Petters says he tried to "fix" fraud at his company

* Prosecution begins cross-examination

* Petters accused of $3.65 billion Ponzi scheme

By Art Hughes

ST. PAUL, Minn., Nov 19 (Reuters) - Federal prosecutors on Thursday confronted Tom Petters over his claim that after he belatedly became aware of the fraud that bankrupted his company, he tried to repair the damage.

In a blistering cross-examination of the Minnesota businessman, prosecutor Joe Dixon asked Petters, accused of a $3.65 billion Ponzi scheme, to explain his comment to former aide Deanna Coleman that there was a big fraud taking place at his Petters Group Worldwide LLC.

Petters suggested the comment, which was recorded secretly by Coleman, meant that he was going to be blamed because the fraud involved his company, not because he was responsible.

"My name was on the company," he said. "I said I'll take the bullet. I had a lot of employees, a lot of investors, a lot of people who count on me," he said.

"What I meant by that statement, 'one big fraud,' is this is one big fraud. We committed fraud, and we need to get in our attorney's office right now and fix it."

Petters' now-bankrupt empire once included companies such as Polaroid Corp and Sun Country Airlines Inc. It crashed last year when he was accused in a 20-count indictment of fraud, money laundering and other charges.

Shortly before the company unraveled, Petters said he had sought to sell lucrative licenses for Polaroid and to sell airplanes from the airline to repay hedge fund investors.

"For the time being, it would have given us cash for the hedge funds, so the hedge funds wouldn't be telling me I was going to jail through the SEC. Everybody would have survived, I believe," he said.

A Ponzi scheme occurs when money from new investors is used to repay earlier investors.

Petters has tried to convince jurors that Coleman and other associates were responsible for the fraud for which he is being tried.

Coleman has pleaded guilty in the case, and testified earlier this month against Petters as a prosecution witness. The two had a brief sexual relationship, Petters testified.

Prosecutors have accused Petters of promising investors big returns through financing his company's purchase and sale of electronics goods to retailers such as Costco Wholesale Corp (COST.O) and BJ's Wholesale Club Inc (BJ.N).

They have also said Petters concocted fake checks and purchase orders to deceive retailers into believing that he was transacting more business with them than he actually was.

Petters said he recognized there were problems at his company before 2007.

"You chose not to look?" the prosecutor asked.

"I chose not to look," Petters agreed.

Petters was asked by Dixon whether he enjoyed the life of a tycoon, with such extravagances as two luxury homes and a jet.

"Others wanted me to be a tycoon," Petters said. "No one forced me. Absolutely, I did not want to be one."

"All of it paid for with other people's money?" Dixon asked, to which Petters said, "No."

The case is USA v. Petters et al, U.S. District Court, District of Minnesota, No. 08-00364. (Reporting by Art Hughes; Writing by Jonathan Stempel and Andrew Stern; Editing by Gary Hill)