CORRECTED-UPDATE 1-Petters eyed delaying audit in Ponzi case-witness

By Todd Melby ST. PAUL, Minn., Nov 2 (Reuters) - Accused Ponzi schemer Tom Petters tried to put off an audit of his businesses shortly before they collapsed, the government's star witness testified on Monday. Deanna Coleman, the whistle-blower for the estimated $3.65 billion alleged fraud, also told a St. Paul, Minnesota, federal jury she secretly recorded conversations with Petters on Sept. 8, 2008, after earlier in the day telling prosecutors he was running a fraud. Petters was indicted by a federal grand jury in late 2008 for fraud, money laundering and other charges in connection with the alleged Ponzi scheme. The indictment said the Minnesota businessman falsely promised investors big returns from financing his company's purchase and sale of electronics goods to retailers such as Costco Wholesale Corp and Wal-Mart Stores Inc's Sam's Club. Coleman, 43, told an overflowing courtroom that Petters' company used fake merchandise orders "basically since day one," and regularly searched for new investors to pay off earlier investors. On a tape played to the courtroom, Petters at that meeting suggested he knew he could possibly face prison time. "If worse came to worst, you would not go to jail," he said. "I'm sure I would." Petters' now-bankrupt empire once included companies such as Polaroid and Sun Country Airlines. He was jailed in October 2008 and his trial, which began last week, may last through at least much of November. Coleman, a former vice president for Petters, pleaded guilty to conspiracy in September 2008 and agreed to cooperate with prosecutors. Six others have also entered guilty pleas. Defense counsel last week began efforts to shift blame for the alleged fraud toward Coleman and away from Petters. At Monday's proceedings, Coleman said Petters was afraid an audit would unearth how transactions the company claimed to perform were a sham. "Auditors usually want proof of the merchandise and we didn't have any of that stuff," she said. Prosecutors also introduced into evidence a letter Coleman said she wrote to Petters on Oct. 27, 2004, in which she said Petters "always promised we'd find a way out of it" and that she thought "nonstop" about the prospect of prison. It was not clear how long Coleman would testify for the prosecution, or when cross-examination might begin. Prosecutors have said that Petters schemed to raise new money to repay earlier investors, fund company expenses and finance a lavish lifestyle including expensive cars and homes. Petters' case gained prominence after last December's arrest of Bernard Madoff for a larger Ponzi scheme. The case is USA v. Petters et al, U.S. District Court, District of Minnesota, No. 08-00364. (Reporting by Todd Melby; Writing by Jonathan Stempel; Editing by Steve Orlofsky) Keywords: PETTERS/PONZI ([e-mail] [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.