Five More Questions: Doug Kelley’s high-stakes, high-profile, high-altitude adventures

MinnPost photo by Brian Lambert
Doug Kelley: "I think there were $41 billion worth of inter-corporate transfers in Petters’ little scheme. Think about that. It’s dizzying."

Some people always get the call. Tricky negotiations with a beloved, high-profile organization? Financial malfeasance on a grand scale involving wealthy client/investors? Doug Kelley’s phone is one of the first to ring. The veteran partner at the firm of Kelley, Wolter & Scott has a long vitae of white-collar litigation, along with a list of board memberships and … an ongoing mountaineering and ice-climbing avocation. He has a feel for calculated risk.

A lifelong Republican (Old School variety) Kelley carried water for the party’s gubernatorial nomination back in the Jon Grunseth-to-Arne Carlson circus of 1990. Post that experience — and since being declared an apostate by “movement conservatives” now controlling the GOP — he has contented himself with working the levers of influence from his 25th floor office in downtown Minneapolis. His two most public cases in recent years have been serving as bankruptcy trustee for the massive Tom Petters Ponzi scheme and negotiator for the Minnesota Orchestra board in the protracted, acrimonious contract dispute with the musicians.

It goes without saying that anyone with Kelley’s connections up and down the judicial/business status ladder and involvement in so wide a range of big money activities is going to take merciless heat from critics and adversaries. At the liberal Daily Kos website, for example, Kelley’s involvement with the Petters case — he was briefly asked to represent Petters —  has had him compared, in classic internet hyperbole, to Al Capone’s notorious henchman, Frank Nitti. There’s no doubt that feelings toward him from Orchestra musician sympathizers have been about as extreme.

After admiring an original large-scale Ansel Adams print of Yosemite next to the reception desk, we sat down for a review of his latest adventures. Dave Phelps of the Strib recently filed a piece updating readers on Kelley’s efforts to claw back money from Petters investors around the world. On that point he reiterated what he told Phelps, that he expects the process to take “years,” based on the unique (read “tortuous”) legal requirements for each country. “But,” he says, “it’s been a fun thing, actually, at this stage of my career, to be facing this steep learning curve. It’s really quite interesting. For instance, I had never heard of the East Caribbean Supreme Court until I got into this.”

MinnPost: One of the takeaways from Phelps’ story was the business of investors receiving mere “pennies on the dollar” at best when all is said and done. I’ve had a couple people say, “Why even bother if that’s all it’s ever going to amount to after, as you say, years of grinding litigation?

Doug Kelley: Well, I think it’s going to be more than pennies on the dollar, and part of this is how do you do the math? I should give you a little primer. For example, at the beginning when this thing broke people said “Petters is a $3.5 billion case.” Well that’s the loss if Petters paid everybody back and paid them the interest he was supposed to pay them and fulfilled his part of the contract. But in Ponzi scheme recovery cases we’re really dealing with “false profit” where if you put in $100 million and you took out $150 million it’s a pretty simple calculation of what has to come back. In that calculation Petters is a $1.7 billion case.

Also, when we talk about recovered assets I like to refer to everything that has been returned, which in this case includes Polaroid, which we sold, but then went to Chapter 7 and has another trustee, who has $100 million in the bank. Likewise we have the sale of Sun Country Airlines for $34 million, which has already been distributed. So when I say we’ve recovered $400 million it’s more than I have in the bank, but I like to describe everything related to this case.

But in terms of the final return, it’s very hard to say because some of the biggest cases are left until the end. I have a $250 million case against JP Morgan. I’ll have cases against a number of Swiss banks. And remember, it’s always a two-step process. You can get a judgment but then it’s a question of can you collect the judgment? So I can’t give an estimate right now, but I’m going to do better than pennies.

MP: Journalists are professional cranks and skeptics, but there were plenty of people around town who recognized the names of Petters’ investors and said, “These people were naive? They didn’t have any questions about what was going on?” You didn’t have to be all that an astute observer to say, “Come on. They had to know.” What do you say?

DK: Uh, I think people wanted to get on the gravy train and since it had been working for a few years they were willing to, uh … [he pauses] … suspend their disbelief. That’s way I put it.

But look, I’ve had people come up to me and say that Petters had approached them to invest, and they’ve told me they said, ‘Look Tom, I’d be happy to invest, but first I have to see your financial statement. I need to see the company’s financial statements. I need to look at your track record, your P and L and such.’ And Petters told them, ‘I don’t do business that way. I work on the shake of a hand, and on my honor and integrity.’ At which point they would say, “good-bye.”

Those people now tell me, “Thank god I walked away from that!” But I’m amazed at how Petters got away with not having financial statements for the huge amount of money he had at JP Morgan and such. Others have said that, well, “Petters had so much concealed.” But Dave Phelps told me he went online and easily found old stories of Petters being sued for fraud. So these people who say he had everything so concealed didn’t try very hard.”

MP: In your mind doesn’t that make them complicit?

DK:  Well, there are a number of red flags in these cases. I give lectures every so often at business schools and in one I was explaining how I had figured out the fingerprint for a Ponzi scheme. It goes kind of like this: You’ll be in the middle of this deal and Petters will owe all kinds of people money and you’ll see a wire transfer come in for $100 million, which is supposed to go out to China to buy TVs. Instead the money goes out — on the same day — $10 million here, $20 million there to pay off the people who were owed money way back when so that at the end of that same day what’s the balance? It’s back to zero.

As an old white-collar crime prosecutor you look at that and you say, “That’s the way it goes.” There is no surprise there. But you sit there looking at all this maneuvering and think, “What role did the banks play? What role did the accountants play? What role did the lawyers play?” You quickly see that the business model does not make sense.

I think there were $41 billion worth of inter-corporate transfers in Petters’ little scheme. Think about that. It’s dizzying. Primarily this was through two or three banks.

5 More QuestionsJoe Dixon, one of the prosecutors for the government on the case, once told me, and I have to give him credit for this, he said, “Doug, it was like everyone knew PCI [Petters’ umbrella company] was a fraud machine, and everyone knew here was a closet up on the third floor that only a few people could look into and nobody wanted to open the door.” That’s the way he put it.

So I’m suing accountants and I’m suing banks. And when you ask me if these people are complicit, I say, “Yes.” There were dozens of red flags and any one or two should have started you asking questions. But no one did.

MP: One of the facts of the story that has always stuck with me, and correct me if I’m wrong, is that Petters’ long-standing legal firm, Fredrikson and Byron, dropped him as a client almost immediately upon his indictment. As in within a day. Is that right? [Kelley sued and settled with Fredrikson & Byron for a $13.5 million clawback claim, in which the law firm declared it knew nothing of Petters’ fraud … to which Kelley was quoted as saying, rather discreetly, “… there were a number of red flags that should have alerted F&B to the possibility that the business allegedly conducted by Petters was fraudulent.”]

DK:  Fredrikson did, um, back out, right away. I have no idea what prompted that. And yes, they had been his lawyers for a while, and I’m presuming they knew their lawyers would be witnesses and other kinds of things. And, I’ve got a lot of good friends at Fredrikson. It’s a good firm. But there was that part that took care of Petters.

MP: In hindsight, now that the dust has settled, do you think the [Minnesota] Orchestra board’s opening position, a 30 percent cut, was too aggressive and contributed to the level of animosity?

DK: I don’t think so. And there are a couple aspects in answering that question. We needed to end up where we did. In fact I had always hoped we’d ask for and get 20 percent. But if you start at 22 percent you’re not going to get to 20. So listen, I understand the shock value of asking for 30-some percent decrease right out of the chute.

But I was with Richard Davis [Orchestra board member and CEO of US Bank] and [Orchestra President] Michael Henson as early as 2009 in meetings with musicians. And Richard, who is a great communicator, had all these PowerPoints showing the terrible deficits we were running. And he was telling them, “Look guys, we will honor the current contract. Because we have to legally. But this has to change. It can’t go on. And if you don’t come and help us feather this off a little bit now, by the time [the contract ends] we’re going to have to do something shocking. As in large givebacks.”

The union did give us some, and then said, “no more.” And every time they offered a new number they wanted to extend the contract, which meant death by attrition. So with no progress when the contract expired the 34 percent number would have meant perfectly balancing the budget. Was that a huge ask? Yeah, it was was. But I don’t know we could have done it differently.

What we didn’t anticipate was that the union was going to take a stance and make Minnesota a test case for the industry. One example there was the local labor lawyer for musicians — he and I had gotten on well in the past— was pushed out and in came Bruce Simon from New York, who was a table-pounder, an in-your-face kind of a guy. [He laughs.] It was great theater. If you’re a trial lawyer you see what he’s doing. He’s performing for his clients. He’s saying what the musicians want to say but won’t. But it was also very counterproductive. Little old ladies don’t like be told, “[Bleep] you” by Bruce Simon, and he literally would do that.

We just didn’t anticipate them not negotiating. They were intent on maintaining this model that has existed since Beethoven’s time.

Simon said to me along the way, “Doug, the industry is going to have to change. But it’s not going to happen in Minneapolis.”

But overall, I think we did achieve a contract that could be a model for the rest of the industry. The different pay scale for substitutes, a smaller core and revenue sharing if we hit certain goals are being looked on quite positively I think. But it was never about breaking the union. That was never even considered.”

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Comments (4)

  1. Submitted by Amy Adams on 06/23/2014 - 02:06 pm.

    Couple of questions for Doug Kelley

    So, did “all these PowerPoints” shown by Richard Davis to the musicians show the same numbers that were being shown to the state of Minnesota?
    Was Richard Davis being a “great communicator” when he said “everyone’s breaking the rules, blah blah blah, get over it” to the Minnesota Chamber of Commerce in 2011?

    You know, when you use the word “union” over and over, you’re really talking about “the musicians.”
    And it is apparent to all who read your words that you saw “the union” as an adversary, not a partner in any sense of the word. Thank goodness Minnesota arts supporters stood by them in droves. Can you count similar numbers who stood by Richard Davis?

  2. Submitted by Michael Hess on 06/23/2014 - 05:18 pm.

    Interesting Revisionist History?

    I seem to recall in interviews and full page newspaper ads that the Minnesota Orchestra viewed the amount of financial cuts to be achieved from the musicians as non negotiable – as in it didn’t matter if they slashed salary or benefits as long as they got to the same bottom line. This was during the management initiated lockout. And somehow it was the musicians that didn’t negotiate? I also thought the world class negotiator that they brought on proposed a negotiated return to work settlement that the musicians accepted and management refused. and still it was the musicians who refused to negotiate? Face it, if management had come out with a respectful, manageable contract proposal from the start as other arts organizations have, who were also facing financial challenge, much of the drama and pain of the lockout could have been avoided. Heck maybe there woudln’t have needed to have been such a housecleaning in the management ranks.

  3. Submitted by Emily E Hogstad on 06/24/2014 - 12:33 pm.

    Inspiration

    Doug Kelley has proven to be an inspiration for the Minnesota Orchestra blogosphere.

    I wrote this – (warning for language) –

    http://songofthelark.wordpress.com/2014/06/23/doug-kelley-still-problematic/

    and Scott Chamberlain wrote this –

    http://maskoftheflowerprince.wordpress.com/2014/06/24/a-voice-from-the-lockout-speaks-up-again/

    These appallingly misleading statements must not be allowed to stand uncorrected. Does this board member not realize that he upsets many donors and audience members by speaking in this manner? He is behaving ridiculously irresponsibly. It’s hugely disappointing.

    As always, Mr. Kelley is welcome to rebut each and every point that Scott and I discussed.

    Emily E Hogstad

  4. Submitted by Hiram Foster on 06/24/2014 - 04:23 pm.

    Some answers

    I thought I would provide some possible answers to questions asked.

    “If said deficits were SO TERRIBLE, then why didn’t you tell legislators about them when you begged taxpayers for $14 million for a lobby renovation?”

    Presumably because he wanted the legislature to allocate money to the building program.

    Would you trust any numbers Doug Kelley gave you?

    Generally, no.

    Why [not]?

    Because they were provided in the context of a negotiation and therefore unreliable. I would have countered with a different set of unreliable numbers, which is basically what happened.

    “How many of the deficits were the fault of community resources being diverted to the hall renovation…or productive staff being fired to fund executive bonuses…or uninspired programming…or slashed programming…or slashed marketing?”

    Probably a lot of them.

    How much of the problem was on the revenue end of the equation versus the expense end?

    Kind of an insider question, but I do think the orchestra needs to do a better job increasing revenue. I have no idea how to do this of course, But other orchestras I hear are rolling in money and it should be easy enough to copy their strategies.

    “Because if you slash musician compensation without addressing (or even acknowledging) core weaknesses on the revenue end… Well, that’s the coward’s way out.’

    Not a question, but financial policy shouldn’t be dependedent on cowardice or lack thereof, especially on the part of a negotiator. When other people are courageous with my money, I am not necessarily filled with confidence?

    And guess what? Ultimately the same old revenue problems will come back to haunt you, except this time they’ll be tagging along with new problems.

    I don’t know this is the case. Is Kelley involved in the ongoing management of the orchestra. The fact is, this labor dispute didn’t seem to address the revenue issues, at least as far as I know. It would really help if the board took this opportunity to bring in a bright new management team to rebuild the marketing appeal of the Minnesota Orchestra for the 21st century. I don’t know if that’s happened yet.

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