Thursday, July 12, 2012

New, Superseding Indictment for Vennes & Fry

The Press Release:

More federal charges filed against Frank Vennes in Petters’ Ponzi scheme

MINNEAPOLIS—This week in federal court in St. Paul, a second superseding indictment was filed against Frank Elroy Vennes, Jr., a business associate of and primary fundraiser for Thomas J. Petters, the Minnesota business man convicted in 2009 of orchestrating a multi- billion dollar Ponzi scheme.

Vennes, age 53, of Stuart, Florida, was originally charged on April 20, 2011, in a five-count indictment that alleged he fraudulently raised money from individuals and through hedge funds for investment in Petters Company, Inc. (“PCI”). A superseding indictment was filed on July 18, 2011. The second superseding indictment adds three new counts of wire fraud and one new count of mail fraud. Vennes is now charged with a total of eight counts of securities fraud, three counts of mail fraud, nine counts of wire fraud, three counts of money laundering, three counts of bank fraud, and two counts of making false statements on credit applications.

The new counts, Counts 22-24 and Count 25 of the second superseding indictment, arose out of attempts by Vennes to raise funds to invest in PCI notes through a third-party agent in 2007 and 2008. Vennes, previously convicted on federal narcotics, firearms, and money laundering charges, had difficulty obtaining institutional funding on his own and regularly worked through others to try to raise money from banks and institutional investors. In 2007, he allegedly directed the third-party agent to approach potential investors, seeking funds that he could invest in PCI notes. To that end, at Vennes’ direction, the agent allegedly prepared and distributed by wire and mail, an “executive summary” that described the process by which Vennes previously raised hundreds of millions of dollars for purchase of PCI notes. The“executive summary” falsely described the due diligence Vennes conducted on PCI transactions.

PCI was owned and operated by Tom Petters, who, in or before 1993, initiated his Ponzi scheme by representing that funds invested in PCI promissory notes would finance the purchase of electronics and other consumer merchandise. Purportedly, PCI would then resell the merchandise for a profit to certain “big box” retailers, including Sam’s Club and Costco. In truth, however, no merchandise was bought or resold. Instead, Petters diverted for his own personal benefit hundreds of millions of dollars. His $3.65 billion Ponzi scheme unraveled in 2008, when federal agents executed search warrants at his business offices as well as other locations. He was subsequently prosecuted and, in April of 2010, sentenced to 50 years in federal prison. He is currently serving his sentence in the federal penitentiary in Leavenworth, Kansas.
From 1999 through September of 2008, Vennes and his company, Metro Gem, allegedly made more than $80 million related to Metro Gem investments in Petters Company. Vennes’s co-defendant in this case, James Nathan Fry, formed hedge funds with Vennes’s assistance, known as the Arrowhead Funds, that raised funds from investors to invest with PCI.

From 1999 to 2008, Fry and his related entities allegedly obtained more than $41 million in fees related to investment in Petters Company notes. Vennes received “commissions” for the money invested in PCI through the Arrowhead Funds, which, between 2001 and 2008, allegedly netted him more than $48 million. In addition, Vennes purportedly obtained more than $60 million in “commissions” related to investments in PCI notes by the Palm Beach Funds, a group of hedge funds managed by David William Harrold and Bruce Francis Prevost, who were charged in the original indictment and pleaded guilty to committing securities fraud. Again, Vennes acted as the intermediary in transactions involving the Palm Beach Funds, those transactions resulting in more than one billion dollars in PCI notes as of September of 2008.

Both Vennes and Fry allegedly made material misrepresentations and concealed material information about the Petters Company investments in order to induce investors. For example, investors were told that whenever a retailer purchased consumer electronics or other goods from PCI, those products were paid for by the retailer with funds directly deposited into a bank account under the control of a management company. As a result, investors were falsely assured that all PCI transactions were, in fact, taking place, and all money was secure. However, Vennes and Fry, among others, knew that no payments were ever received from retailers and, instead, came from PCI alone. Moreover, while Fry was aware of Vennes’s criminal history, he purportedly failed to disclose it to institutional investors, although he knew such information was material.

Fry also allegedly asserted to potential investors that historically, PCI notes had been paid in 90 days, even though, after the fall of 2007, he knew that statement to be false. In order to conceal default of the notes, Fry and Vennes allegedly arranged to extend the payment dates for PCI notes without advising investors of those extensions. At the same time, both men purportedly continued to seek new investors, never advising them of the PCI notes’ problems.

In or about July of 2008, Petters allegedly informed Vennes that there was fraud at PCI, with as many as twenty percent of the PCI notes being compromised. Vennes allegedly concealed that information from investors. He also purportedly continued to take money from investors, even after learning some of the money in PCI notes was not being used to buy and resell consumer electronics or other merchandise.

If convicted, Vennes faces a potential maximum penalty of 20 years in prison on each mail fraud, wire fraud, bank fraud, and false statement count; ten years on each money laundering count; and five years on each securities fraud count. Fry faces a potential maximum penalty of 20 years on each wire fraud count and five years on each securities fraud and false statement count. All sentences will be determined by a federal district court judge.

This case is the result of an investigation by the Federal Bureau of Investigation, the Internal Revenue Service–Criminal Investigation Division, and the U.S. Postal Inspection Service. It is being prosecuted by Assistant U.S. Attorneys Timothy C. Rank, Kimberly A. Svendsen, and Robert M. Lewis.

This law enforcement action is in part sponsored by the interagency Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive attack on financial crimes. It includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement, who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force hopes to improve efforts across the federal executive branch, and, with state and local partners, investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

Friday, July 6, 2012

Palm Beach Finance Trustee Files Motion to Settle With Minnesota Teen Challenge

The motion can be downloaded at this link (PDF).

Some highlights:

Altogether, as set forth in the complaints filed in the Litigation, the Petters Trustee, Petters Receiver and Liquidating Trustee assert that MTC received in the aggregate, approximately $8,247,319.51 in transfers from the Petters Receivership Defendants, the Vennes Parties and PCI. In particular: 
a) During the period beginning on or about April 1998 and ending on or about December 2007, one or more of the Receivership Defendants made transfers totaling $ 1,979,883.00to MTC; 
b) During the period beginning on or about August 2000 and ending on or about September 2005, PCI made transfers totaling $476,830.00 to MTC; 
c) During the period from February 4, 1998 through May 14, 2003, the Vennes Parties made transfers, including transfers made through the Fidelis Foundation, to or for the benefit of MTC in the amount of approximately $2,817,000; and 
d) During the period beginning on or about June 2004 and ending on or about July 2008, the Vennes Parties made transfers totaling $5,790,606.51 to MTC of which (i) approximately $2,689,606.51 of these transfers are asserted by MTC to be unrelated to donations made by the Vennes Parties and (ii) approximately $ 1,451,000.00 of these transfers were made by Mr, Vennes to MTC to refurbish and repair the Hope Commons Building located in Minneapolis, Minnesota, which is partially occupied by Teen Challenge under a tenant-friendly twenty-five year lease.
The settlement terms:

Cash consideration: upon approval of the Settlement, MTC shall pay or cause to be paid $2,051,000.00 ("Settlement Payment" ) in settlement of the Litigation. The Settlement Payment is comprised of two components, $600,000.00 of the Settlement Payment is directed at settling all claims the Petters Receiver and the Petters Trustee have against MTC directly based on transfers to or for the benefit of MTC made by entities for which Mr. Kelley serves as receiver or trustee (the "Direct Claim Amount" ). The remaining $1,451,000,00 is directed at settling all claims the Petters Trustee and the Liquidating Trustee have against MTC resulting from transfers MTC received from either of the Vennes Parties, either directly or through the Fidelis Foundation ("Indirect Claim Amount" ).
Allocation of the Settlement Payment with respect to the Indirect Claim Amount: The Petters Trustee, on behalf of PCI, will receive 50% ($725,500,00) of the Indirect Claim Amount on account of his settlement of his claims that predate November 30, 2003. In general, these claims are premised on the theory that MTC was a ) 550(a)(2) subsequent transferee of transfers made initially by PCI to one or both of the Vennes Parties. The remaining 50% ($725,500.00) of the Indirect Claim Amount is allocated 50% to the Petters Trustee on behalf of PCI ($362,750.00) and 50% to the Liquidating Trustee ($362,750.00) ("Palm Beach Settlement Payment" ) according to the Allocation Agreement.
MNTC also has to drop its motion to dismiss.

The settlement motion explains that there would be problems in going ahead with the clawback, including the cost of litigation and discovery and the recently passed Minnesota Uniform Fraudulent Transfer Act (MUFTA). And then there is the complication of the trial in October:
Moreover, a significant focus of the litigation will be the Vennes Parties themselves. To that end, the pending criminal case against Mr. Vennes is currently scheduled for trial in the fall of 2012. The possibility exists that discovery from the Vennes Parties may be delayed until the conclusion of that proceeding.
Will we learn more about the business relationship between Frank Vennes and Minnesota Teen Challenge at the trial? Stay tuned.