Successful MN Restaurateur Files for Chapter 7

Tom Petters, a former Minnesota business mogul, is serving a fifty-year jail term for twenty counts of fraud relating to his $3.65 billion Ponzi scheme. A Ponzi scheme is run by promising high returns to new investors in order to convince them to invest while using the investment money to pay off older investors who ask to cash out their investments. Ponzi schemes become more expensive to run as the number of investors grows. Like most Ponzi schemes, Petters’s scheme collapsed when he could not raise enough money from new investors to cash out his older investors.

Because Petters is now bankrupt, anyone wishing to recover money from him in order to recoup their losses from investing in his Ponzi scheme will have to sue someone else. As a result, many of Petters’s relatives, officers and close friends are now being sued for millions of dollars each. These lawsuits, in which someone other than the perpetrator of a financial crime is sued, are referred to as “clawback lawsuits” because the plaintiffs attempt to “claw back” profits from parties who benefited unjustly from the crime.

One notable clawback defendant is Dean Vlahos, a successful MN restaurateur who manages Champps, a chain of sports bars; Redstone, a more upscale dining chain; and BLVD, a Minnetonka bistro, and then lost $26 million to Petters. Vlahos invested $16 million with Petters in 2001 and eventually loaned Petters an additional $10 million in 2007. Petters and Vlahos had been very close friends, sharing in each other’s travels, holidays and family affairs. Vlahos thus never suspected that his $16 million “investment” and $10 million “loan” were actually being used to pay off investors who had asked to cash out their investments in Petters’s Ponzi scheme. Petters had told Vlahos that he was investing in a consumer electronics resale business that would yield thirty-six percent returns but in fact, Petters was not involved in any such resale business. Within two years of loaning $10 million to his trusted friend, Vlahos was testifying in Petters’s fraud trial. Three years later, Vlahos is filing for Chapter 7 bankruptcy.

Vlahos still has lucrative business positions (for example, he earns six figures per year from restaurant management) but he will need additional revenue if he ever hopes to pay off his Petters-induced debts and losses for, despite Vlahos’s above-average income, his debts dwarf his assets. After the $39 million clawback lawsuit, Vlahos’s top creditor is Home Federal Savings Bank of Rochester, to which Vlahos owes $7.6 million. He also owes so much money in federal and state back taxes that the IRS and the MN Dept. of Revenue have seized control of a handful of his bank accounts. He hopes that bankruptcy will help him to erase some of his debts and start anew.