidence () -0

19 0 0 to prove beyond question that what I'm telling you is true. The offer of proof that I've made to you, I would have deposition transcripts. You wouldn't have to take my word for it. It would be in the record. But that's what's happening is that these things go on an expedited basis to exclude us and keep us out. And then we're told, "Haven't you argued this before?" The truth is, your Honor, we've never had anybody get on the witness stand and be cross-examined. All these things have come on -- THE COURT: And everything you wanted has been rejected, and in most instances it's been basically approved by the Eighth Circuit Court of Appeals; and you seem to be knocking on the door again and again and again. I don't think you're going to give up. I'm not suggesting you are. But I think maybe you ought to give some thought to that. MR. VAIL: Well, I'd like you to give some thought to something, your Honor. If you were a citizen of the State of Minnesota -- THE COURT: I am. MR. VAIL: -- and the United States of America, and the Government came in and swept away $ million of your money and made secret deals with a bunch of people and shipped it off to Washington, would you give up or would you want to make a record? That's all we're trying to do is () -0

20 0 0 0 make a record. THE COURT: I think that's beyond that. The Government didn't sweep away $ million. Someone in your organization made some very bad decisions, some very bad investments without due diligence. MR. VAIL: Well, you don't know that, your Honor, because there's no evidence. THE COURT: Hold on, hold on. MR. VAIL: You're making that stuff up. There is no evidence of that. That's just -- that's things have been tossed around here in court. It's not true. It's false. It's never been determined by any of these courts. We haven't had a day in court. No evidentiary hearing, no testimony, no cross-examination, no due process. And the receiver spent $0 million -- THE COURT: I would say no more due diligence on the part of your client. MR. VAIL: If you want to consider the evidence I'll tell you what the due diligence is. THE COURT: That's it. MR. VAIL: There's mountains of due diligence. THE COURT: Sit down. I've heard you out. MR. VAIL: Thank you, your Honor. I appreciate it. THE COURT: Thank you. () -0

21 0 0 Mr. Dixon. MR. DIXON: Thank you, your Honor. I think it important that I clarify a few things for the Court here because there have been a number of misrepresentations made to the Court about what's occurred here. First, with regard to Ritchie, they point to the Government's proposed restitution order as a basis for claiming their status as a victim, and I would agree that Ritchie is a victim in this case along with the hundreds of other individuals identified by the Government on the proposed restitution order. THE COURT: Including those who made investments with Ritchie. MR. DIXON: That's correct. Well, it's not with Ritchie but that's -- THE COURT: Through Ritchie. MR. DIXON: -- hundreds of victims. And the Government, unlike Ritchie, is interested in protecting the rights of all victims, not simply Ritchie. With respect to the testimony at trial that you heard, you heard evidence and saw s showing that Ritchie invested personally. Thane Ritchie personally invested with Tom Petters hundreds of millions of dollars of his investors' money; and unfortunately that was an imprudent investment, and I understand why he's upset with () -0

22 0 0 that and why his lawyers are doing everything they can to protect the collateral that they seek for themselves as opposed to every other victim. And I don't begrudge them their efforts to protect themselves, but the Government has an obligation to protect all victims. With regard to the procedure, and guilty plea by corporation, what's happening here today is exactly what's supposed to happen which is the representative of the company is supposed to plead guilty. Not an individual with personal knowledge, but the representative of the company. There's a claim here that there's insufficient notice about what is going on today. That is preposterous. The Guilty Plea Agreements were filed in the District Court in mid-august by Mr. Kelley once they were entered into or once there was an agreement. Those Plea Agreements were the subject of two separate hearings. One on September th before Judge Montgomery and Judge Kishel, at which time they authorized the companies to plead guilty. There was a second hearing on September in Bankruptcy Court before Judge Kishel where again the very issue was the companies entering a guilty plea, and the Bankruptcy Court gave authority to the bankruptcy trustee, that is Mr. Kelley, for both companies to enter guilty pleas. Mr. Vail suggested that his objection here today is with respect to both companies pleading guilty. That's () -0

23 0 0 inconsistent with the position that Ritchie has been taking. Throughout this proceeding for the last two years they have complained about PGW pleading guilty, not both companies. They have taken the view that only PCI is the guilty company and PGW is not somehow a guilty company. That was the objection that they specifically raised in both hearings. So they've had ample time to address the Plea Agreements which were posted on the Internet and filed in court. I acknowledge my responsibility as an Assistant United States Attorney to confer with victims regarding Plea Agreements. I have personally met with Ritchie representatives on a number of occasions, including Mr. Vail, in my office. When they have called and asked for a meeting, I've met with them. I've talked to them on the telephone. I never received a phone call regarding this Plea Agreement that is -- they've had for over a month. So I want to acknowledge my responsibility and that I have fulfilled that responsibility to these victims. I will also note that this Court has entered an order that notifications to victims, given the number of victims in this case, is through the Internet. Their claim that they received notice of this hearing on the th, that that may be. I don't know when they started looking at it. But we posted this hearing last Friday, September th, as soon as we received word as to the time. And so that's been () -0

24 0 0 on the docket. But frankly, this hearing today is the culmination of something that began in mid-august and that has been the subject of two separate hearings already where Ritchie has made the same arguments that they have made here today. So I would ask the Court to move forward with this guilty plea. The Government has the right to indict these companies. We've done that, and now it's time for these criminal enterprises to plead guilty. THE COURT: Anything further from Ritchie? MR. VAIL: Yes, your Honor. THE COURT: Briefly. MR. VAIL: Your Honor, it is true that I met with Mr. Dixon in May but that was on restitution. We never talked about a Plea Agreement. My understanding is that, first of all, Mr. Dixon wasn't at the bankruptcy hearings and I don't believe that the substance -- and I was. The substance of the Plea Agreement, the terms and conditions and the alleged factual basis was not the subject of their review. It was merely whether a trustee could be authorized. And then they would defer to your court, this Court, to decide what we're talking about today. Finally, your Honor, I want to make one other point. Is that in the Plea Agreement there's a discussion about a fine and also about costs. The Government has filed () -0

25 0 0 a proof of claim for $. billion in the PGW bankruptcy case and the PCI case claiming the right to payment of $. billion which, if not withdrawn, is an allowed claim. And I would ask the Court that before the Court approves any fine or any costs, the Government has maintained that it's not seeking forfeiture from the bankruptcy assets, but they have not withdrawn their $. billion claim. This Plea Agreement says it's the entire agreement of the parties. I think that was a stray issue that somehow fell by the wayside. But if the Government is asking for a fine and for costs here, it should withdraw its $. billion unsecured claim in PCI and PGW bankruptcy cases so that it won't need to have other proceedings there. I believe it was implicit in the Coordination Agreement. It may be implicit in this agreement. It's just not stated there. So I would ask the Court to refuse to give fine or costs unless or until the Government withdraws that $. billion claim. Thank you, your Honor. THE COURT: I think there's a provision in the Plea Agreement which says the Government will recommend no fine. MR. DIXON: There's a couple of things that I want to point out on the Plea Agreement that's before you, your Honor. And this just reflects that we're taking the () -0

26 0 0 victims' interests into account here. For two years I've heard from Ritchie how they are fearful of somehow Government forfeiture of assets that should go to victims. In fact, we heard it today that somehow the Government has sweeped away $ [sic] million without any due process. That's false. That's totally false. In fact, under this agreement and the Coordination Agreement which the Court will have before it, we're agreeing not to forfeit any corporate assets. Even though we have the absolute right to do so, we're agreeing not to forfeit any corporate assets precisely so they can go to victims in bankruptcy. With regard to criminal fine, as part of the Plea Agreement we're agreeing not to seek any criminal fine so that corporate assets can go to victims. And with regard to the proof of claim, again, because we were reading Ritchie's pleadings in the bankruptcy proceedings where they were worried about this proof of claim, we indicated in the Plea Agreement that if this Court decides not to issue restitution, as you have in the other cases, the parallel cases, that we will withdraw our proof of claim. That is part of the Plea Agreement. So in all cases I got to say that the Government has been fully responsive to the concerns raised by Ritchie. And so I really am perplexed by their continued persistence () -0

27 0 0 in this, even though the agreement in all respects is what they want. I understand that things aren't going well for them in the bankruptcy proceeding, but that really is between all of the victims and not for the Government to mess with. Thank you. THE COURT: Mr. Kelley. MR. KELLEY: Your Honor, I wonder if I could just be heard on this piece on the motion of Ritchie? THE COURT: You may. MR. KELLEY: Very briefly, and I won't repeat the arguments Mr. Dixon has made. It is true Mr. Ritchie is a victim and we have -- MR. VAIL: Your Honor, I want to -- Mr. Kelley is not a party here. THE COURT: I said he could talk. Now you sit down, please. MR. VAIL: I would just like to, your Honor, object. He's not a party. He is not a witness. THE COURT: Your objection is noted. MR. VAIL: He shouldn't testify. THE COURT: Your objection is noted. MR. KELLEY: Your Honor, with regards to the -- to just give a little context to this, much of Ritchie's claim comes from its interest rates and its notes,. percent. () -0

28 0 0 MR. VAIL: Objection. THE COURT: Sit down, Counsel. MR. VAIL: He is testifying, your Honor. THE COURT: Sit down. MR. KELLEY -- and 0 percent interest many of those notes were, your Honor. And there is an adversary proceeding in Bankruptcy where we are contesting Mr. Ritchie's right to the claims. With regard to whether or not they had notice and whether or not anybody talked to them, I submitted to a deposition and that was with regard to whether or not the Coordination Agreement would be approved. I sat and answered questions from their lawyer all day long and they asked many, many questions about this guilty plea. And I answered all of my reasoning and told them what my basis was. MR. VAIL: Your Honor, he's -- THE COURT: Counsel. MR. VAIL: At the deposition he refused to answer. THE COURT: Counsel, do you want to be escorted out of here? Sit down. Next time you're up without asking permission you're going to be ejected from here. Maybe that's what you want. Mr. Kelley. MR. KELLEY: With regard to the deposition, I () -0

29 0 0 answered their questions about the evidence that I have taken into consideration and also the analysis that I made with regard to the guilty plea. And for the bankruptcy, it is what were our chances of success on the merits if we went to trial. What would it cost the estate if we went and sat through a long trial and did all of that kind of stuff. Again, I answered every question they had. What we did not answer, the only thing, is answer the negotiations between Mr. Dixon and the Government and I. That was one part, and my lawyer has instructed me not to answer and we didn't. But they have had adequate opportunity to test the basis for that before they came here and I just thought the Court ought to know that. Thank you. THE COURT: Okay. Well, based upon my review of Ritchie's motion, Written Objection to the Guilty Plea, and hearing from counsel, I'm satisfied that the motion is without merit and the motion will be denied. We will proceed with the Change of Plea Hearing at this time. Mr. Dixon. MR. DIXON: Thank you, your Honor. Maybe it's appropriate for me to call up the corporate representative for these matters, Doug Kelley, on behalf of Petters Group Worldwide, LLC, as the bankruptcy trustee, Chapter trustee; as well as the Chapter trustee for Petters () -0

30 0 0 0 Company, Inc. THE COURT: Is he going to testify? MR. DIXON: Yes, he is. THE COURT: Madam clerk, would you swear in Mr. Kelley. (Witness Kelley sworn by the clerk.) MR. KELLEY: I do. THE COURT: Just for the record, although I think probably the court reporter knows it, would you give us your full name and spell your last name, please. THE WITNESS: Douglas, middle initial A as in alpha, Kelley, K-E-L-L-E-Y. THE COURT: Mr. Dixon. MR. DIXON: Thank you, your Honor. First, Mr. Kelley, let's establish that your appointment as trustee for Petters Company, Inc., and Petters Group Worldwide, you were appointed as the trustee. Is that right? MR. KELLEY: That's correct. MR. DIXON: And do you have a document that shows that? MR. KELLEY: Yes, I have given it to the Court. There's one that's marked Exhibit, your Honor. And that is Judge Kishel's order appointing me as trustee on February of 00. And that's Exhibit which was provided () -0

31 to you. 0 0 THE COURT: I'm not sure that I -- I've got Exhibit, but that's entitled Order Overruling the Objections of Ritchie. Is that the right one? MR. KELLEY: Yes, that's the one, your Honor. The actual title is Order Overruling Objection of Ritchie Special Credit Investments, Ltd., et al, to the Appointment of the Trustee in Chapter cases and Approving Appointment. THE COURT: Okay. MR. KELLEY: So that's the order that approved that. And then -- MR. DIXON: And so you were appointed on February th, 00, by Judge Kishel, is that right, as trustee? MR. KELLEY: That's correct. MR. DIXON: Over both Petters Company, Inc., or PCI, and Petters Group Worldwide, LLC, or PGW? MR. KELLEY: Correct. MR. DIXON: And both of those were in Chapter bankruptcy? MR. KELLEY: Correct. MR. DIXON: And you have been under the authority and supervision of Bankruptcy Court every step of the way since then; is that true? MR. KELLEY: That's correct. () -0

32 0 0 MR. DIXON: Exhibit, do you want to explain what Exhibit is? MR. KELLEY: Yes. Your Honor, Exhibit is the order that Judge Kishel issued last Friday, September th. It's entitled Order Granting Expedited Hearing and Authorizing the Trustee to Enter Plea Agreements and Conduct Transactions Outside the Ordinary Course of Business. And this is the order that was done after the hearing that was held last week on February -- or I mean on Friday, excuse me. THE COURT: And that order authorizes you to enter pleas to Counts and of --, and of the superseding indictments in each of the two cases? MR. KELLEY: That's correct, your Honor. MR. DIXON: And the Court had before it the Plea Agreements in question? MR. KELLEY: Yes. MR. DIXON: That was the -- MR. KELLEY: The Plea Agreements essentially were attached and the Plea Agreements were given to the Ritchie Group the day that they took my deposition. So they have had them since then. MR. DIXON: Although they have been altered in the sense that there's now a provision discussing the proof of claim, the Government's agreement to withdraw the proof of () -0

33 0 0 claim should this Court decide not to issue a restitution order? MR. KELLEY: That's correct. MR. DIXON: And that was in response to Ritchie's request? MR. KELLEY: Right. MR. DIXON: So you were given specific authority to enter guilty pleas on behalf of PCI, PGW on September th by the Bankruptcy Court Judge? MR. KELLEY: That's correct. MR. DIXON: And the creditors, including Ritchie, had an opportunity to be heard at that hearing? MR. KELLEY: They did. In fact, Ritchie had a lawyer there and participated in that hearing. MR. DIXON: And they objected to that? MR. KELLEY: They did. MR. DIXON: Did any other creditors object? MR. KELLEY: No. MR. DIXON: Just Ritchie? MR. KELLEY: Yes. MR. DIXON: Exhibit? MR. KELLEY: Exhibit, your Honor, is the Coordination Agreement which was the subject of the joint hearing before Judge Kishel and Judge Montgomery. And that was approved earlier. And the reason I put that in here is () -0

34 0 0 because there are alternative mechanisms for claimants and creditors to get distributions, and that's what this Coordination Agreement provides. And the Exhibit is the joint order approving the Coordination Agreement that's signed by Judge Montgomery and Judge Kishel after that hearing. THE COURT: I'm not sure I've got Exhibit. MR. KELLEY: It was on the back of, your Honor. They might have been attached together. If not, I have an extra copy I would be happy to provide for the record. THE COURT: I think the Exhibit that I have has pages and page is just the signature page. So I don't think I've got -- MR. KELLEY: Exhibit. May I approach the bench, your Honor? THE COURT: You may. I now have Exhibit. MR. DIXON: May I proceed, your Honor? THE COURT: You may. MR. DIXON: So, Mr. Kelley, Exhibit is an order signed by both Judge Kishel and Judge Montgomery authorizing you to enter into the coordination; which in turn contemplates you entering guilty pleas on behalf of the companies, does it not? MR. KELLEY: That's correct. MR. DIXON: Was there an opportunity to be heard () -0

35 0 0 by both victims and creditors at that hearing? MR. KELLEY: There was. MR. DIXON: Was Ritchie able to object to what you were doing? MR. KELLEY: Certainly was. It appeared by Tim Kelly of Kelly Berens in Minneapolis and they made a vigorous argument and they were overruled. MR. DIXON: And did the Court, both Judge Montgomery and Kishel, find that the Coordination Agreement and the guilty pleas and the way the Government was handling this case was to be commended because it maximized returns for victims? MR. KELLEY: It did. MR. DIXON: Your Honor, I would offer the Exhibits through. THE COURT: through will be received. MR. DIXON: Mr. Kelley, why don't you tell us about Petters Company, Inc. and what Petters Company, Inc. is. MR. KELLEY: I just wanted you to know, your Honor, Petters Company, Inc., or PCI is a Minnesota corporation which was formed in. Tom Petters was PCI's sole owner and shareholder. He was the sole director. He was chairman, he was CEO, and president. PGW is a Delaware Limited Liability Company which () -0

36 0 0 was formed in 00. Petters was the sole owner and shareholder, sole director. Excuse me. He was the sole owner and member, the sole governor, chairman and CEO. And I would stand in his shoes with regard to those corporations, your Honor. MR. DIXON: Thank you. Mr. Kelley, I have before you two Plea Agreements, one captioned United States of America versus Petters Company, Inc., and one captioned United States of America versus Petters Group Worldwide, LLC. Do you recognize these two documents? MR. KELLEY: I do, and I executed them this morning, your Honor, here in Court. MR. DIXON: And you see my signature and Mr. Short's signature on both of them; is that right? MR. KELLEY: I do. MR. DIXON: Your Honor, these agreements are identical and I would propose proceeding with both of them at the same time if that's all right with you. THE COURT: That's fine. MR. DIXON: Mr. Kelley, under these Plea Agreements you have obviously had an opportunity to go through them and go through them with your bankruptcy attorney, as well as your criminal attorney; is that right? MR. KELLEY: That's correct. () -0

37 0 0 MR. DIXON: And you fully understand the terms of these Plea Agreements? MR. KELLEY: I do. MR. DIXON: And we've already discussed how you received authority from the Bankruptcy Court and Judge Montgomery to enter into these agreements; is that correct? MR. KELLEY: That's correct. MR. DIXON: Under these agreements you're going to plead guilty on behalf of each of the two companies to Counts, and of the superseding indictment charging the companies with wire fraud, conspiracy to commit mail fraud and wire fraud, and conspiracy to commit money laundering; is that right? MR. KELLEY: That's correct. MR. DIXON: I'm going to skip over the factual basis for the moment. But under these Plea Agreements you are going to, on behalf of the companies, waive the right to challenge the Government's evidence through pretrial motion; is that right? MR. KELLEY: That's correct. MR. DIXON: And you understand that there are maximum penalties that can be imposed under each of the counts; a term of probation up to five years, a criminal fine of $0,000 or twice the gross gain or loss, a special assessment of $00 per count, and the potential costs of () -0

38 0 0 prosecution as defined in the United States Code. Do you understand that those are the maximum penalties? MR. KELLEY: I do. MR. DIXON: There's also sentencing guidelines that the Court will consider in imposing sentence and we can run through those briefly, but essentially there's a base offense level of. The loss well exceeds $00 million. It is close to $. billion. There are more than 0 victims involved, and there are a number of other enhancements including a level enhancement for affecting the soundness of a financial institution. And because there was a money laundering conviction it's enhanced by, totalling -- a total offense level calculation of. Do you see that? MR. KELLEY: I do. MR. DIXON: There's a culpability score, again based on the guidelines, that results in a culpability score of, which would result in a potential fine range of $. million and $ billion based on the loss. Which in turn would result in a fine range of at least $. million to $ million, potentially $. billion. But you understand that as part of this Plea Agreement the Government is recommending no criminal fine. In fact, if the Court were to disagree with the Court's recommendation, you would have a right to withdraw from this plea to protect the victim creditors; is that right? () -0

39 0 0 MR. KELLEY: That's correct. MR. DIXON: And you negotiated to have that right to withdraw from the guilty plea if the Court were to disagree with our recommendation of no criminal fine in this case? MR. KELLEY: That's correct. MR. DIXON: Again, to protect the creditor victims? MR. KELLEY: Yes. MR. DIXON: You understand that the Government takes the view that the Mandatory Victim Restitution Act applies here. This Court has previously ruled that restitution is -- can't be ordered because it's impracticable. And if it does so in this case based on the information that it has, like it has in the other parallel cases, the Government has agreed to withdraw its proof of claim in the Defendant's bankruptcy proceeding. Is that right? MR. KELLEY: That's correct. MR. DIXON: And you, again, negotiated for that provision because Ritchie was asking for that; is that right? MR. KELLEY: That's correct. MR. DIXON: And we've agreed to limit our forfeiture rights in a manner that's consistent with the () -0

40 0 0 0 Coordination Agreement that you have entered into and that has been approved by the Court. Is that right? MR. KELLEY: That's correct as well. MR. DIXON: That's the complete agreement between you and the Government to resolve the case against the -- each PCI and PGW; is that right? MR. KELLEY: That's correct, too. MR. DIXON: Your Honor, may I file these? THE COURT: Are you going to go through some factual basis? MR. DIXON: I sure will. THE COURT: I understand what the factual basis is in here, but I think Mr. Kelley, based upon his familiarity with the background and the facts of this case, should at least approve or agree that that is an accurate representation of the facts. MR. DIXON: Very good. Mr. Kelley, you had an opportunity to observe much of the trial that actually occurred in this very courtroom last year; is that right? MR. KELLEY: That's true. MR. DIXON: And you have, in addition, been provided with discovery by the Government of numerous documents, and you had an opportunity to review other documents that you obtained through your role as trustee and () -0

41 0 0 receiver; is that right? MR. KELLEY: That's correct. MR. DIXON: Based on what you've learned during your term as trustee and receiver, you've reviewed the factual basis that's in this Plea Agreement? MR. KELLEY: I have. MR. DIXON: And it's the same in both Plea Agreements. Have you literally gone through this sentence by sentence? MR. KELLEY: Yes. MR. DIXON: And to your best knowledge and belief, is this true and could the Government prove this beyond a reasonable doubt every fact in here? MR. KELLEY: Yes. MR. DIXON: And you are pleading the company is guilty because you believe in your role as trustee and in your good faith judgment that the companies, both of them, are guilty? MR. KELLEY: That's correct. And maybe I could just tell the Court, you know, also there were the many, many Plea Agreements that were given here and an important aspect of all of this was the forensic accounting work that was done by PricewaterhouseCoopers, and I have been apprised of that all along the way. Kevin Short, who has represented me in the () -0

42 0 0 corporations in these matters, has had access to discovery and he has conducted extensive discovery and he has advised me. And in addition, I have some of the lawyers from Lindquist Vennum look these through these facts to make sure that they are accurate. So, your Honor, I'm confident that there is a solid basis for the facts that are included in this Plea Agreement. MR. DIXON: Mr. Kelley, now just as sort of maybe as a matter of law, a corporation is responsible for the acts of its agents; is that right? MR. KELLEY: Yes. MR. DIXON: And so if an agent conducts a criminal act on behalf of the company, the company is guilty of that criminal act; is that right? MR. KELLEY: That's correct. MR. DIXON: And in this case the Government has brought charges against two of the most criminally -- two criminal enterprises, essentially, that have driven one of the largest frauds in the United States' history, right? MR. KELLEY: That's correct. MR. DIXON: And you heard testimony from the officers of PCI, namely Robert White and Deanna Coleman, and you also heard the testimony of the other officer, Tom Petters, and you heard evidence that they acted to commit a fraud on investors; is that right? () -0

43 0 0 MR. KELLEY: That's correct. I don't know if I attended each one of those during the trial but I had access to the transcripts and certainly read them. MR. DIXON: And so you heard testimony from those agents that they were conducting a criminal enterprise through PCI? MR. KELLEY: Correct. MR. DIXON: And you're aware that the evidence at trial showed through testimony of PGW witnesses that PGW and its companies, including Polaroid and others, were used by Tom Petters in enticing victims? MR. KELLEY: That's correct. MR. DIXON: And you're aware of evidence at trial that money from the fraud and from PCI was used to prop up the PGW companies? MR. KELLEY: Yes. Not very many of the companies that were under the PGW umbrella ever made a penny, your Honor. MR. DIXON: And you're aware that Mr. Petters was himself an officer or an agent of Petters Group Worldwide? MR. KELLEY: Correct, as I stated earlier. MR. DIXON: And you're aware of the evidence at trial that demonstrated beyond all doubt that Mr. Petters was guilty of committing a fraud using Petters Company, Inc., and Petters Group Worldwide? () -0

44 0 0 MR. KELLEY: Correct. MR. VAIL: Your Honor, there was no evidence at trial of that. The jury was asked -- THE COURT: Counsel, I heard the evidence at trial. I'll make a decision on that. Please sit down. MR. DIXON: You're also perhaps aware of testimony from the chief executive officer for tax or senior vice president for tax and finance of PGW and that he had personally assisted in the preparation of false financial statements which he knew were given to PCI investors? MR. KELLEY: That's correct, Mr. Wehmhoff. MR. DIXON: And you are aware the testimony that the chief legal officer of PGW at one point asked Mr. Wehmhoff, "Do I want to know what bad paper is?" And was told, "No, you don't want to know what bad paper is." MR. KELLEY: I was aware of that fact. MR. DIXON: And you're aware of willful blindness as a basis for imputing knowledge to individuals and therefore agents of the company? MR. KELLEY: I am familiar with that doctrine. MR. DIXON: As trustee you're aware that -- of these companies and proceeds of the fraud were distributed widely to the individuals who were running companies both in PCI and PGW so that they received proceeds of the fraud? MR. KELLEY: That's correct. () -0

45 0 0 MR. DIXON: And you're attempting to recover that on behalf of the victims? MR. KELLEY: That's correct, contrary to some of the assertions here this morning. MR. DIXON: Again, in your best judgment as trustee, are you pleading these companies guilty because they are in fact guilty? MR. KELLEY: Yes. MR. DIXON: And because pleading the companies guilty as opposed to going through a trial is in the best interests of the creditors in the bankruptcy? MR. KELLEY: Yes, it is. And I think it was -- just so the Court knows -- it was one factor in a number of factors that went into that Coordination Agreement. And I think that Coordination Agreement protects the creditors and the bankruptcy estate and also claimants and victims better than any of the other major Ponzi schemes that are going on in the United States of America today. And I think part of this was if I would plead these companies guilty and, as Judge Kishel said, it was one chip in the negotiations and he thought it was done properly. MR. DIXON: Any further questions from the Court, your Honor? THE COURT: Yes, just a few. Mr. Kelley, in reaching the Plea Agreement with () -0