Sunday, December 16, 2012

Frank Vennes' Quest for a Presidential Pardon Was Used to Obtain Funds for the Petters Ponzi Scheme

In a pretrial document filed Friday with the Federal Court last week, prosecutors argued that Frank Vennes' three felony convictions for money laundering, gun and drug trafficking should be permitted as evidence at the trial in February with an instruction to jury that Vennes’s past criminal conduct won't be used by prosecutors to suggest an inclination ny the defendant to commit crimes. Instead, the evidence will be necessary to explain the peculiar history of fraud and deceit at the heart of every transaction Vennes controlled between co-defendant James Fry's Arrowhead hedge funds and Petters Company Inc. (PCI). In addition, it became necessary for the Vennes and Fry to conceal his criminal record from investors. Normally, prior convictions are precluded as prejudicial to juries. In previous proceedings before a magistrate judge, government attorneys successfully argued that Frank Vennes' prior convictions are an integral part of the alleged crimes Vennes and Fry are currently being charged.

To further explain the importance of admitting the prior convictions as evidence, the government gave a brief history of the career Frank Vennes with new details that help explain the furtive manner in which Frank Vennes conducted business and lived his life. The following narrative of the colorful career of Frank Vennes is derived from the government documents with some additional information added from other sources including the chapter on Frank Vennes in "The Madness of Michele Bachmann", a book I co-authored with Karl Bremer and Eva Young (Wiley & Sons).

In the mid - 1980's, Bismark, North Dakota pawn shop owner Frank Elroy Vennes Jr. was caught up in an IRS investigation of money laundering in North Dakota. A sting was set up in which an agent posed as an investor from Chicago. Vennes, knowing that what he was doing was illegal, agreed to courier cash in exchange for a commission of 6% of the cash he took out of the United States. Over the ensuing months, Vennes and his cohorts received $370,000 from the undercover agent (minus substantial commissions) and illegally conveyed the money to offshore accounts in the Bahamas, the Isle of Man, and Switzerland. In October 1986, Vennes hid $100,000 in cash on his person and caught a plane from Minneapolis to London and deposited the cash in an account in the Isle of Man.

A few weeks later, Vennes took a trip to Switzerland with a hundred grand to be deposited as instructed by the undercover agent in a Swiss bank, but Vennes returned clamming his cohorts in Switzerland walked off with the money. The undercover agent then asked Vennes to recoup the "lost" money by arranging illegal firearms and drug deals. An undercover agent paid Vennes $3,000 for two machine guns, two semi-automatic pistols and 700 rounds of ammunition. Vennes also tried to buy kilogram quantities of cocaine. In May 1987, Vennes was charged with various money laundering, firearms and narcotics offenses. In August 1987, Vennes pled guilty to one count of money laundering, and pled nolo contendere (no contest) to one count of illegal firearms sales and one count of using a telephone to distribute cocaine.

From the Vennes chapter in "Madness of Michele Bachmann":

On September 11, 1987, Vennes was sentenced to a 5 years, speeding most of his time in the Sandstone correctional facility 100 miles northeast of Minneapolis. . He served thirty-eight months in prison; was released on parole on December 12, 1990. While in prison, Frank Vennes met and developed a close relationship with visiting members of the Minnesota prison ministry Charis. After his release from prison in 1990, Vennes moved to the Twin Cities area and landed a job with a job pushing a broom for seven bucks an hour in metal fabrication company in Bloomington. Vennes talked about this difficult time in his life in recorded speech he gave to students at a college in Minneapolis (listen to the talk at this Vennes Info link).
Following his release from prison, Vennes did not appeal his sentence or conviction, but he commenced a “Bivens action” against the federal government, seeking $10 million in damages from “unnamed federal agents for entrapment, outrageous conduct, and willful violation of the tax laws.” 
According to a judicial opinion from the 8th Circuit Court of Appeals, Vennes testified that at the prompting of undercover agents posing as Chicago businessmen in North Dakota, “he made two trips to Switzerland to launder money provided by the agents. Vennes successfully laundered $100,000 on the first trip, but on the second trip, associates of Vennes made off with the other $100,000. 
“When Vennes returned without the money,” the opinion stated, “the Chicago businessmen revealed themselves to be members of the Mafia and threatened . . . to dismember his children if he failed to recoup this money (perhaps suspecting that their superiors would be none too pleased at the loss of $100,000 of government money). These newly revealed mobsters then suggested that Vennes engage in illegal drug and firearms transactions in an effort to recoup the money and thereby avoid serious bodily harm to him and his family. Vennes did so, the efforts to recoup the money were unsuccessful, and Vennes was eventually charged with a panoply of crimes.” Vennes told the court that “I did get involved with some drug deals, but I lost money on those too, or got ripped off, so that there was never any money to repay the agent.” 
The District Court acknowledged, “the underlying factual situation . . . is wondrously bizarre. Especially fascinating is speculating about the scene which occurred when the undercover agents tried to explain the loss of $100,000.” 
Yet Vennes failed to convince the court that he was entrapped, most notably because he pleaded either guilty or no contest to the charges. In dismissing Vennes’s claims, North Dakota U.S. District Judge Patrick Conmy wrote that “The record reveals that at one point, Vennes purchased cocaine from his own source in Florida after haggling with an undercover agent supplier about price and speed of delivery. This is not the conduct of one coerced or entrapped into crime.” 
In addition, at sentencing, according to the appeals court record, “Vennes’s attorney stated that the presentence report was complete, fair and thoroughly professional. He further stated that he was not ‘in any way indicating that these government agents acted in an improper fashion.’” 
Vennes argued that he pled guilty and no contest on the advice of his attorney, whom he accused of “ineffective assistance.”

Vennes appealed the District Court’s decision to the 8th Circuit Court of Appeals and lost, and he was denied appeal to the U.S. Supreme Court. His claims were ultimately rejected in 1994.

While employed as a janitor, Vennes began borrowing money from his boss and others he met through the faith community associated with Charis. He used the money to buy goods – including gold coins and expensive watches – which he resold at a profit. At his trial, Tom Petters testified that he was introduced to Frank Vennes (around 1995) by Petters associate Ruth Kahn. When asked by his attorney to describe Vennes, Tom Petters offered a one word description - "peculiar".

Prosecutors describe what happened next:
Petters offered to pay Vennes a substantial interest rate if he could secure money to loan to Petters, purportedly to fund the purchase of consumer goods that Petters was going to resell at a profit. Vennes did not have the money himself, so he asked his boss, the man who had given him a job upon his release from prison, for money to loan to Petters. Vennes’s boss agreed to lend Vennes $100,000, and Vennes, in turn, lent the money to Petters. Petters gave Vennes a promissory note in which he promised to repay Vennes in 30 days, along with $10,000 in interest (an annualized interest rate of 120%). Over the next several months, Vennes borrowed additional funds from his boss, which he gave to Petters in exchange for promissory notes in which Petters agreed to pay similar interest rates. Vennes took a cut of the interest on each transaction for himself.

Vennes also began borrowing money from others associated with Charis or related Christian organizations, which, in turn, he used to lend Petters progressively larger amounts. Indeed, by the end of 1995, Vennes (who did not have even $100,000 to lend Petters in May of 1995) was able to obtain more than $1.2 million to lend Petters in a single financing transaction. Vennes kept a portion of the interest paid by Petters on each transaction. Starting at the end of 1995, Vennes began issuing the promissory notes to the people from whom he borrowed money in the name of his newly formed company, Metro Gem, Inc. Over the next couple of years, the amounts of money Vennes was obtaining from others to lend to Petters continued at an ever-increasing rate. The source of this money remained largely the same, as Vennes continued to obtain loans from those in Charis or related Christian organizations.
By 1996, the voracious Ponzi scheme at the heart of PCI needed more money than Vennes could provide by exploiting his affinity with the trusting, faith-based community he met through Charis (On the Charis prison ministry's IRS #990 form for 2003, Frank Vennes is listed as the treasurer and the address listed for Charis was the same as Metro Gem).

Toward the end of 1996, Vennes began looking for funding through institutional lenders. With the assistance of a Twin Cities businessman, Vennes tried to get a $5,000,000 revolving loan from Allstate Financial Services to Metro Gem for to be used to finance transactions arranged by Petters. On November 20, 1996, Vennes travelled to Arlington, Virginia to meet with Allstate representatives to sign documents to close on the loan. The next day, Allstate refused to loan Vennes the money because a background check had uncovered the money laundering conviction and the related drug and gun charges. Vennes begged the Allstate loan officer to reconsider to no avail. Vennes tried again to obtain loans through institutional lenders including including American Express, GE Capital, Nations Bank, and Merrill Lynch with the assistance of a convicted fraudster Vennes met in Sandstone. The effort of these two jailbirds failed.

August 6, 2001, Frank Vennes was interviewed by an FBI special agent in connection to his request for a pardon. In that interview, Vennes complained to the agent about the convictions he was petitioning to be expunged by Presidential order:
The stigma of a felony conviction has denied him free enterprise opportunities. Financial institutions do not even want to negotiate terms for loans. Consequently, he is forced to obtain capital from individuals.
Vennes was finally able to obtain funding for Metro Gem through James Fry a former dentist, former broker with Smith Barney and Piper Jaffray, and manager of a small investment company he started in 1996, called Arrowhead Capital Management. The Arrowhead fund's investments were primarily in the medical device industry. Fry lent some of his fund’s investors’ money to Metro Gem, and Vennes paid Fry up to 48% annual interest on short-term notes. Vennes took that money and stirred it into the Petters' promissory note milll and obtained even higher rates of return.

In 1999, Vennes and Fry patterned to obtain a 150 million dollar line of credit from Barclays Capital to pour into PCI. In April of 1999, after more than two months of negotiations, Vennes and Fry had an agreement in principle with Barclays. As part of a due diligence procedure, Barclays asked Vennes and Fry to sign released to conduct a criminals background check on them. Vennes, knowing what information such an investigation would uncover, admitted up front to the Barclays representative that he had a felony record whereupon Barclays promptly informed Fry and Vennes that the the deal was off because of Vennes’s criminal history.

After the Barclays fiasco, Fry got creative. In late 1999, using an offshore hedge fund Fry set up the previous year in Bermuda, Arrowhead Capital Finance, Ltd.(ACI) to loan millions of investors' dollars to Metro Gem. Vennes, who insisted on being the go-between Petters, loaned the money to PCI. The money was intended to fund the purchase of consumer goods such as televisions and VCRs for resale at a profit. In return for the financing, Petters gave Vennes a promissory note promising to pay Metro Gem in 90 days later at annual rates around 70 percent. Vennes would then hand over the PCI promissory notes to Fry's offshore hedge fund. Fry's hedge fund was used almost exclusively as a conduit of investor money to PCI, however PCI was not mentioned by name in the fund's "Offering Memorandum", neither was Vennes named as the gate-keeper between Petters' PCI and Fry's hedge funds.

In the summer of 2000, Butterfield Bank, the custodian of Fry's hedge fund uncovered the promissory notes and the Vennes convictions in a routine review of the fund's collateral. Butterfield Bank promptly ended its relations to Fry and his hedge fund based on Fry’s failure to disclose Vennes’s criminal history. at this time, KPMG Peat Marwick (KPMG), an auditing firm involved with Fry's offshore hedge fund also learned of Vennes and his criminal history - Fry explained away the Vennes connection claiming Vennes and Metro Gem were mere conduits to Petters. In October of 2000, Fry disclosed that Vennes was seeking a Preidential pardon. He told KPMG that the “Vennes’ case is before the Executive Committee of the White House for expungement and complete discharge.”

Fry then approached the Bermuda Commercial Bank to provide the services lost when Butterfield and Fry parted ways. In December of 2000, Fry told KPMG and Bermuda Commercial Bank that “in the event that Mr. Vennes’ expungement has not been achieved to KPMG’s satisfaction prior to 31st December, 2000, that Arrowhead will cease from dealing with MetroGem.” With this assurance, KPMG and Bermuda Commercial Bank agreed to work with Fry. But, the campaign for a Presidential pardon expunging the Vennes crimes was not successful by the December, 2000 deadline. For more detailed background on the Vennes fruitless effort to obtain a pardon from President Bill Clinton, read part 2 of Karl Bremer's "Lawyers Guns & Money: The Twisted Trail of the Frank Vennes Jr. Presidential Pardon."

Without the pardon, Fry lied to the KPMG auditors claiming “ACF now deals direct with Petters and the previous arrangements involving MetroGem and Frank Vennes no longer apply.” In addition, Fry altered paperwork to conceal his ongoing business relationship with Vennes and Metro Gem and the relationship continued even after Fry unsuccessfully attempted to go around Vennes and deal with Petters directly in 2002. The arrangement with Vennes and Metro Gem as "service agent" for Arrowhead loans to PCI continued from 2001 and for much of 2008. Even though Vennes was in firm control of communications and the flow of money between PCI and Arrowhead, and was compensated for this service to the tune of $48 million dollars, Fry concealed all of that from his investors and Vennes was totally aware of that deception.

A similar arrangement concealing the Vennes role as go-between existed with the Palm Beach Finance hedge funds. The PDF principals Bruce Prevost and David Harrold also concealed from investors the Vennes name and criminal history. Vennes raked in more than $58 million from PBF transactions in PCI notes.

We are unable to say whether Vennes received the pardon he desperatley sought, however in a recorded conversation  between government witness Deanna Coleman and Tom Petters dated September, 8, 2008, Petters says Vennes told him he would be saved from the consequences because he was going to get a pardon "next year"- complete audio file and transcript is on the MN DOJ website (Exhibit #377)."

For additional information about the role the Vennes' quest for a Presidential pardon played in Vennes'  alleged role as financier for the Petters Ponzi scheme read Karl Bremer's 3-part investigative series "Lawyers Guns & Money,: The Twisted Trail of the Frank Vennes Jr. Presidential Pardon" at Ripple in Stillwater.

frank vennes,ken avidor

Saturday, December 15, 2012

Frank Vennes Defense Plans to Introduce Testimony and Exhibits About HIs "Good Acts"

The Government has filed pretrial motions with the Court  his week including a history of the criminal activities of Frank Vennes that includes new details about his previous conviction for money laundering, drug and gun trafficking (more about that in the next post).

In one document, the prosecution says Vennes has submitted a list of 45 witnesses to be called to testify on his behalf and 196 exhibits. James Fry has not yet submittted a witness list or exhibit list.

The Government says witnesses and exhibits are about specific "good acts" including his involvement with "various charities" and his donations. Readers of this blog will have a pretty good idea who those charities are and number and size of the contributions.

The Government also asked the Court to preclude an expert witness for Defense who will apparently testify that the criminal history of Frank Vennes and "the flow of funds" is not material to the case. The prosecutors claim that testimony will only confuse the jury who will, in the end be deciding the materiality of that evidence.

Wednesday, December 12, 2012

Palm Beach Finance Trustee Sues Fulbright & Jaworski

From the complaint (PDF) filed 11/30/12:
Fulbright failed to comply with its duties to the Palm Beach Funds and the applicable standard of conduct. As a result, the Palm Beach Funds suffered damages.

Pre-Trial Motions

Vennes defense attorney James Volling has asked Judge Kyle to exclude recorded conversations that do not involve the defendants on the basis that the audio files are hearsay. Volling also requested that Vennes' prior felony convictions not be admitted as evidence or if the felony is allowed, the jury should receive instruction about how that evidence of past crimes should not be used as proof that the defendant is guilty of crimes he is currently charged.

Volling also seeks to exclude co-defendant James Fry's testimony to the SEC or include a limiting statement to the jury. Volling also asked the Court to prevent the prosecution from using Rule 404(b),  evidence that the crimes were committed because of a character trait  in the Government's opening statement.

Volling  also asked for cautionary instructions to the jury about testimony from cooperating witnesses.

Volling asked the Court to exclude evidence or testimony "regarding alleged violations of civil rules or regulations". Voling also asked the Court to prevent the prosecution examining witness regarding their veracity.  Voling also asked that forfeiture be removed from the verdict form and presented to the jury in a separate procedure following conviction (if Vennes is convicted).