Petters associate jailed after 'sham' divorce

A businessman who pleaded guilty to charges stemming from a multibillion-dollar scheme to defraud investors has been jailed in Minnesota after a judge decided his "sham" divorce was just a ruse to shield his assets from the court.

Larry Reynolds was convicted of working with Tom Petters, the former CEO of Minnetonka-based Petters Group Worldwide. Petters was convicted last December of running a $3.7 billion Ponzi scheme and sentenced to 50 years in prison.

Federal prosecutors are now working to recover assets from Reynolds and other Petters co-conspirators, hoping to return some cash to those who lost millions.

Doug Kelley, the court-appointed receiver in the Petters case, told a judge that Reynolds' divorce was an attempt to protect his assets from being seized by the court by giving them to his ex-wife, Antoinette.

"All the assets with no equity were given to Mr. Reynolds" in the divorce, Kelley said. Antoinette Reynolds, meanwhile, got the couple's Los Angeles home, he said, according to the St. Paul Pioneer Press.

Fred Bruno, Reynolds' defense attorney, argued that he had offered to void the property transfers in June and instead make the assets accessible to Kelley.

U.S. District Judge Ann Montgomery sided with Kelley on Friday and jailed Reynolds for contempt of court.

Reynolds, 69, had taken the stand to argue that the divorce was legitimate. When Kelley pointed out that Reynolds and his ex-wife still live together, Reynolds said the move was out of necessity.

"Neither of us can afford to live apart," he said.

Reynolds was convicted of funneling billions of dollars through a shell company to help Petters convince investors that their money was being used to buy and sell consumer electronics. No such electronics deals actually existed.

Reynolds faces up to 20 years in prison when he is sentenced Sept. 14. He's hoping for leniency because he pleaded guilty and testified against Petters.

The upcoming sentencing gives Kelley some leverage but also creates a sense of urgency. Kelley said he would try to find an attorney to undo the divorce, but Reynolds might be more likely to cooperate with those proceedings if doing so might help him get a lighter sentence.

Even if Reynolds signs, there's no guarantee that Antoinette Reynolds would agree to sign off on any change to the divorce decree.

"There's a lot more underlying facts that will get fleshed out in court or in negotiations," said her attorney, Arlo Vande Vegte. "My client had nothing to do with any of the Petters fraud. She has rights under the law. She intends to assert those rights."

Larry Reynolds will remain in jail until a Tuesday hearing.

Other Petters-related court appearances are expected in the next few weeks. Seven former Petters employees and business associates who participated in the scheme or helped Petters evade taxes are set to be sentenced starting Sept. 2.

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Information from: St. Paul Pioneer Press (Copyright 2010 by The Associated Press. All Rights Reserved.)