The SEC charged 2 Minnesota-based hedge fund managers and their firm with facilitating a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters.  Chicago Regional Office Director Merri Jo Gillette notes that Chicago investors lost more than $600 million dollars. James Fry of Long Lake, MN, Michelle Palm of Edina, MN, and Fry’s firm Arrowhead Capital Management LLC invested more than $600 billion in hedge fund assets with Petters - and collected over $42 million in fees. It's alleged that Fry, Palm, and Arrowhead falsely assured investors and potential investors that the flow of their money would be safeguarded by the operation of certain collateral accounts.  In fact, the process didn't as described and, when Petters was unable to make payments on investments held by the funds they managed, the defendants concealed Petters’s inability to pay by entering into secret note extensions with Petters. Fourth Enforcement Action. SEC Enforcement now has brought actions against 4 hedge fund managers that collectively fed billions of dollars into the Petters fraud.  The SEC previously charged Petters and froze the assets of an Illinois-based hedge fund manager who was a $2bn feeder to his scheme.  They also had charged 2 Florida-based fund managers who facilitated the scheme, and blocked an attempt by a CT-based hedge fund manager to divert funds from victims of the scheme. Allegations Against Petters. According to the SEC’s complaint, Petters promised investors that their money would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to “Big Box” retailers, like Wal-Mart and Costco.  In reality, Petters’s “purchase order inventory financing” business was a complete sham and amounted to nothing more than a Ponzi scheme. Petters was charged with selling promissory notes to a number of hedge funds, including those managed by Fry, Palm, and Arrowhead.  From 1998 to 2008, the defendants funneled money to Petters by selling interests in the funds managed by Arrowhead to investors throughout the country.  The funds, in turn, invested nearly all contributions into the Petters Ponzi Scheme and were holding more than $600 million worth of Petters’s notes when the Ponzi scheme collapsed. The SEC complaint further noted that Fry, Palm, and Arrowhead hid the fact that Petters was on the verge of defaulting on certain of the notes held by the funds, by engaging in a series of secret note extensions with Petters beginning around February 2008.  While holding the Petters notes out as 90-day notes, the funds were holding a group of notes that were so far past due that they were on the verge of their 182-day default date.  In order to hide that fact and help Petters avoid default, Fry, Palm, and Arrowhead secretly extended the due dates on these notes without ever informing investors in the funds. Criminal Charges. Both Fry and Palm have been charged criminally in connection with the same misconduct. Palm pleaded guilty to one count of securities fraud and one count of making false statements to SEC staff during investigative testimony. Fry pleaded not guilty to multiple counts of securities fraud, wire fraud, and making false statements to SEC staff during investigative testimony. SEC Chicago Regional Office Staff Credits. Investigation by Michael Wells, Andrew O’Brien, Donald Ryba, Peter Chan.  Litigation will be led by Daniel Hayes, John Birkenheier.  Questions should be directed to:  Timothy Warren, Assoc.Regional Director:  (312) 353-7394;  and Peter Chan, Asst Regional Director:  (312) 353-7410. For further details, go to:   [SEC PR 11-237, 11/9/11]   and  [SEC Complaint].