Hedge Fund Exec. Pleads Guilty In Petters Fraud

Apr 12 2011 | 1:10pm ET

Another hedge fund has been dragged into the Thomas Petters Ponzi scheme as prosecutors pursue further criminal cases almost a year-and-a-half after the mastermind of the $3.65 billion scam was convicted.

Michelle Palm, a former executive at hedge fund Arrowhead Capital Management, pleaded guilty to securities fraud and making false statements to the Securities and Exchange Commission. Palm is cooperating with prosecutors and has pledged to assist "in the investigation and prosecution of other suspects," potentially including other employees of Arrowhead.

Palm is the seventh person to plead guilty in the case—Petters himself was convicted by a jury before being sentenced to 50 years in prison. While Palm, former vice president of special operations and managing director of finance at Arrowhead, said at her plea hearing last week that she did not know Petters was running a Ponzi scheme, she did say she knew that payments made to the hedge fund came from Petters Co. Inc. itself and not the retailers who were supposed to be making the payments. Still, she admitted that she told both investors and the SEC that the payments had, in fact, come from the retailers.

She added that she was instructed not to tell investors about the real source of the payments by "Individual A," identified as Arrowhead's owner. The Minnetonka, Minn.-based hedge fund was owned by founder James Fry, who has not been charged in the case.

Palm is the third hedge fund executive to be charged in the case; Lancelot Investment Management's Gregory Bell and Harold Katz previously pleaded guilty to helping Petters cover up his scam. The former was sentenced to six years in prison and the latter to one.

Arrowhead is among at least a half-dozen hedge funds to be caught up in the Petters scam. In addition to Lancelot, they include Acorn Capital Group, sued last month for helping Petters conceal his fraud, Palm Beach Capital Management and Agile Group, sued last year, and Ritchie Capital Management, sued by Barclays Bank for allegedly hiding more than $150 million in Petters investments.

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