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DEPOSITION
I EXHIBIT
1 j^SL
EXPERT REPORT
ui

JEFFREY H. SLOMAN, ESQ.

\
\p
vs

<
Barry E. Mukamal, Liquidating Trustee,
v.
General Electric Capital Corporation

In the United States Bankruptcy Court

For the Southern District of Florida
Case No. 12-01979-PGH

December 27, 2016

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I. INTRODUCTION

1. General Electric Capital Corporation ("GECC"), a registered State of New York

Article XII investment company, entered into a significant commercial lending relationship with

Thomas Joseph Petters ("Petters") and his company, Petters Company, Inc. ("PCI"), knowing

that Petters had a history of committing fraud. To protect itself, GECC imposed specific cash

control and due diligence procedures in the loan agreements with Petters Capital, Inc. ("Petters

Capital"), a special purpose entity created by PCI, and Redtag Biz, Inc ("Red tag"), a Petters

affiliate. GECC, however, virtually ignored these extra safeguards from the outset, enabling

Petters Capital to accumulate more than $45 million in delinquent debt. In order to ensure

lepayment, GECC agreed to conceal obvious and significant evidence that Petters and Petters

Capital were engaged in unlawful conduct This concealment, combined with the acceptance of

the repayment of all delinquent debt, allowed Petters to continue to promote and perpetrate, over

the next several years, one of the largest Ponzi schemes1 in U.S. history.

2. Based upon my review of the below-mentioned materials, combined with my

experience (detailed, in part, below) and the application of the facts derived from those materials

to the law, I conclude that (i) there is probable cause that GECC's employees committed

promotional money laundering and conspiracy to commit promotional money laundering; and (ii)

GECC could be held ciiminally liable for the i legal acts of Its employees.

1 A Ponzi scheme is wliere "investors ore paid off with money rece ved from later investors in order to prevent
discovery and lo encourage additional and larger investments " United States v, Loay2a, 107 F,3d 257, 259 n. 1 (401
Cir. .997).

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IL QUALIFICATIONS

3. In 1990, after practicing commercial and products liability litigation for six years

with two Miami law firms, I became an Assistant United States Attorney ("AUSA") in the United

States Attorney's Office for the Southern District of Florida (the "Office"). I spent my career in

the Office prosecuting serious criminal matters including narcotics, economic crimes, organized

crime, and terrorism. A copy of my curriculum vitae is attached to this report as Exhibit A.

4. During my nearly twenty (20) year career as a prosecutor, I tried approximately

fifty (50) jury trials to verdict. The Department of Justice honored me twice with one of its most

prestigious national awards: In both 1997 and 2003, 1 received the "Director's Award" for Superior

Performance as an AUSA for United States v. Castillo, and United States v. Imran Mandhai,

respectively.

5. Castillo was a health care fraud case that involved numerous licensed medical

doctors and clinic employees who defrauded public and private insurance companies. Following

several guilty pleas from doctors and clinic employees, the lead defendant was convicted after a

month-long trial on numerous counts, which included promotional money laundering, and was

sentenced to 168 months imprisonment and ordered restitution in the amount of $5,763,519. At

the time, that sentence was the longest for a health care fraud case. Due to its novelty, Castillo

generated one ofthe first series of newspaper articles examining the problems ofhealth care fraud

in South Florida. I was the lead prosecutor on the case and handled everything from strategic

decisions at the inception of the investigation through the trial and sentencing. The citation for the

appellate decision affirming the conviction and sentence can be found at United States v. Castillo,

146 F.3d 870 (1 1th Cir. 1998).

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6. United States v lmrcin Mandhai was the first post-September 1 1 , 2001 , prosecution

of radical Islamic fundamentalists. Their goal was to bomb various South Florida installations on

behalf of Osama bin Laden. The citation for the appellate decision affirming the conviction and

sentence can be found at United States v. Imran Mandhai, 375 F.3d 1243 (11th Cir. 2004), cert.

denied, 549 U.S. 923 (2006).

7. In 2001, 1 became the Deputy Chief of the Fort Lauderdale Narcotics and Violent

Crime Section, where 1 supervised approximately ten (10) AUSAs.

8. In 2003, 1 was promoted to the Chief of the Fort Lauderdale branch office, where I

supervised approximately thirty (30) AUSAs in the economic and narcotics and violent crimes

sections.

9. In early 2004, I was named Chief of the Criminal Division. As Chief of the

Criminal Division, I supervised all seven criminal sections in the Miami office and each branch

office (Fort Lauderdale, West Falm Beach and Fort Pierce) in the Southern District of Fjorida

Each branch office had separate sections dedicated to prosecuting economic crimes and narcotics

and violent crime. In that capacity, I supervised approxima ely 200 AUSAs and reviewed and

approved hundreds of significant indictments and negotiated resolutions involv'ng a wide-variety

of issues, including money laundering

10. In October 2006, I was promoted to First Assistant United States Attorney

("FAUSA"). The FAUSA is the princ'pal legal advisor to the United States Attorney and

supervises approximately 270 AUSAs in the civil, criminal, and appellate divisions. As FAUSA,

I was the Office's liaison to the Department of Justice, client law enforcement agencies, the

defense bar, and, at times, the judiciary regarding a wide range of issues. I also remained intimately

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involved in reviewing and approving the most significant indictments and negotiated resolutions

in the District

11. In May 2009, 1 was appointed the acting United States Attorney for the Southern

District of Florida, and in January 2010, 1 was named United States Attorney for the Southern

District of Florida. I served in that position until approximately June 2010. As the chief federal

law enforcement officer in South Florida, I focused on national security, organized crime, public

corruption, and a wide-variety of white-collar criminal offenses, including health care fraud,

securities fraud, mortgage fraud, and money laundering. While I was United States Attorney, the

Office achieved a record number of convictions, including cases involving the prosecution of the

largest Ponzi scheme in Florida history, multiple elected public officials, and high ranking

members of international organized criminal organizations, as well as numerous health care,

mortgage, and bank fraud offenses.

12. In each one ofthe above-mentioned supervisory positions, I reviewed and approved

numerous indictments involving a wide-variety of money laundering issues.2 Each of the

indictments that I approved were presented to, and eventually returned by, federal grand juries in

the Southern District of Florida. My supervisory responsibilities required me to provide legal and

strategic advice to the lawyers handling the matters, negotiate or help negotiate various issues with

opposing counsel, and/or reconfigure office resources to address emerging issues in litigation. The

following represents a sample of the types of significant money laundering and Ponzi scheme

matters I supervised and/or prosecuted:

2 In order to accomplish the goals ofa Ponzi scheme, i.e., "not getting caught," the participants take steps to either,
inter alia, conceal or disguise the nature of the proceeds, etc., or promote the carrying on of specified unlawful
activity.

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i. United Stales v. Scott Rothstein. On December 1, 2009, 1 approved a multi-count

RICO conspiracy Information, which also charged separate counts of money laundering

conspiracy and wire fraud. The Information alleged that Scott Rothstein engaged in a pattern of

racketeering activity from around 2005 through November 2009 using the Rothstein, Rosenfeldt

and Adler ("RRA") law firm, located in Ft. Lauderdale. During his plea, Rothstein admitted that

RRA was the criminal enterprise through which he and others fraudulently obtained approximately

$1 2 billion from investors through bogus investments and other schemes. Rothstein used RRA to

fraudulently induce investors to: (1) loan money to non-existent borrowers based upon promissory

notes and requests for short-term bridge loans for business financing; and (2) invest funds based

upon anticipated pay-outs from purported confidential civil settlement agreements. Rothstein and

his co-conspirators used multiple bank accounts at TD Bank, N.A., Gibraltar Private Bank and

Trust, and other financial institutions to deposit and launder investors* money. To peipetuate and

conceal the fiaud, Rothstein and his co-conspirators created, and caused the creation of, false bank

documents, false on-line bank account information, and false settlement agreements and

promissory notes, which were shown to investors as proof that the settlement and loan monies

existed. In fact, however, there were no settlement funds or loan clients, and the bank accounts

oniy contained "Ponzi" scheme funds, See Fort Lauderdale Attorney Charged in Billion-Dollar

Ponzi Scheme, Federal Bureau of Investigation, Miami Division (May 25, 2016, 2:39 PM),

https://www.fbi.gov/miami/prcss-rclcascs/2009/mml20109a.htm. Fort Lauderdale Attorney

Sentenced to 50 Years in Billion-Dollar Ponzi Scheme, Federal Bureau of Investigation, Miami

Division (May 25, 2016, 2:39 PM), https ://www.fbi. gov/m i am i/press-

e eascs/2010 mm060910.htm.

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XI. United States v. JackAbramoff. In August 2005, Washington, D.C. lobbyist Jack

Abramoff was indicted for various fraud and money laundering charges concerning the financing

for the purchase of a South Florida gambling cruise line called Sun Cruz Casino. Abramoff pled

guilty, agreed to cooperate, and was sentenced to 70 months' imprisonment. This case led to an

expedited negotiated resolution of a companion case in Washington, D.C. by the Public Integrity

Section of the Department of Justice. Abramoff cooperated against several public officials,

including United States Representative Robert Ney, R-Ohio, his former chief of staff, Neil Volz,

and former deputy secretary for the Department of the Interior Steven Griies.

nr. COMPENSATION

13. I bill at an hourly rate of $650 per hour for any file review, research, report

preparation, conference calls, travel, deposition, trial preparation, or testimony at deposition or

trial. My fees are not contingent on the opinions expressed herein or the outcome of this case.

IV. DATA AND OTHER INFORMATION CONSIDERED

14. This report is a statement of my major opinions to date. The information and data

I reviewed in preparing this statement is listed below. GECC may produce additional materials,

and I anticipate that depositions regarding this report will be taken. As such, I reserve the right to

supplement or change my opinions after reviewing any such materials.

Transcript of deposi tion of Thomas Donnelly dated December 1 8, 20 1 4.

Transcript of testimony of Paul Feehan at Thomas Petters' criminal trial (the "Feehan
Criminal Trial Testimony").

Transcript of deposition of Paul Feehan dated August 9, 2012 (the "Feehan 2004
Examination Transcript").

Transcript of deposition of Paul Feehan dated December 10-11, 2014 (the "Feehan
Deposition Transcript").

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Transcript of deposition ofPaul Feehan dated May 1 9, 201 6 (the "Feehan 2016 Deposition
Transcript").

Transcript of deposition of William Mayer dated September 10, 2015.

Transcript of deposition of Richard Mcnczynski dated April 13-14, 20 J 5

Transcript of deposition of Glenn P. Bartley dated July 17, 2015.

Transcript of deposition of Deanna Coleman dated April 18, 2016.

Transcript of deposition of Geoffrey K. Hall dated January 1 4, 2015

Transcript of deposition of James Ungari dated May 12, 2015.

Transcript of Scott Haggbloom testimony at Thomas Peters' criminal trial

Transcript of deposition of Erik Hulsey dated July 1, 2015.

Transcript of testimony of Jack Morrone at Thomas Fetters' criminal trial.

Transcript of deposition of Jack Morrone dated December 3-4, 2014.

Transcript of testimony of Robert Pugmire at Thomas Petters' criminal trial.

Transcript of deposition of Robert Pugmire dated August 21, 2015.

All exhibits in the above testimonies, examinations, and depositions referenced in this
report.

Sworn Declaration of Thomas J Petters dated October 6, 201 3 .

Amended Complaint ("Complaint") [D.E. 26].

Amended Answer to Amended Complaint ("Answer") [D.E. 68]

GECC's document retention policy (the "Document Retention Policy") 3

GECC's Money Laundering Prevention4 and Integrity Policies.5

3 GE02827 6-27.
4 Money Laundering Prevention, Issued: October 2000, GE0014854-14858.
1 Integrity: The Spirit & the Letter ofOur Commitment, "1995, General Electr c Company, Fairfield, CT 0643 J. All
rights reseiyed" GE0034873-0014960; Integrity: TheSphit& the Letter ofOur Commitment, October 2000,
GE00 1 496 1 -00 14996; and Compliance & Integi ity: A Guidefor Leaders; Integrity. The Spirit & the Letter ofOur

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V. SUMMARY OF OPINIONS

1. THERE IS PROBABLE CAUSE TO BELIEVE THAT GECC'S EMPLOYEES COMMITTED

PROMOTIONAL MONEY LAUNDERING AND CONSPIRED TO COMMIT
PROMOTIONAL MONEY LAUNDERING.

2. GECC COULD BE HELD CRIMINALLY LIABLE FOR THE ILLEGAL ACTS OF ITS
EMPLOYEES.

VI. SIGNIFICANT PERSONS AND ENTITIES

IS. GECC is a commercial lender that, at all material times, was chartered under the

New York State Banking Law and subject to supervision by the State of New York Banking

authority.6 GECC is one of the most sophisticated commercial lenders in the world.7 The

following were GECC employees with the following titles and roles during the relevant time

period:

Jim Ungari ("Ungari"), Managing Director of Portfolio Operations for GE Coiporate

Financial Services.8 Ungari joined GE in approximately 1977 as a collateral auditor. By
1 985, he was promoted to Senior Vice-President, Manager of Operations, for GE Capital
Corp's Finance Group. In 1999, Ungari became the managing director of portfolio
operations. In that capacity he was responsible for managing GECC's loan portfolio.
Portfolio management involves monitoring and managing loans that the underwriting
department had approved.9

Paul Feehan ("Feehan"), GECC's Senior Vice President ofRisk and Underwriting. Feehan
earned his bachelor's degree in accounting from the University of Illinois and an M.B.A.

Commitment, undated, authored by Jeffrey R. Iimnelt, Chairman of the Board, Chief Executive Officer,
GE0121981-0 121995.
6 Answer at If 14.
7 Id. at 1 13.
* Ungari Deposition Transcript at 27.
9 Id. at 16-17; 26-28; and 34.

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from the Kellogg School of Management at Northwestern University,10 Feehan also

qualified as a certified public accountant 11 He began working for GECC in 1987 and
worked his way up GECC's corporate ladder.12 Starting in approximately late 1998, Feehan
succeeded Catharine Midkiff as Senior Vice President of the portfolio and underwriting
group and remained in that position until June of 200 1 ,13 When he succeeded Midkiff, the
Pctters Capital Line was part of the portfolio of loans that Feehan oversaw.14 Feehan
reported to Ungari at all relevant times.15

Richard Menczynski ("Menczynski"), GECC's Assistant Vice President and primary

account manager for the GECC-Petters Capital relationship until September 2000. 16
Menczynski left GECC in 1998 and then returned to GECC in March or Apr 1 1999 at
Petters' request.17 When he returned to GECC in 1 999, he was involved in the due diligence
for any future advance requests on the Petters Capital Line 18 Menczynski reported to
Feehan at all relevant times. In or around September 2000, Menczynski left GECC to work
atRedtag.19

Jack F. Morrone ("Morrone"), was an assistant underwriter, business analyst and associate
for GECC from 1997 to 2002.20 At all relevant times, he reported to Paul Feehan.21 He was
the primary account manager for the Redtag credit line, and in or around September 2000,
after Richard Menczynski left GECC for Redtag, Morrone took over as the primary account
manager for the GECC-Petters Capital relationship.22

Geoffrey Hall ("Hall"), was an account manager for GECC's central region, corporate
finance group between 1994 and 2001 23 He reviewed Menczynski 's work on certain
transactions including Petters Capital 24 Although he oversaw Menczynski, he was not
responsible for checking on his daily responsibilities.25 In early 2000, GECC realized that
the Petters Captial Line and the Redtag Line were almost entirely concentrated in deals
with Costco and Quietco (a company GECC learned was affiliated with Costco). When
Ungari became aware of the concentration issue, he instituted a concentration limit and

10 Feehan Deposition Transcript at 9.

uld.
12 Id.
11 Id. at 25-26
14 Id. at 110
15 Id at 30
14 Menczynsk Deposition Transcript at 84-86
17 Id at 80 81.
"Id. at 88,
9 Id. at 1 12-U3 and Feehan Deposition Transcript at 80,
20 Morrone Deposition Transcript at 22.
22 Id. at 22-23.
21 Id. at 381
13 Hall Deposition Transcript at 27-28
1 Id, at 77- 78.
25 Id. at 17 .

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was very upset with Feehan, Menczynski, Morrone, and Hall for allowing the concentration
issue to arise.26

16. Fetters was indicted for, convicted of, and sentenced to 50 years for, orchestrating

a $3.65 billion Ponzi scheme. See U.S. v. Thomas J. Fetters, et al.t No. 08-364 (D. Minn. June 3,

2009) (D.E. 196) ('Teters Criminal Case").27 Specifically, on December 2, 2009, after five days

of deliberations, a jury convicted Petters of ten counts of wire ftaud, three counts of mall fraud,

one count of conspiracy to commit mail and wire fraud, one count of conspiracy to commit money

laundering, and five counts of money laundering. On April 8, 201 0, Petters' 50-year sentence was

imposed, and, on February 17, 2011, the United States Court of Appeals for the Eighth Circuit

affirmed his conviction and sentence.28

1 7. PCI was a company owned and controlled by Petters and was purportedly in the

business of purchasing closeout and overstocked goods, mainly electronics, from distributors and

merchants and selling them to big box retailers 29 Deanna Coleman ("Coleman") was die vice

president of operations for PCI.30

1 8. Petters Capital was a single purpose entity ("SPE") formed to facilitate the lending

relationship between PCI and GECC. In 1998, GECC agreed to provide Petters Capital, a revolving

line of credit with a maximum exposure of $50 million ("Petters Capital Line").31

36 Id. at 232-236, 239-24 1 , 33 6-342.

27 The Superseding Indictment alleged, inter alia, that from at least 1995 to about September 2008, "PETTERS ...
made numerous false statements, false representations and material omissions to fraudulently induce investors to
provide [his companies] with billions of dollars. These funds were purportedly to be used to purchase merchandise
which would then be resold to retailers at a profit. In fact, there were no such purchases or resales." See id at 2, H5.
a U.S. v. Petters, 663 F.3d 375 (8th Cir. 201 1).
29 At the time, Petters Capital did not exist Petters, through his entity Petters Company, Inc., created Petters Capital,
a single purpose entity, for the purpose offacilitating Petters' transactions with GECC. See Feehan Deposition at 1 86.
30 Coleman Deposition Transcript at 9.
31 Answer at KH 29 32.

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19. Redtag was a Petters-affiiliated company that was purported y in the business of

pure lasing closeout and overstocked goods from distributors and me chants and selling them

online. Petters was Redtag's founder and CEO.32

20 Costco Wholesale Corporation is a big box re ailer, to whom Petters Capital and

Redtag (allegedly) sold, or arranged for the sale of, consumer electronic goods. National

Distributors (a.ka. National Clothing) (with Costco Wholesale Corporation, "Costco") was a

wholly-owned subsidiary of Costco Wholesale Corpora ion whose business was to purchase goods

from manufacturers and then sell those goods to Costco W .olesale Corporation 33

VII. GENERAL FACTS APPLICABLE TO ALL OPINIONS

21. In 1997, GECC and Petters started discuss'ng the possibility of GECC financing

Petters' acquisitions of goods for resale to big box retailers.3 GECC's financing was intended to

allow PCI, through Petters Capital, to pay suppliers while they awaited payment from (i) retailers

who purchased the merchandise or (ii) online sales, respectively,35

22 Prior to entering into the GECC-Petters lending relationship, GECC commissioned

a background investigation on Petters individually ("Kroll Report").36 The Kroll Report

documented that* (i) arrest warrants had previously been issued against Petters for passing bad

checks and possibly forgery; (ii) Petters previously filed for Chapter 7 bankruptcy, and (iii) Petters

was sued several times for bad debts resulting in the entries ofjudgments against him and, in one

instance, a court found his actions constituted "bad faith."37 As a result of the findings in the Kroll

" Exhibit 29, at p. 1 3, GE4052-GE4069.

33 Answer at ^ 28
34 Answer at 1 32.
35 74 at |1f 20 and 28.
36 Id at 1 33.
37 Id. at K 3d ; and Kroll Report (Exhibit 20 GE00202 1 1 - 1 6).

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Report, Catharine Midkiff, then GECC's Senior Vice President ofRisk and Underwriting, objected

to GECC conducting business with Petters.38

A. Petters Capital Line

23. Despite Midkiff s objection to GECC conducting business with Petters, GECC

entered into a credit agreement with Petters Capital ("Credit Agreement")39, evidenced by a

closing memorandum ("Closing Memorandum") dated March 26, 1 998.40 The Credit Agreement

had a 36-month term and contained the following terms: (i) a $50 million line of credit ("Petters

Capital Line"); (ii) Petters Capital would submit due diligence packages to GECC including

copies of supporting documents for each draw request; (tii) GECC would approve draws on the

credit line on a transaction-by-transaction basis; (iv) funds could only be used to purchase

merchandise; (v) repayment of the Petters Capital Line would come from the sale of purchased

merchandise; (vi) retailers would pay GECC directly by depositing funds into a GECC-controlled

lockbox or blocked account over which Petters would have no authority; and (vii) GECC's

compensation would include (a) interest, (b) a profit-sharing success fee ("Success Fee"), (c)

inventory loan fees, (d) collateral monitoring fees, and (e) fees for non-use of available funds.41

24. For each draw request, the Credit Agreement required Petters Capital to provide

GECC with, among other information and documents, the following: (i) an acknowledgment letter

signed by Petters Capital's customer in which the customer (a) agreed to transmit payment for the

merchandise it purchased from Petters Capital into a GECC-controlled lockbox and blocked

account and (b) acknowledged that it may be held liable for its debt to Petters Capital if the

31 Answer at 36; and hand-written note on Closing Memorandum (Exhibit 4, GE1360-62).

39
Credit Agreement, Dated as of March 26, 1998 between Petters Capital, Inc., as Borrower and General Electric
Capital Corporation as Lender, Exhibit 738, GE079 1-0880 ("Credit Agreement").
40 Closing Memorandum, GE 1360-62,
41 Credit Agreement

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customer made payment other than directly into the GECC-controlled lockbox and blocked

account ("Acknowledgment Lctter(s)")12; (u) bills of lading; (lii) purchase orders; and (iv) bills

ofsale."13 GECC required that merchandise purchased by Petters Capital be (l) pre-sold to retailers

and (ii) serve as GECC's specific collateral 44 Additionally, each advance request needed to be

approved by GECC and GECC could turn down any advance request.45 Each loan to Petters

Capital was secured by the merchandise that Petters Capital purchased with each draw and the

accounts receivable owed to Pet ers Capital from the retailers that purchased the merchandise.46

GECC filed a UCC-1 financing statemen with the Minnesota Secretary of State to perfect its

security in eresis in Petters Capital's assets.47

25. GECC's senior management who approved the Credit Agreement included Hall,

Rachel Hands (GECC Region Manager), and Michael Gaudino (GECC Region Manager, Chief

Credit Officer, and President of Portfolio and Underwriting for the Division).*8 The Petters Capital

Line was significant and substantial to GECC a Petters Capita] default would have been a "big

9
loss. GECC's senior management approved the Credit Agreement because they believed that

die Credit Agreement s "addition[al] .... cash control requirements," such as performing due

di igence on all proposed advances, and the Acknowledgment Letters afforded GECC sufficient

protection from the risk associated with Petters' disreputable past.50 Notably, however, Midkiff

added a handwritten note on the C osing Memorandum "to establish clearly and on the record that

47 Teehan lest tied hat the Acknowledgement Letters were contracts between GECC and Petters' customer, e g ,
Costco Fcelwn Deposition Transcript at 426-427.
45 Closing Memorandum, Answer at f| 30, Menczynski Deposit on Transcript at 72-73; Feehan Deposition Transcript
at 498; see also Credit Agreement
44 C'osing Memorandum, Answer at Tiff 5 and 37; and Feehan Deposition Transcrip a 1 226-230 and 291.
45 Feehan Deposition Transcript at 120- 21 ; and Internal GECC Presentation, Exttb 1 3, at GE1 1653.
4C Closing Memorandum; and Answer at f 44.
47 Exhibit 11, GE9456-9466.
48 CJosing Memorandum.
49 Answer at U 38; and Feehan Deposition Transcript at 61 9,
30 Clos ng Memorandum.

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I do not support this transaction. I believe that the additional controls will largely prevent the

opportunity for GE Capital's money to be used improperly but I do not approve of being in

business with a person who has previously demonstrated a lack of integrity. si

26. In 1999, GECC and Petters Capital agreed to change the terms of the Credit

Agreement These changes were documented in a letter executed by Petters, individually and on

behalf of Petters Capital, and Hall, on behalf of GECC ("Letter Amendment").52 Under the

original Credit Agreement, Petters Capital was prohibited from borrowing funds from any lender53

other than GECC.54 The Letter Amendment allowed Petters Capital to borrow money from other

private lenders to purchase merchandise ("Bridge Lenders").55 Upon sale ofthat merchandise to

a retailer, GECC would, upon an approved draw request, advance funds to Petters Capital to repay

the Bridge Lenders' loans to Petters Capital.56 GECC's collateral for these loans would then

become the receivable owed to Petters Capital from the retailer.57 The Letter Amendment did not

change the other terms of the Credit Agreement, including the cash controls and due diligence

requirements, such as the Acknowledgement Letters.58

27. GECC, however, failed to regularly verify its collateral by communicating directly

with retailers, instead accepting Acknowledgment Letters horn Petters Capital.59

28. Feehan testified that on or before June 23, 2000, he learned that Costco checks were

not being deposited in GECC's lockbox but instead were first being deposited into a Petters bank

31 Id.
12 Exhibit 27 to Morrone Deposition, PCI_S_GE_000005966-67.
13 Some witnesses refer to the lenders as investors or lenders interchangeably and some documents refer to the
lenders as investors. For convenience, 1 use the term lender throughout this report except when quoting language.
54 Answer at IT 58 -59; and Feehan Deposition Transcript at 145-150, 1 88-1 89 and 248.
35 Exhibit 27 to Morrone Deposition, PCI S GE 000005966-67

57 Id
aJd
59 Answer at T 52; Feehan Deposition Transcript at 157, 279-300, 374-381, 460-461.

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account from which he would pay GECC.60 After realizing that Petters Capi tal was not complying

with the Credit Agreement's cash controls by ignoring the lockbox requirement, Feehan had

Petters agree to endorse and forward "all future payment checks received on GECC-financed deals

directly to GECC "61 Therefore, Petters Capital was obligated to forward all retailer checks for

payment ofmerchandise directly to GECC.62

29. In a handwritten note on a financing request memo dated My 3, 2000, Feehan

memorialized the requirement that Petters Capital comply with the cash control requirements and

that Petters agreed to forward all Costco checks directly to GECC 63 There was no evidence that

Petters ever complied with this agreement 64 Rather, Petters continued paying GECC using PCI

and/or Petters Capital checks and wire transfers.

30. On August 25, 2000, Feehan told assistant underwriter Jack F. Morrone65 that a

particular Redtag deal sounded "shady."66 Specifically, Feehan was concerned that the deal

contempla ed financing Redtag on a Friday for deals that it would close on Monday but for which

"68
there was no ascertained buyer 67 Feehan thought the deal sounded "too good to be true

31. In early October 2000, after Morrone rep aced Richard Menczynski69 as the day-

o-day manager of the Petters Capital Line, Feehan became more involved in managing the GECC-

40 eehaa Deposition Transcript at 280-81 ,

61 Exhibit 2, GE12440-GE 12442 and Feehan 2004 Examination Transcript at 351-353.
62 Answer a ff 65; and Feehan Depos tion Transcript at 279-280.
63 Exhibit 8 to Feehan 2004 Examination, GE12440-42; Feehan Deposition Transcript at 279-286.
M Menczynski Depos tion Transcript at 245-246.
65 From 1 997 to 2002, Morrone reported to Paul Feehan. Morrone Deposition Transcript at 22.
66 Feehan Deposition Transcript at 358; Exhibit 31 in Feehan Deposition, GE01 1 1799-802; and Exhibit 42 in Feehan
Deposition GEO! 1 1803-806.
67 Feehan Deposition Transcript at 364
68 id. at 367.
69
Between approximately March 1999 and September 2000, Menczynski managed the Petters Capital Line. He was
one of two GECC employees <io receive Petters Capital's draw requests. After receiving the requests, Menczynski
would prepare a proposal outlining the terms of Ihe req est and send it for approval to GECC's senior management,
including Feehan and Ungu *. While Menczynski was overseeing Ihe Petters Capital Line, Petters Capital's
indebtedness to GECC hod grown to approximately $45 mil ion In approximately September, 2000, Menczynski left
hisjob at GECC overseeing he Petters Capital Line to work as a Vice President at Redtag,

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Petters relationship because the balance on the Petters Capital Line had grown and Petters Capital

was slow in paying it down.70 According to Feehan, Petters made various excuses about the slow

payments. For example, he claimed he was trying to curry favor with Costco by giving them more

time to pay; however, each excuse was getting harder for Feehan to believe since "the oldest of

the Costco receivables was getting on 120 days old which had never happened before."71 Although

Petters blamed the delay on Costco, Feehan did not believe him.72 As a result, Feehan began

negotiating the early termination of the Petters Captial Line.

32. On October 9, 2000, Feehan sent a letter to Petters Capital terminating the Petters

Capital Line ("Termination Letter"),73 The Termination Letter, which Petters executed, required

Petters Capital to pay the outstanding principal balance on the Petters Capital Line (then

approximately $45 million) plus interest, the Success Fee (then approximately $400,000,) and

other charges totaling approximately $45,891,229,62 (collectively, the "Final Payment") by

October 27, 2000.74

33. Before receiving the Final Payment, Feehan decided to independently verify

Petters' claim that Costco was delinquent in satisfying its debt to Petters Capital.75 Accordingly,

on October 23, 2000, GECC sent a letter to Costco directly seeking verification ofpurchase orders

("Costco Purchase Orders") that Petters Capital previously provided GECC, allegedly

evidencing Costco's debt to Petters Capital and GECC's collateral on the Petters Capital Line

("Ocotber 23 Verifiction").76 The next day, Feehan called Costco's representative, Erie Hulsey,

to follow-up on the October 23 Verification. Prior to the call, and upon request, Feehan faxed

70 Feehan Deposition Transcript at 417-422.

71 Feehan 2004 Examination Transcript at 143 - 146.
71 Feehan Deposition Transcript at 420 and 422.
73 Exhibit 7 to Feehan 2004 Examination, PCl-S-GE_0000060489-93.
74 Id.\ Answer at K 70.
75 Feehan Deposition Transcript at 424-426 and 456.
76 Id. at 447-450; and Exhibit 48 in Feehan Deposition, GE15271. .

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Hulsey copies of the Costco Purchase Orders so he could verify their authenticity.77 Hulsey

returned Feehan's call and disclaimed all of the Costco Purchase Orders.78 Feehan was "fairly

stunned" to learn that these were not the Costco Purchase Orders.79

34, Feehan testified that "I'm quite certain that when we had the phone call with

s80
Costco, that I talked to Bill Mayer and we talked to Jim Ungari about that as wel .

35. Deanna Coleman (the government's mam cooperating w'tness at the Petters

criminal trial) testified t at after leaving multiple unreturned voicemails for Petters, Feehan, or one

of his colleagues, called Coleman to say that he was trying to reach Petters because GECC had

just learned that the Costco Purchase Orders were fake.81 According to Coleman, Petters was

82
actually trying to avoid Feehan's calls.

36. Eventually, Pette s spoke to Feehan on October 24, 2000. According to his October

6, 2013 declaration, Petters staled that on October 24- 2000, Feehan told him, inter alia, that

"GECC did not have [any] collateral to secure payment ofthe Petters Capital L ne and that Petters

Capital was a fraud."83 Petters stated that Feehan threatened to disclose the fraud to law

enforcement.84 Petters also stated that he and Feehan agreed that Petters "would raise money from

new lenders, that these new lenders loans would be secured by the same [fake and fraudulent

col ateral . . and that [Petters] wou d use this money to pay off GECC in full."85

37. In contrast, Feehan testified lha' no sooner had he hung up with Hulsey, then an

"out of control" Petters called and instructed him to stop contacting Costco because "(Feehan] was

77 Feehan Deposition Transcript at 466 and 468.

78 Answer at U 74 Feehan Deposition Transcript at 468; Hulsey Deposition Transcript at 104 - 1 15.
79 Feehan Deposition Transcript at 471-472
80 Feehan Deposition Transcript at 433.
8 Coleman Deposition Transcript at 88-92.
82 Id at 90
81 Fetters Declaration, dated October 6, 2013 at I.
84 74 at 2.
85 Id. at 4

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going to wreck Petters' business relationship with Costco."86 Feehan further testified that Petters

said that "of course [Costco is] not going to tell you [the Costco Purchase Orders are] theirs. They

don't want anyone to understand where they're getting their diverted goods so they are not going

to admit this to you, they are not going to admit this to anyone."87 Based on the time and content

of Petters' call, Feehan claimed "it was believable and I had all the other documentary evidence

88
that I believed at the time, you know, was a valid receivable.

38. Significantly, no one documented: (i) Feehan's conversation with Hulsey when he

learned that the Costco Purchase Orders were Me; (ii) Feehan's conversation with Petters about

these fake Costco Purchase Orders; or (iii) Feehan's conversation with his supervisors regarding

89
Feehan's discovery.

39. When Petters offered to pay down the Petters Capital Line with new lenders'

funds,90 Feehan accepted and said "that sounds like a good plan to me"91 even though he never (i)

tried to directly communicate with the new lenders or (ii) asked Petters who the new lenders

were.92

40. After Feehan agreed to accept repayment from new lenders' funds, Petters left

Feehan the following voice mail:

. . .Thanks for your straight shooting with me and thank you for your undaunting
support and all the good things coming. I know that you know, on the streetpeople
say things about companies and talk about people and things, ttnsureness and
scaring people or whatever. But 1 tell you what, I'll make you look like a hero, I
promise you on the Petters [Capital] situation and the Redtag situation. Thanksfor
believing in me, thanksfor watching outfor us and I'll do the samefor you and
I just wanted to tell you that ... .You'll have copies of every single solitary check

86
Feehan 2004 Examination Transcript at 1 65.
"Id. at 156.
u Id. at 165-66 and Feehan Deposition Transcript at 49.
89 Answer at 80-82.
50 Feehan Deposition Transcript at 493-494.
91 Id. at 494.
91 Id. at 534-535 and 538-541 .

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from Cosco [sic] cause [sic] I want you to be able to push it in somebody's face
when its [sic] paid off. . 93

41. Between the time of Petters' proposal to pay GECC with new lenders' funds and

the time GECC deposited the Fnal Payment, Feehan recalled that Petters and Petters Capital's

purported banker, "Gary Anderson," called and told Teehan that Petters Capital would be

submitting a partial pay off of the Petters Capital Line with a $20 million payment from new

lenders' funds made by way of four checks, each in the amount of $5 million 94 Feehan even

recalled that "Anderson" confirmed that Petters Capital had enough money in its account to honor

the $20 million worth of checks.95

42. When GECC received and deposited the four $5 million checks, the checks

bounced even though purported banker "Gary Anderson" previously told Teehan that Petters

Capital had sufficient funds to honor $20 million worth of checks 96 Even though Feehan "began

to wonder who 'Gary Anderson' was," be claims that he was not suspicious about the true identity

of "Gary Anderson" or the source of the funds after Petters wired $20 million to GECC to replace

the bounced checks a few days later 97

43. In late October 2000, after Feehan learned that the Costco Purchase Orders were

fake, Glenn Bartley, an employee in GECC's Atlanta office, without knowledge ofFechan's recent

discovery regarding the fake Costco Purchase Orders, told the Managing Director of Portfolio

Operations for GE Corporate Financial Services, Jim Ungari, that he was contemplating approving

93 Exhibit 15 to Feehan 2004 Examination, GE00 14841; and Feehan 2004 Examination at 264.
94 Answer at K 96; and Feehan Deposition Transcript at 531-532; Ex. 84 (IRS Feehan Memorandum of Interview
dated May 6, 2009), at f 16.
95 Feehan Deposition Transcript at 532,
94 Id at 533-534; Answer at K 96.
97 Id at 531-534, and Ex. 84 at f17.

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a multi-million dollar loan with a GECC customer who intended to use die funds to enter into a

significant transaction with Petters.98 Ungari instructed Bardey to speak to Feehan before entering

into the transaction.99 Following Ungari's instruction, Bartley called and asked Feehan for any

advice or warnings about entering into the transaction since it involved Petters.100 According to

Bartley, Feehan did not warn him about any issues and said "no problem."101 As a result, Bardey

approved the deal. When Ungari found out that Bartiey approved the deal, he was furious.102

According to Bartley, Feehan lied to him. 103

44. In December 2000, GECC received the final installment of the Final Payment and

the Petters Capital Line was satisfied on December 8, 2000. 104

B. RcdtagLine

45. In December 1999, GECC provided a $55 million revolving line of credit to Redtag

("Redtag Line"). 105

46. In December 2000, Redtag made a funding request to GECC under the Redtag

Line.106 While discussing that request, Petters told Feehan that Redtag would use the funds to

purchase goods from Petters Capital and/or PCI. 107

47. Feehan became concerned108 and asked Petters how he could be sure that the Redtag

funding request would not be used to pay off the lenders that had just repaid GECC in connection

n Bartley Deposition Transcript at 37-50, 70-74, 88-89, 148-149, and 183-186.

99 Id. at 41.
m Id. at 43-44.
101 Id. at 48-49; see also 45-46 and Exhibit 183 to Bnrtley's Deposition.
m Id. at 71.
103 Id.m 73-74 and 183.
104 Ex. 84 at $20; and Answer at $ 106.
105 Answer at $ 42; and Feehan 2004 Examination at 130-13 1.
106 Feehan Deposition Transcript at 552-553.
107 Id. at 553.
mId at 554-555.

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109
with satisfying the Petters Capital Lme. Petters said that those lenders were paid by Coslco's

payments lo PCI and/or Petters Capital,110 and offered to fax Feehan copies of the Costco checks,

hi
which he said showed that the new lenders were paid-off by Costco.

48 Upon GECC's receipt of the checks, Morrone, at Feehan's direction, called

Costco's bank to determine whether they cleared in the amounts reflected on the face of the

checks.112 Costco's bank told Morrone that the checks did not clear in those amounts,113 Morrone

told Feehan, and together they called the bank again to re-confirm that information, 1 14 When the

second bank employee confirmed that each check cleared in a dramatically smaller amount than

was reflected on its face, Feehan concluded that Petters doctored the checks ("Doctored

Checks").1 15 He told Petters that he did not believe him and accuse him of doctoring the checks

and the Costco Purchase Orders."6 Accordingly, leehan denied Redtag's funding request. 117

49. Soon thereafter, the Redtag loan was paid off 1 18

C. Audit Response Letter

50 On December 27, 2000, a few days after GECC discovered the fraudulent checks,

Redtag, through its contiol er, sent a letter to GECC (through Morrone) stating that Redtag's

auditors Ernst & Yo ing LLP - were auditing Redtag's financial statements ("December 27th

Audit Letter" . In the December 27 11 Audit Letter, Redtag requested that GECC provide Ernst &

109 Id at 553.
110 Id. at 553-554.
11 Id. at 553-557; and Exhibit 56 to Feehan Deposition, 0304.0001-.00012
1 12 Feehan Deposition Transcript at 556 and 563-566.
113 Id. at 564
luId at 564-565.
11S Feehan 2004 Examination at 216, 222-223, 225-226; and Feeiian Criminal Trial Testimony at 265-266.
1 6 Answer at U 1 10; and Feehan Criminal Trial Testimony at 265-266 ("there's been two times I have tried to
independently verify what you ve told me Once with Costco and now with the bank, and both times the answer has
been contrary lo what you've said or represented ... ")
1 1 7 Fccban Deposition Transcript at 573-574.
mEx 84 at ^31.

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Young LLP with certain information, including the "nature of defaults, if any" by Redtag on the

Redtag Line. 119

51. On January 30, 2001 , GECC (through Morrone) responded to Ernst & Young that

Redtag had merely committed a "Net Worth Covenant Event of Default" ("January 30,h Audit

120
Letter Response"), while omitting any reference to the Doctored Checks.

52. In 2009, approximately nine years after Petters sent GECC the Doctored Checks, it

was revealed that Morrone maintained a copy of the Doctored Checks in his desk drawer with

handwritten notes on it detailing the conversation with Costco's bank - apparently the only copy

of the Doctored Checks and the only record ofthe conversation with Costco's bank that GECC or

any ofits employees kept.121

D. GECC Violated Its Money Laundering Prevention and Integrity Policies

The following are relevant portions of GECC's Money Laundering Prevention ("MLP")

and Integrity policies that were in effect when the above-discussed activities occurred

(collectively, "MLP and Integrity Policies"):

a. Publication: Money Laundering Prevention

[General Electric ("GE")] will conduct business only with reputable customers who
are involved in legitimate business activities and whose fhnds are derived from
legitimate sources. 122

Employee's responsibilities: Learn about and carefully watch for anything that
might indicate money laundering or other illegal activities or violations of GE
Policies. Ifthese or any other signs ofpossible violation come to your attention be
sure to promptly resolve your concern before proceeding further with the
transaction. Resolution should include management review and should be well
documented.123

1,9 Answer at 1 114.

120 Answer at 1115.
121 Exhibit 64 at PettersReports001526 at 133; also see PettersReportsOO 1524-25 at H23-28.

m Money Laundering Prevention at GEOO 14854

133 Id at GE0014855.

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What to watch out for:

A customer . . . who provides insufficient, false or suspicious information, is

te uctant to provide complete information, or is anxious to avoid a reporting or
record-keeping requirement 24

Payments by use of monetary nstruments that are not consistent with the business
activities of the client; appear to have no identifiable link to the customer; or have
been identified as money-laundering mechanisms.125

b. Publication: Integrity: The Spirit & The Letter of Our Commitment126

AT GE Employees must comply not on'y with the letter of these policies but also
their spirit 127

GE policies apply to all employees ofthe company throughout the world.128

Employees' responsibilities] Promptly raise any concern that you or others may
have about possible violations of any GE policy, or about a possible request that
129
you believe might violate a GE policy.

If you raise an integrity concern and the issue is not resolved, raise it with one of
the other contacts listed above.130

When You Have an Integrity Concern: One of the most important responsibilities
each of us has as a GE employee is the obligation to raise a concern about a possible
violation of GE policy or the law.131

How to Raise an Integrity Concern : Contact superv'sor or manager,

compliance/auditing resource, company legal counsel, next level of
132
management.

What Happens When an Integrity Concern is Raised: Assign Review Team ->
Conduct Investigation Determine Actions Improve Processes -> Provide
Feedback.133

134 74
1JS/4atGE0014856.
GEOO 1496 1-00 14996
37 Id. at GE0014962, \ 3.
11 Id. at GE0014966
mId at GEOO 14967
mjd

131 Id. nl GEOO 14970.

131 Id.
133 Id.

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Working with Cttstomers & Suppliers: No matter how high the stakes, no matter
how great the "stretch," GE will do business only by lawful and ethical means.
When working with customers and suppliers in every aspect of our business, we
will not compromise our commitment to integrity.134

Money Laundering Prevention

Core Requirements: If you encounter a warning sign, raise your concern with
company legal counsel and be sure to resolve your concern promptly before
proceeding further with the transaction. Resolution should include management
review and should be well documented.133

What to Watch Out For,

A customer, agent or proposed joint venture partner who is reluctant to provide
complete information, provides insufficient, false or suspicious information, or is
anxious to avoid reporting or record-keeping requirements. 136

Payments by use of monetary instruments that are not consistent with the business
activities of the client, appear to have no identifiable link to the customer, or have
been identified as money laundering mechanisms. 137

138
c. Publication: Integrity: The Spirit & the Letter of Our Commitment

Responsibilities of all employees: Promptly report:

Any concerns that you have about possible violations of a GE policy.

Any concern others may have about a possible violation of a GE policy. You may
report your concerns to a GE manager, or, if you prefer to a company legal counsel,
GE auditor, GE ombudsperson or other designated person. Your report may be
written or oral, and it may be anonymous. 139

c. Publication: Compliance & Integrity: A Guidefor Leaders; Integrity: The Spirit & the
Letter of Our Commitment 140

Detection: GE requires employees to raise their concerns about violations of law or

policy. We offer many channels: employees can raise concerns through their

m Id. at GEOO 14971.

OJ Id. at GB0014976.
m Id. at GEOO 14977.
137 Id.
134 GEOO 14 873-0014960 at GE00I4960: "3995, General Electric Company, Fairfield, CT 06431. All rights
reserved."
135 Id. at GEOO 14895.
140 GEO 121981-0121995, undated, authored by Jeffrey R. ImmcJt, Chairman of the Board, ChiefExecutive Officer.

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manager, through one of the compliance specialists in the business or at corporate,

or through the extensive network of ombudspersons 141

Response: Investigations and Remedial Actions

Concerns can come in from a variety of sources: from a concerned employee; from
an allegation in an actual or threatened lawsuit; from an inquiry or subpoena from
a regulator; from an article in the press, When a concern does arise, a leader must
act promptly to have the concern evaluated and investigated by counsel and other
persons with the appropriate expertise. If the concern turns out to be warranted,
appropriate remedial action must then be promptly taken.

The investigation of a legal comp iance concern should typically be led by counsel
who, at the direction of management, will investigate the facts and then provide
legal advice to the company. Immediately after the investigation is commenced,
counsel and management will determine whether any pre'iraiaaiy remedial action
's necessary to reduce the risk of unlawful action.

Your responsibility: Ensure the prompt and thorough investigation of

142
compli anceconcerns.

53. GECC's employees violated GECC's MLP and Integrity Policies by, among other

things: (i) failing to investigate Fetters' suspicious conduct in light of employee concerns; (ii)

failing to resolve suspicions before continuing to do business with Petters; and (iii) failing to

document and report suspicions to superiors and other ethics personnel. Specifically, Feehan,

Morrone, Ungari, and/or Menczynsld, violated GECC's MLP and Integrity Policies through the

following acts and omissions, among others:

Conducting Business With a Disreputable Customer: The Kroll Report clearly

highlighted Petters as a disreputable and untrustworthy individual. In fact, it was the
primary basis for Midkiff stating "on the record" her objection to the GECC-Petters
relationship Despite those facts, and over MidkifPs objection, GECC entered into a
lending relationship with Petters because GECC believed that the controls it intended to
impose and enforce would prevent Petters from defrauding GECC.

Failing to Resolve Concerns Relating to the Fake Costco Purchase Orders: Feehan did
not believe Petters' excuses as to why the Petters Capital Line was not performing.
Ult'mately, Feehan took the initiative to contact Costco directly to verify the validity ofthe
Costco Purchase Orders that secured Petters Capital's repayment to GECC. Costco's

141 Id, at GE0121989

141 W. at GEQ121990,

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representative told Feehan that the Costco Purchase Orders were fake. Feehan was "fairly
stunned" by this revelation. Nevertheless, neither Feehan nor anyone else from GECC took
any further steps to investigate the legitimacy of Petters Capital's operations or the source
of the funds for the Final Payment.

Failing to Resolve Concerns Relating to Petters Capital's Bounced Checks: Petters

told Feehan that Petters Capital would commence satisfying the Petters Capital Line with
a $20 million payment made by way of four $5 million checks. Petters Capital's alleged
banker was on the phone during the conversation and confirmed that Petters Capital's
account had sufficient funds to make the payment. Nonetheless, when GECC tried to
deposit the four $5 million checks, they bounced. Again, neither Feehan nor anyone else
from GECC took any further actions to reconcile Petters and Petters Capital's banker's
assurances that Petters Capital had sufficient funds against the reality that it did not, before
accepting the replacement funds by wire.

Failing to Resolve Concerns Relating to the Doctored Checks: In connection with

Redtag's funding request in December 2000, Petters made it clear to Feehan that Redtag
would use the borrowed funds to purchase goods from Petters Capital. Feehan, suspecting
that Petters was lying, suggested that Petters intended to use the Redtag line to pay off the
new lenders whose funds had just been used to pay off the Petters Capital Line. When
Petters stated that the new lenders had been paid through Costco funds, Feehan required
some proof given that he already knew that Costco had previously disclaimed the Costco
Purchase Orders. In response, Petters provided Feehan with copies of checks allegedly
evidencing that Costco 's payments to Petters Capital had paid off the new lenders. Deeply
concerned that those checks were fake, Feehan personally called Costco's bank to confirm
the checks' authenticity. Costco's bank confirmed the checks had cleared in amounts
significantly less than were on the face of the checks sent by Petters to Feehan. This led
Feehan to conclude that Petters doctored the checks. Therefore, it is certainly more likely
than not that Feehan knew that Petters had altered the checks in order to convince Feehan
to approve Redtag's advance request of and that Petters lied when he stated that the new
lenders had been paid from payments from Costco.

Based on the foregoing, GECC's employees violated GECC's MLP and Integrity Policies.

E. GECC Violated Its Document Retention Policy.

54. GECC's Document Retention Policy143 was in effect at all relevant times. The

Document Retention Policy required GECC employees to, among other things, memorialize and

save into each client's credit file a commentary sheet that provide dates and summarized comments

on "notable situations, conversations with client management, requests and follow-up activity . . .

W3 Exhibit 435, GE02827I6-282727

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so the credit file will serve as an informative source of information "l4 In addition, "if third party

credit inquiries are made, documen ation should include name, address, and telephone number of

145
the respondent, purpose ofthe inquiry, amount invo ved, and date of response.

146
55. As stated in the Document Re ention Policy:

Comprehensive and well-structured credit files are an absolute necessity in

maintaining the continuity and history of the relationship between GECC and its
customers. Well documented credit files are invaluable to credi , audit,
management, and legal personnel. Properly organized files can assist in keeping
loan losses to a minimum and provide quick, useful information for analytical and
reporting purposes.

For example, proper file maintenance allows a prompt reply to credit inquiries and
facilitate preparation of annual credit reviews and special client requests
Authorized employees should be able to study the file's contents and readily obtain
the client's history, loan status, and GECC experience. It is important that credit
files be accessible, secure, and as complete, and accurate as possible.

56. Feehan identified the following events, among others, as "notable": (i) Feehan's

conversation with Costco on October 24, 2000, in which he learned that Petters had forged the

Costco Purchase Orders147; (ii) Feehan's subsequent conversation with Petters regardingthe forged

Costco Purchase Orders148; (iii) the fact that the four $5 million checks that Petters provided GECC

to start paying down the Petters Capital Line bounced despite assurances from Petters' alleged

banker that Petters Capital account had sufficient funds to back those checks149; (iv) Feehan

learning that Petters had forged the Doctored Checks1 so; (v) copies ofthe Doctored Checks181; and

Id. at GE0282719 (emphasis added).

*Id.
H4 Id at GE02827 16(emphasis added).
147 Feehan 2016 Deposition Transcript at 487
m Id. at 487-488.
lA9Jd. at 490,
150 Id. at 491.
151 Id. at 494-495.

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(vi) Feehan's conversation with Petters in which Petters said that Petters Capital would pay down

152
its line with GECC using new lenders rather than from Costco receipts.

57. Significantly, none of the preceding "notable" matters were documented, let alone,

"well documented" in the credit files for Petters Capital or any other entities, a direct violation of

153
GECC's Document Retention Policy.

58. Notably, in 2009, approximately nine years after Petters sent GECC the Doctored

Checks, it was revealed for the first time that Morrone maintained a copy of the Doctored Checks

in his desk drawer with handwritten notes on it detailing the conversation with Costco' s bank -

apparently the only copy of the Doctored Checks and record of the conversation with Costco' s

bank that GECC or any of its employees kept.154 Apart from a copy of the Redtag Credit

Agreement, the Doctored Checks were the only Petters-related documents that Morrone kept in

his office - the rest of the Petters files were stored off site in their respective credit files. None of

those files contained the copies of the Doctored Checks. 155

59. If "well documented credit files are invaluable to credit, audit, management and

legal personnel," then the converse is true. The above-mentioned omissions may have impeded the

timely discovery of Petters' scheme and, certainly, corroborates my conclusion set forth below,

that there is probable cause that Feehan knew that the proceeds used to pay off the Petters Capital

Line was illegally derived in some way.

60. Therefore, it is apparent to me that Feehan and Morrone violated GECC's

Document Retention Policy by failing to memorialize and save the above-mentioned "notable

152 Id at 496-497.
133 Document Retention Policy.
U4 Exhibit 64 8tPettersReports001526 also see PettersReports001524-25 at ffl23-28.
153 Morrone Deposition Transcript at 725-728 and 846-85 1.

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events" and the Doctored Checks with Morrone's handwritten notes from the respective credit

files.

vm. OPINIONS

A. HAD I BEEN PRESENTED WITH THESE FACTS WHILE I WAS A

PROSECUTOR, I WOUD HAVE CONCLUDED THAT THERE IS PROBABLE
CAUSE THAT GECC EMPLOYEES COMMITTED PROMOTIONAL MONEY
LAUNDERING AND PROMOTIONAL MONEY LAUNDERING CONSPIRACY.

61. The United States Attorneys9 Manual ("USAM9) 9-27.220 (2015) sets forth the

courses of action available to the attorney for the government once he/she has probable cause to

believe that a person has committed a Federal offense within his/her jurisdiction. The "probable

cause standard" is the same standard as that required for the issuance of an arrest warrant or a

summons upon a complaint (See Fed. R. Cnm P. 4(a)), for a magistrate's decision to hold a

defendant to answer in the district court (See Fed R. Crim. P. 5.1(a)), and is the minimal

requirement for indictment by a grand jury. See Branzburg v. Hayes, 408 U.S. 665, 686 (1972).

156
This is, of course, a threshold consideration only.

62 A definition of "probable cause" cannot be reduced to a neat set of legal rules. As

the Un'ted States Supreme Court explained in Illinois v Gates, 462 S.Ct 213 (1983): "In dealing

with probable cause, ... as the veiy name implies, we deal with probabilities. These are not

technical; they are the factual and practical considerations of everyday life on which reasonable

and prudent men, not legal technicians, act" Id. at 23 1 , citing Brinegar v. United States, 338 U.S.

160, J 75 (1949). In Gates, the Court further explained that "[o]ur observation in United

156 Merely because this requirement can be diet in a given case docs not automatica jly warrant prosecution; further
investigation may be warran ed, and the prosecutor should stil take into account all relevant considerations,
including those described in the other provisions, in deciding upon his/her course of action See USAM 9-27400.
I have not considered any other grounds in the USAM for commencing or declining prosecution, I.e., no substantial
Federa interest would be served by prosecut'on, the person is subject to effect ve prosecution in another
jurisd e'ion, or there exists an adequate non-criminal alternative to prosecution. See USAM 9-27420 and 230.

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States v. Cortez, 449 U. S. 41 1, 418 (1981), regarding 'particularized suspicion,' is also applicable

to the probable-cause standard:

The process does not deal with hard certainties, but with probabilities. Long before
the law ofprobabilities was articulated as such, practical people formulated certain
common-sense conclusions about human behavior; jurors as factfinders are
permitted to do the same and so are law enforcement officers. Finally, the
evidence thus collected must be seen and weighed not in terms of library analysis
by scholars, but as understood by those versed in the field of law enforcement."

Id. at 231-232.

63. Courts have addressed the definition of probable cause with more specificity as

well. In Maryland v. Pringle, the Supreme Court noted that "[l]he substance of all the definitions

ofprobable cause is a reasonable ground for belief of guilt . . 540 U.S. 366, 371, 124 S. Ct. 795,

800, 157 L. Ed. 2d 769 (2003) (citation omitted). And as noted by Judge Michael Moore in the

Southern District of Florida:

Probable cause "is defined as a reasonable ground of suspicion ... to warrant a

cautious man in the beliefthat the person accused is guilty ofthe offense with which
he is charged." Fee, Parker & Loyd, PA. v. Sullivan, 379 So.2d 412, 417
(Fla.DistCtApp.1980) ("one need not be certain of the outcome of a criminal or
civil proceeding to have probable cause for instituting such an action") (citations
and internal quotation marks omitted).

EMI Sun Vill, Inc. v. Catledge, No. 13-CV-21594-KMM, 2013 WL 5435780, at *3 (S.D. Fla.

Sept 27, 2013).

64. It is against this backdrop that I now consider whether there is probable cause that

GECC employees committed promotional money laundering and promotional money laundering

conspiracy.

Money Laundering

65. A person violates the federal money laundering statute if he (1) engages in a

"financial transaction" that (2) "involves the proceeds of specified unlawful activity" and (3) either

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engages in the transaction to "promote" further acts of specified unlawful activity or with

knowledge of a design to conceal the nature, ownership, or control of the funds being laundered.

18 U.S.C. 1956(a)(l)(A)(i) & (B)(i\ The elements of promotional money laundering pursuant

to 18 U.S.C. Section 1956(a)(l)(A)(i) 57 are: (1) the defendant knowingly conducted or tried to

conduct, a financial transaction; (2) the defendant knew that the money or property involved in the

transaction was the proceeds of some kind of unlawfu activity; (3) the money or property came

from an unlawful activity; and (4) the defendant was involved In the financia transaction with the

158
intent to promote the carrying on of that unlawful activity, The evidence supporting the

contention that GECC's employees committed promotional money laundering is set forth as

follows:

137 18 U S.C. 1956 : (a) (1) Whoever, knowing that the property involved in a financial transaction represents the
proceeds ofsome form of unlawful activity, conducts or attempts to conduct such a financia transaction which in feet
Involves the proceeds of specified unlawful activity(A)(i) with die intent to promote the carrying on of specified
unlawful activity;

(c) As used in this section

(1) the term "knowing that the property involved in a financ al transaction represents the proceeds of some form
of unlawful activity" means that the person knew the property involved in the ransaction represented
proceeds from some form, though not necessarily which form, of activity that constitutes a felony under
State, Federal, or foreign law, regardless of whether or not such activity is specified in paragraph (7);
(2) the term "conducts" includes . . . concluding n transaction;
(3) the term "transaction" includes a . . . transfer, delivery, or other disposition . . .;
(4) the term "financial transaction" means (A) a transaction which in any way or degree affects interstate foreign
commerce (i) involving the movement of funds . . or (ii) involv'ng one or more monetary instruments . . .
or (B) a transaction involving the use of a financial instituUon which is engaged in, or the ncti iries of which
affect, interstate or foreign commerce in any way or degree.
(5) the term "monetary instruments" means (i) coin or currency . ., personal checks, bank checks, and money
orders or (ii) . . negotiable instruments . . .;
(6) the lerm "financial institution" includcs-[(A) an insured bank . . . [and] (B) a commercial bank or trust
company] See 31 U.S.C. 5312.

(7) the term "specified unlawful activity" means(A) any act or activity constituting an offense listed tn section
1961(1) of this title[, including section 1956 (rearing to the laundering of monetary instruments) [and]
scct'on 1957 (relating to engaging in monetary transactions in property derived from unspecified unlawful
activity)] . . .

(9) the term "proceeds" means any property derived from or obtained or retained, direc ly or indirectly, through
some form of unlawfu! activity , ,

151 Ellventh Circuit Pattern jury Instructions (Criminal Cases) Offense Instructions 74.1 (2010)

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1. GECC Knowingly Conducted a Financial Transaction

66. To "conduct a transaction" means to start or finish a transaction, or to participate in

a transaction at any point. Eleventh Circuit Pattern Jury Instructions (Criminal Cases),

Offense Instructions 74.1 (2010). A "transaction" means a purchase, sale, loan, promise, gift,

transfer, delivery, or other disposition of money or property. A transaction with a financial

institution also includes a deposit, withdrawal, or transfer between accounts .... Id. By GECC

entering into the Credit Agreements and accepting the Final Payment, including the Success Fee,

and depositing it into its bank account, there is probable cause establishing that GECC knowingly

conducted a financial transaction.

2. Feehan Knew that the Final Payment Was the Proceeds1*9 of Unlawful
Activity.

67. To prove this element of 1956(a)(1), the prosecutor must prove, either by direct

or circumstantial evidence, that the defendant knew that the property involved was the proceeds

ofany felony under State, Federal or foreign law. The prosecutor need not show that the defendant

knew the specific crime from which the proceeds were derived; the prosecutor must prove only

that the defendant knew that the property - in this case the Final Payment was illegally derived

in some way. 160

159 Prior to 2009, "proceeds" was not defined in 18 U.S.C. 1 956, A circuit split developed whereby some courts
deGned "proceeds" narrowly to mean only "net profits" (/. e. revenue left over after expenses arc paid for the underlying
offense) and others defined it more broadly as "gross receipts" (i.e. all funds stemming from the underlying offense).
In 2008, the United States Supreme Court determined that "proceeds" should be defined narrowly as "net profits."
United States v. Santos, 553 U.S. 507 (2008). Thereafter, in 2009, Congress enacted the Fraud Enforcement and
Recovery Act, which essentially overruled Santos and defined "proceeds" as "gross receipts," not "profits." See 18
U.S.C. 1956(cX9). Further, the Eleventh Circuit addressed this issue in UnitedStates v. Marion, 418 F. App'x 847,
849 (1 1th Cir. 201 1) f'We are unpersuaded by Marion's argument that, under . . . Santos, the loan proceeds must
constitute profits to satisfy the 'proceeds' requirement of the money laundering statute. . . . (T]he narrow ruling in
Santos, at most, meant, 'that the gross receipts of unlicensed gambling operation were not 'proceeds' under section
1956(h).' . . . Accordingly, in contexts other than an unlicensed gambling operation, we have continued to apply the
previous definition of 'proceeds' to include 'receipts as well as profits.'") (citing United Slates v. Jennings, 599 F.3d
1241, 1252 (1 1th Cir. 2010) ("Santos has limited precedential value.").
160 USAM, CRIMINAL RESOURCE MANUAL 2101 (2015).

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68. From the inception of its business relationship with Petters, GECC documented that

Fetters' past was so troubling that the Senioi Vice President of Risk and Underwriting Catharine

Midkiff objected to GECC conducting business with him.t6i Despite Ms, MidkifPs objection,

GECC approved tens of millions of dollars in financing to allow Petters Capital to pay suppliers

while it purportedly awaited payment from retailers who purchased the merchandise. While GECC

agreed to this lending agreement with Petters Capital, it contained fraud prevention mechanisms

which permitted GECC to conduct extensive due diligence at all stages of each transaction Instead

of utilizing and enforcing those protections, however, GECC virtually ignored them.

69. When Feehan learned that the Costco Purchase Orders were fake, he understood

the Petters Capital Line was not collateralized, each draw on the credit line was based on a lie and

162
he was primarily responsible for what would have been considered "a big loss This likely

explains why he was "fairly stunned" when Hulsey told him the Costco Purchase Orders were

fake. The factual and practical considerations of everyday life strongly suggest that, the only way

to avoid losing approximately $45 million on the Petters Captial Line, was for Feehan to accept

Petters' proposal to take the Final Payment from new lenders without learning who they were and

not documenting or reporting what occurred 163

70. Furthermore, by December 8, 2000, GECC received and deposited the Final

Payment on the Petters Capital Line with money from new lenders Around that same time, Feehan

received a funding request from Redtag. Feehan admitted that he was so suspicious that Petters

would misappropriate those funds to pay the new lenders who had just paid GECC for the Petters

IC Closing Memorandum, ntGE1362.

162 Petters stated that on October 24*2000, Feehan told him, inter alia, that "GECC did not have [any] collateral to
secure payment of the Petters Capital Line and that Petters Capital was a fraud." See p. 18, f.n. 86 above.
S3
Deliberate ignorance of criminal activity [is] 'the equ valenl of knowledge." United Slates v. Adair, 951 Fj2d
316, 319 (1 l^Cir. 1992),

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Capital Line, that he denied the funding request. Common sense conclusions about human

behavior suggest that Feehan's and Morrone's failure to report and/or document the evidence in

Petters' credit files, Le., the Doctored Checks, provide additional evidence that Feehan knew that

the proceeds used to pay off the Petters Capital Line were illegally derived in some way.

71. Therefore, it is my opinion, based on the facts, combined with my experience, that

there is more than probable cause that Feehan knew that the proceeds used to pay off the Petters

Capital Line were illegally derived in some way.

3. The Final Payment and Success Fee Came From Petters' Unlawful Activity

72. The collateral for GECC's loans to Petters Capital was a series of fake purchase

orders created as part ofthe same Ponzi scheme that Petters operated from the time that he opened

PCI and Petters Capital, until 2008.164 There is no dispute that Petters Capital paid the Final

Payment, including the unearned Success Fee, to GECC from proceeds of the Petters' Ponzi

scheme.

4. Feehan Was Involved in the Financial Transaction with the Intent to Promote
the Carrying on of that Unlawful Activity.

73. As previously demonstrated, Feehan implicitly agreed with Petters that in exchange

for Petters paying off the Petters Capital Line from unknown sources, GECC would ignore its

investigative, reporting and document retention responsibilities. Compliance with those policies

and regulations would have exposed the scheme, caused GECC to suffer a significant financial

loss, and prevented Petters from continuing to promote his Ponzi scheme. Stated differently,

accepting the Final Payment from unknown sources, in light of all of the above-mentioned facts,

creates more than sufficient probable cause to show that Feehan intended to promote the carrying

164 See Coleman Deposition Transcript at 87-88.

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on of Petters' Ponzi scheme to shield GECC from a significant financial loss and himself from

blame.

Promotional Money Laundering Conspiracy

74. To obtain a conviction for a promotional money laundering conspiracy, the

government must prove that (1) two or more persons agreed to commit a section 1956(a)(l)(A)(i)

promotional money laundering violation, and, in this case, (2) Feehan, knowing the unlawful plan,

voluntarily joined the conspiracy. See U.S. v. Johnson, 440 F.3d 1286, 1294 (11th Cir. 2006)

(citation omitted) "The existence of an agreement may be proven by circumstantial evidence,

including inferences from the conduct of the alleged participants or from circumstantial evidence

of a scheme. Indeed, the government may establish knowledge of an illegal agreement by showing

that the defendant knew the essential object of the conspiracy." U.S. v. Silveslrt, 409 F.3d 1311,

1328 (1 1th Cir. 2005) (citations and quotations omitted).

75. "Because the text of 1 956(h) does not expressly make the commission of an overt

act an element of the conspiracy offense, the Government need not prove an overt act to obtain a

conviction." Whitfield v. U.S., 543 U S. 209, 214 (2005). The Eleventh Circuit has held that

conspirators* sharing the proceeds of their crime can both promote their ongoing and future illegal

activity and further the ultimate object oftheir conspiracy. See U.S. v. Williamson, 339 F.3d 1295,

1302 (11th Cir. 2003); U.S. v. Kelley, 471 F. App'x 840, 845 (11th Cir. 2003) ("[T]he monthly

dividend payments were designed to gtve the principal players in the steroid distribution scheme

an incentive to continue their activities despite the risks inherent in such activity.").

76. As set forth above, Feehan implicitly agreed with Petters that in exchange for

Petters paying off the Petters Capital Line from new lenders, Feehan/GECC would ignore its

investigative, reporting and document retention responsibilities. Therefore, I conclude that

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probable cause exists that Feehan and Petters conspired to commit promotional money laundering

in violation of Title 18, United States Code, section 1956(a)(l)(A)(i).

B. GECC MAY BE HELD CRIMINALLY LIABLE FOR THE ILLEGAL

ACTS OF ITS EMPLOYEES.

77. Under the doctrine of respondeat superior, a corporation may be held criminally

liable for the illegal acts of its directors, officers, employees, and agents. To hold a corporation

liable for these actions, the government must establish that the corporate agent's actions (i) were

within the scope ofhis duties and (ii) were intended, at least in part, to benefit the corporation. In

all cases involving wrongdoing by corporate agents, prosecutors should not limit their focus solely

to individuals or the corporation, but should consider both as potential targets.

78. Agents may act for mixed reasonsboth for self-aggrandizement (direct and

indirect) and for the benefit of the corporation, and a corporation may be held liable as long as one

motivation ofits agent is to benefit the corporation. See United States v. Potter, 463 F.3d 9, 25 ( 1 st

Cir. 2006) (stating that the test to determine whether an agent is acting within the scope of

employment is"whetherthe agent is performing acts ofthe kind which he is authorized to perform,

and those acts are motivated, at least in part, by an intent to benefit the corporation."). In United

States v. Automated Medical Laboratories, Inc., 770 F.2d 399 (4th Cir. 1985), for example, the

Fourth Circuit affirmed a corporation's conviction for the actions of a subsidiary's employee

despite the corporation's claim that the employee was acting for his own benefit, namely his

"ambitious nature and his desire to ascend the corporate ladder." Id at 407. The court stated,

"Partucci was clearly acting in part to benefit MLP since his advancement within the corporation

depended on MLP's well-being and its lack of difficulties with the FDA." Id. ; see also United

States v. Cincotta, 689 F.2d 238, 241-42 (1st Cir. 1982) (upholding a corporation's conviction,

notwithstanding the substantial personal benefit reaped by its miscreant agents, because the

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fraudulent scheme required money to pass through the corporation's treasury and the fraudulently

obtained goods were resold to the corporation's customers in the corporation's name).

79. As set forth above, GECC's employees were within the scope of their duties when

they ignored their due diligence results at the outset oftheir business relationship, along with their

internal policies to which they were required to adhere, and nearly every safeguard built into the

Credit Agreement designed to detect fraudulent activity when Fetters made a draw request.

GECC's employees were also within the scope of their duties when they accepted the Final

Payment and Success Fee.

80. Since the Fetters Capital Line was significant and substantial to GECC, coupled

with it being a "big loss" to GECC if Petters Capital defaulted, Feehan's decision to accept the

Fina Payment and Success Fee was mtended, at least in part, to benefit the corporation by making

money or preventing loss. Specifically, when repayment was not forthcoming, and in light of all

of the above-mentioned facts, Feehan ignored GECC's MLP, Integrity and Document Retention

Policies and accepted approximately $45 million from unknown sources. By accepting that money,

there is probable cause that GECC engaged in promotional money laundering and conspiracy of

the same smce these acts were within the scope of their duties and were intended, at least in part,

to benefit GECC.

CONCLUSION

Based on my experience and the application of the law to the facts of this case, had I been

presented with these facts while I was a prosecutor, 1 would have concluded that there is probable

cause that GECC's employees committed promotional money laundering and conspiracy to

commit promotional money laundering, and that GECC could be held criminally liable for the

illegal acts of its employees, and therefore, I would likely have sought an indictment.

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RESPECTFULLY SUBMITTED this 27th day of December, 2016.

it
Jeffrey W. Sloman, Esq.
Stumphauzer & Sloman
1 SE 3rd Avenue, Suite 1 820
Miami, Florida 33131

If
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JEFFREY H. SLOMAN

Education

University of Florida B.A. Politica Science 1976 - 1980

University of Miami Law School Juris Doctor 1980-1983

Employment

Stumphauzer & Sloman 1 SE 3rd Ave, # 1 820 Aug 20 1 6 - present

(Partner) Miami, Florida 33131

O'Quinn Stumphauzer 1 SE 3rd Ave. #1820 March 2015 -Aug 2016

& Sloman (Partner) Miami, Florida 33131

Fcrraro Law Firm 600 Brickell Ave. #3800 June 2010 -Feb 2015
(Partner) Miami, Florida 33131

United States Attorney's Office 99 NE 4U' Street Aug. 1990- June 2010
Southern District of Florida Miami, Florida 33132

- United States Attorney (June 2009 May 20 10)

- First Assistant United States Attorney (October 2006 June 2009)
- Chief, Criminal Division (January 2004 - October 2006)
- Chief, Ft. Lauderdale Branch Office (Feb. 2003 - January 2004)
- Chief, Narcotics /Major Crimes, Ft Lauderdale (September 2000 - Feb. 2003)
- Organized Crime Section (April 1997 - September 2000)
- Economic Crime Section (January 1993 - April 1997)
- Narcotics & Major Clime Section (September 1 990 - January 1993)

Stuzin & Camner, P.A. 777 Brickell Avenue 09/89 - 09/90

Miami, Florida 33131

ICimbrell & Hamann, P.A. 799 Brickell Plaza 07/84-09/89

Miami, Florida 33131

Court Admissions

The Florida Bar November 1983 - present

The Trial Bar, Southern District of Florida November 1984 - present

E eventh Circuit Court of Appeals November 1985 - present

EXHIBIT A