A Chicago federal judge has dismissed litigation brought against GE Capital by the trustee for a bankrupt lender who claimed the bank’s failure to publicly expose a Ponzi scheme before the scheme was halted by law enforcement cost the bankrupt lender millions of dollars in defaulted loans.
In October, Francis Gecker, bankruptcy trustee for the estate of Ark Discovery, lodged a two-count fraud complaint against General Electric Capital Corporation, alleging GE aided and abetted fraud by crooked Minnesota businessman Thomas Petters, and conspired with Petters to commit fraud.
From 1994 to 2008, Thomas Petters operated a multi-billion dollar Ponzi scheme, in which his corporations ostensibly bought discontinued and overstocked electronic merchandise, then resold the items to big box retailers. In reality, there was little merchandise involved and no retailers, but Petters hid this from investors and repaid lenders with money obtained from other lenders.
Ark Discovery came into Petters’ orbit in 2007, operating as a hedge fund to extend 30 loans, totaling $165 million, over the course of 11 months to Edge One and Petters Group Worldwide – both sham corporations formed by Petters. Ark Discovery made the loans in the belief it would be paid interest and fees from profits made by Petters’electronics sales. GE had also loaned money to Petters from 1998 to 2003.
Ark continued making loans to Petters until finding out Petters was under a criminal investigation. A short time later, Petters was hit with federal fraud charges that eventually led to a 50-year prison sentence. In May 2009, Ark entered involuntary bankruptcy proceedings in Chicago federal bankruptcy court. Gecker then took court action against GE 5 ½ years later, alleging GE had been aware of the Ponzi scheme, but did not expose the scheme. Rather, he alleged GE helped Petters to keep the scam afloat, in return for Petters’ repayment of GE’s loans, plus a “success” fee from new investors.
Gecker maintained Ark was misled into loaning money to Petters, through GE’s role in helping maintain the Ponzi scheme from 1998 to 2003 – in short, if GE had reported the scheme, the scheme would have collapsed before Ark entered the picture and extended the loans.
In the end, Ark lost about $107 million, which was the amount Gecker sought from GE in compensatory damages.
GE filed a motion to dismiss the case, saying Gecker had no standing, did not state a claim and filed the suit after the statute of limitations had expired. Magistrate Judge Sidney I. Schenkier, presiding over the case, agreed with GE, ruling on July 27 in U.S. District Court to dismiss Gecker’s action.
Schenkier said Gecker did not explain how GE harmed Ark, as there were no direct dealings between the two and Ark did not even know GE was involved with Petters until after Ark made the loans to Petters.
Schenkier took note the Petters case involved bankruptcy courts in Minnesota and Illinois, with Minnesota having a six-year statute of limitations for fraud claims and Illinois having five years. Gecker filed the suit against GE on Oct.27, 2014 and contended Oct. 29, 2009 was when the statute of limitations began running, because on that day testimony in Petters’ criminal trial made known GE’s involvement with Petters. However, GE argued the clock began ticking in late September-early October 2008, when Ark, by its own admission, learned Petters was in trouble with the law for fraud. Judge Schenkier agreed with GE’s date.
“The statute of limitations began to run at that point even if Ark did not know that GECC played a part in any wrongdoing. Six years was ample time to obtain that information and to take action,” Schenkier said.
Schenkier granted the motion to dismiss, terminating Ark’s case.
GE is represented by Latham & Watkins, which has offices in Chicago and New York City. Gecker is represented by Scandaglia & Ryan and FrankGecker LLP, both of Chicago.