October 12, 2010

No Wrongdoing by Trustee Implicated in Ponzi Scheme

Updated: November 8th, 2015. The lawsuit involving Stevanovich was settled in 2014. The settlement dropped all allegations against Stevanovich, and concluded that Stevanovich was unaware "at all times" of the Ponzi scheme operated by convicted businessman Tom Petters.

Updated: October 18, 2010 with a statement from Stevanovich's lawyer.

A civil lawsuit filed last week accused a University trustee of knowingly contributing $3.2 billion to a Minnesota-based Ponzi scheme, though his lawyer has denied any wrong-doing.

The trustee, Steve G. Stevanovich (A.B. ’85, M.B.A. ’90), was named as a defendant in the suit that claims he made $323 million in “false profits” from the scheme. The complaint was filed in Minnesota District Bankruptcy Court by the trustee in charge of the Petters Company, which was at the center of the scheme.

Stevanovich donated $7 million to the University in December 2006, a gift that led to the expansion and renaming of the Stevanovich Center for Financial Mathematics. He was later elected to the Board of Trustees.

In the suit, the trustee in charge of the company also names 17 other “feeder funds” Stevanovich is alleged to have run as part of the scheme. These investments were allegedly paid back, with interest, after others invested in the Petters Company, unaware that it was fraudulent. Stevanovich's lawyers contest the company was paid back both before and after others invested, which would call into question any involvement in a Ponzi scheme.

Thomas Petters, owner of the Petters Company, was convicted in the same court in 2008 of orchestrating an estimated $40 billion Ponzi scheme over a 15-year period, involving a host of subsidiary companies including Petters, Ltd.

Petters Company and Petters, Ltd., have been placed by the Minneapolis District Bankruptcy Court in trusteeship of Douglas A. Kelley, who is responsible for reclaiming the money Petters fraudulently gave away.

“I’ve had to sue charities,” Kelley said in a Sunday article in the Minneapolis Star-Tribune referring to the Petters case. “I have investors who feel they’ve now been victimized twice. But the fundamental law in a Ponzi scheme is that the money was not Tom Petters’s to give away.”

Kelley’s current suit against Stevanovich alleges that Stevanovich benefited substantially from illegal financial activity and that he was aware it was illegal. “Stevanovich received millions in false profits through his active and direct involvement in the Petters Ponzi scheme,” according to the October 8 complaint.

A lawyer representing Stevanovich denied that his client was aware any fraudulent activity was taking place. The court has not yet named a date to begin proceedings, according to the complaint.

The complaint depicts an intricate web of companies, called “feeder funds,” affiliated with Epsilon Investment Management and Westford Investment Management. Stevanovich is described in the complaint as being “directly involved with the operations and management of the Epsilon and Westford Funds,” and as “founder, portfolio manager, president, and owner” of all firms detailed in the complaint.

These feeder funds allegedly invested in the Petters Ponzi scheme through a “master fund,” and received up to 48-percent interest on allegedly fraudulent loans made to Petters's companies (see diagram).

A statement from Jay Biagi, Stevanovich's Seattle-based lawyer, calls the allegations "false in every respect."

"Rather than serving justice, Kelley's overreaching claim would damage innocent investors and reward those who were involved with Petters until the day his companies were forced into bankruptcy."

The statement notes that an auditor Stevanovich hired had found no suspicious activity with Petters investments, and that Stevanovich stopped investing in Petters' companies 18 months before Petters was accused of committing fraud.

Kelley’s complaint alleges that the firms Stevanovich controlled began issuing suspicious loans to a firm acting as a front for Petters’s company in April 2001, if not sooner.

Those investments were allegedly funnelled to Petters’s companies, which Stevanovich allegedly used in Petters’s Ponzi scheme.

According to the complaint: “Petters, through a multitude of entities and with the assistance of his associates, induced investors into financing the purchase of non-existent electronic equipment purportedly secured by fabricated purchase orders.” Those investments went to pay earlier investors, including Stevanovich’s funds, the October 8 document alleged.

The statement from Stevanovich's attorney says Stevanovich's companies invested in Petters' at market rates and "received principal and interest in entirely conventional transactions with terms and conditions consistent with generally accepted lending practices."

Petters and six others have pled or have been found guilty of an involvement in the scheme, including Greg Bell, who pled guilty to wire fraud related to the Petters scheme and committed while Bell worked for Lancelot Investment Management.

Bell was a managing director at Epsilon, but left that position in 2002 and went on to work for Lancelot. Bell testified at Petters' trial that Espilon invested $12 million in a Petters company, though Epsilon's auditors were not granted access to the inventory being invested in, a breach of standard practice the suit alleges should have been a "red flag" and stopped the investment.

Kelley, the man entrusted with returning and repaying funds Petters obtained fraudulently, has engaged in many other “claw back” lawsuits, according to media reports.

In this case, Kelley is seeking either the full $3.2 billion the companies were paid through 344 transactions with Petters, Ltd.., or at least the $323 million in profits that it alleges those companies made.

Moreover, the complaint links those profits with Stevanovich’s personal enrichment, saying it went “to fund his extravagent lifestyle.”

The complaint stated, “Stevanovich and his immediate and extended family became exceptionally wealthy as a result of the Epsilon and Westford Funds’s investments in the Petters Ponzi Scheme, including, on information and belief, millions of dollars received by Stevanovich in management fees, performance fees, and false profits.”

Stevanovich’s 2006 donation to the University included funding for the renovation of the Statistics and Mathematics Building between East 57th and 58th Streets and South University Avenue to accommodate the Stevanovich Center for Financial Mathematics, according to a December 6 University of Chicago Chronicle article on his $7-million donation. A sign on a current construction project on that building indicates it is under renovation for the Stevanovich Center.

Stevanovich was elected as a trustee by the Board of Trustees in June 2009, University spokesman Steve Kloehn said. He would not comment on matters involving the complaint or the donations Stevanovich made to the University, noting the University’s policy of not commenting on donations.

“The Stevanovich Center advances the understanding of the increasingly complex world of financial markets by integrating mathematics, statistics, and economics,” according to its University website. It was founded in August 2006 and received its name in December, after Stevanovich’s donation was announced, according to the Chronicle article.

“World financial markets are becoming more and more complex, and mathematics is increasingly becoming an invaluable and necessary tool in understanding these markets,” Stevanovich said in the December 6 article. “The financial mathematics program at Chicago is at the forefront of providing students with the necessary tools to filter and decode this complexity. It is an honor for me to be a part of this endeavor and to continue the legacy of excellence at the University.”