Petters' attorneys lose bid for mistrial

The fraud trial of Tom Petters turned contentious Monday as his attorneys had their request for a mistrial immediately denied and prosecutors played an audiotape to show Petters was running out of energy to keep the scheme alive several weeks before federal authorities raided his business.

Prosecutors put Larry Reynolds, a former attorney who has a lengthy criminal past, on the stand. Reynolds said he was deeply involved in the alleged $3.5 billion fraud scheme at Petters Co. Inc.

But after his testimony ended and the jury left the courtroom, Petters' defense team told U.S. District Judge Richard Kyle that he had prevented them from asking the questions they wanted of Reynolds, whom they called their most important witness.

"There's a fraud within a fraud," defense attorney Paul Engh said.

Engh argued for the mistrial because Kyle repeatedly upheld prosecutors' objections to questions about Reynold's history.

Specifically, Reynolds was involved in a scheme in Massachusetts in the early 1980s to collect $700,000, even as he was cooperating with federal authorities and wearing a concealed recording device to catch another criminal, Engh said with the jury absent.

"He lied to the jury about his crimes," Engh said. "The jury has to hear the truth."

Reynolds' birth name is Larry Reservitz, and he is a native of the Boston area who was disbarred in the early 1970s after he took part in a scheme to file fake insurance claims for auto accidents.

Reynoldsfled the country to avoid prosecution in the insurance fraud case. He later returned to Massachusetts and pleaded guilty to larceny in 1973.
By the early 1980s, Reynolds was involved in other crimes and pleaded guilty to a drug charge stemming from an attempt to bring a semi-truck full of marijuana into Massachusetts.

Soon after, facing charges on another scam involving bank checks, he said, he agreed to work with prosecutors and wore the hidden recording device to bring down another criminal deal. Afterward, he said, he learned that a contract had been put out on his life. After serving 13 months of an 18-month sentence, he entered the federal witness protection program.

The program issued him a new Social Security number, gave him a new name — Larry Reynolds — and relocated his family to San Diego.

He testified that he met Petters in the mid-1990s and said they initially did legitimate business deals together, involving buying and reselling shoes and clothing. Reynolds said he never told Petters about his past.

Reynolds testified that Petters asked him in 1998 to come up with a fake invoice for $1.7 million. Petters needed it to convince investors he had a real deal for shoes, Reynolds said, explaining that he made up the fake invoice that Petters used to get the financing, and the fraud scheme with Reynolds only grew after that.

Reynolds also testified that when Petters needed warehouses that an insurance inspector could visit, Reynolds contacted a friend and inspections were set up in the friend's warehouses. The insurance inspection documents were then presented to investors to reassure them that the deals were real and that the consumer electronics and other goods were secured by an insurance policy.

The insurance inspectors were concerned with the security of the warehouses "sprinkler systems, alarm systems, locks" and not the presence of actual merchandise, Reynolds said. Over the years, Reynolds said he moved $12 billion through bank accounts for Petters, helping convince investors that the money was actually being used to finance the purchase of consumer electronics.

Reynolds has pleaded guilty to fraud and is hoping his testimony in the Petters case will reduce the 20-year maximum sentence he faces.

Petters is on trial on 20 counts of fraud related and faces 30 years in prison. He told investors he was using their money to buy massive amounts of consumer goods and sell them to retailers, prosecutors say, but in fact was constantly dependent on finding new investors to pay off existing ones.

Petters maintains his associates carried out the alleged fraud behind his back.

In other testimony, Reynolds said that on the evening of Sept. 23, 2008, he and Petters were at the Bellagio resort casino in Las Vegas, playing slots and discussing the pressure they were under.

Reynolds worked from Los Angeles and Las Vegas and rarely came to the Twin Cities. Petters wanted Reynolds to act as an auditor at Petters Co. in Minnetonka to satisfy the hedge funds, Reynolds said. "I said I just can't do it," Reynolds testified. "I haven't the vaguest idea what an auditor does to come up with their numbers."

The next morning, federal authorities raided Petters' headquarters and searched the homes of Reynolds and several others involved in the scheme.

Engh's cross-examination of Reynolds focused on his criminal past and a pattern of activity.

"All you've done through the courts is commit crimes, get caught, testify and hope for a break," Engh said. "It's the Larry Reynolds way, isn't it?" Engh was cut off by an objection before Reynolds could respond.

Prosecutors also played an audio recording, which they said Deanna Coleman, a Petters' aide, captured with a secret device in Petters' corporate offices Sept. 9, 2008.

Executives at Petters Co. had just heard that Palm Beach Capital Group, a hedge fund that invested in the company, was planning to send auditors the next day.

"The auditors suspect this is a complete fraud," Jim Wehmhoff, an accountant and Petters executive, says on the tape. Wehmhoff has pleaded guilty to two counts of tax fraud and could testify as early as today. Petters says on the tape that he would call Palm Beach and tell them not to send auditors, but no one in the conversation is convinced anything can keep the auditors out.

Wehmhoff discusses what records the auditors would want and what the company had to give them.

"By the way, you didn't get us into this," Petters tells Wehmhoff. As Wehmhoff asks what they can show auditors, Petters says, "What are you going to give them, Jim? Empty hands?"

Petters says later on the tape that he had been trying to raise money seven days a week for 12 months and that he was wearing out.

"I can't put on a game face anymore," Petters says. "I can't do it anymore. I can't. I'm done."

As the executives in the room talked about how the scheme might collapse, Petters says, "You don't know how bad it's going to be."


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Spinka Grand Rabbi, Four Others Plead Guilty

Rabbi Naftali Tzvi Weisz, the Brooklyn-based grand rabbi of the Spinka sect, along with four local associates, pleaded guilty to criminal conspiracy charges in downtown federal district court Monday.

As part of the plea agreement, Weisz, 61, admitted he worked with others in a decade-long $8.5 million tax fraud and money-laundering scheme, which was set up to fund four charities and a school for Spinka, an ultra-Orthodox sect that originated in 19th century Romania and has adherents in Israel, Europe and Brooklyn.

The Spinka pleas come nearly two weeks after U.S. prosecutors charged five Syrian rabbis from New York and New Jersey in a public corruption and international money-laundering investigation that included three mayors and two state assemblymen. But local prosecutors say the July 23 arrests had no direct influence on Monday’s guilty pleas.

“They had executed the plea agreement prior to the arrests in New Jersey,” U.S. assistant attorney Dan O’Brien said.

According to the federal prosecutors, the Spinka scam began in 1996 and continued until 2007, laundering money back to donors — up to 95 percent, based on court documents — through a network of Los Angeles businesses, including some in and around the city’s downtown jewelry district, as well as through donors and the Tel Aviv-based United Mizrahi Bank and its Los Angeles branch.

In his plea agreement, Weisz admitted learning from his assistant, Gabbai Moshe E. Zigelman, that Spinka charities received nearly $8.5 million in 2006 and had “profits” of $744,596 after deducting amounts paid back to various contributors.

Los Angeles businessman Robert Kasirer, who had helped raise money for Spinka, first tipped off investigators about the scam in October 2004, when he turned state’s evidence in exchange for a reduced sentence on civil fraud charges stemming from his health care business.

The four local Spinka associates who also pleaded guilty Monday for their roles in the money-transfer network included Alan Jay Friedman, 45; Moshe Arie Lazar, 62; Yosef Nachum Naiman, 57; and Yaacov Zeivald, 44.

In March, Weisz’s assistant, Zigelman, 62, was sentenced to two years in federal prison after he pleaded guilty in June 2008. Joseph Roth, an Israeli banker who also pleaded guilty in June 2008 for his role, was sentenced to 14 months and released on time served.

Weisz is scheduled for a Nov. 16 sentencing and is expected to face a maximum sentence of three years in federal prison. Friedman, Lazar and Zeivald will be sentenced Nov. 23, while Naiman will appear on Nov. 30.

Defense attorneys were not immediately available for comment.

Federal prosecutors are still investigating more than 100 contributors to Spinka charities, and O’Brien said he expects two plea agreements from contributors in the coming weeks.

Attorneys for five Spinka charitable organizations are scheduled to appear before U.S. District Judge John F. Walter regarding a plea agreement for Spinka’s charities on Wednesday. Yeshiva Imrei Yosef Spinka is expected to enter a guilty plea to similar conspiracy charges, and will likely face a fine. As part of the plea agreement, which was filed Tuesday, O’Brien said other Spinka charities would not be charged but would face strict compliance rules, including maintaining detailed accounting records and adopting corporate ethics rules.
Sentencing for the yeshiva is also expected to take place in November.


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