Monday, January 28, 2013

The Prosecution Releases Trial Brief

Government attorneys released its summary of the criminal case against Frank Vennes and co-defendant James Fry. In an overview of their case, Assistant United States Attorneys Timothy Rank, Kimberly Svendsen and Robert Lewis claim Frank Vennes was the primary source of funds for the massive Ponzi scheme orchestrated by Tom Petters and the company at the heart of the scam Petters Company, Inc. (“PCI”).

Frank Vennes raked in millions from his role as financier for the Petters Ponzi scheme. Vennes made more than $100 million from interest derived from individual investors. He received commissions from To Petters totaling more than $100 million, including $60 million related to the Palm Beach hedge funds unds and $48 million related to the Arrowhead hedge fund.

The Government traces the role of Frank Vennes back to 1995, only a few years after Vennes was released from a Club Fed at Sandstone, Minnesota. In a classic case of affinity fraud, Vennes began by borrowing money from people he met in the prison ministry that visited in prison.

Petters and Vennes needed to raise more money for their scheme, so Vennes tried to get funding from banks and other institutional lenders, but the lenders balked at lending to Vennes because of his criminal record. Vennes met James Fry in 1998. Fry managed an investment company. Arrowhead Capital Management, which had hedge funds invested primarily in medical device companies. Vennes was the go-between for Arrowhead's investments in PCI and for nearly eight years, Fry shoveled hundreds of million of dollars from investors into the gaping maw of PCI for the purpose of financing the purchase of consumer goods which Petters supposedly sold at a profit - the transactions did not exist. Fry lied to his investors about the transactions and Vennes knew Fry was lying to his investors.

Eventually, the relationship between Vennes and Fry "soured" when Fry tried and failed to deal directly with Tom Petters. Vennes recruited Bruce Prevost and David Harrold to help him find more money for PCI. In 2002 Prevost and Harrold created the Palm Beach Funds. They also were required to invest in PCI through Frank Vennes and could only contact Tom Petters through Vennes. As with Arrowhead, Vennes was aware that Prevost and Harrold were lying to investors (Prevost and Harrold have pled guilty).

Vennes also used his company Metro to attract investors to PCI. Vennes is also alleged to have lied to a bank to obtain a multi-million dollar line of credit.

The Government also charges James Fry with lying to the SEC about being unaware that Arrowhead funds were not paid directly from retailers and claiming he was unaware of marketing materials with false information.

The Government states that they are not out to prove that Vennes and Fry knew the full extent of the Ponzi scheme at the heart of PCI. The indictment, however claims Vennes and Fry's lies prevented investors from being able to doing due diligence on where their money was going. Vennes and Fry are alleged to have lied to investors by telling them that the Arrowhead and Palm Beach Funds were getting paid directly by the big box stores like Costco or Sam’s Club, which gave investors as if there were real transactions underlying the PCI investments. The funds Vennes and Fry controlled never received a single payment from a retailer. Payments on the PCI promissory notes came from PCI, which was, of course a Ponzi scheme paying old investors with money obtained from new investors. The PCI Ponzi scheme continued to grow until it inevitably collapsed.

The Government also seeks to prove the defendants concealed from investors Vennes’s role the transaction. They were aware that Vennes’s criminal history (money laundering, firearms and narcotics trafficking convictions) would make it difficult to raise money from institutional investors.

Vennes is charged with eight counts of aiding and abetting securities fraud, seven counts of aiding and abetting wire fraud, three counts of aiding and abetting mail fraud, three counts of bank fraud, two counts of making false statements on a credit application, and three counts of money laundering.

Fry is charged with five counts of aiding and abetting securities fraud, four counts of aiding and abetting wire fraud, and three counts of making false statements to the Securities and Exchange Commission.

The Government's brief goes on to relate the early history of Frank Vennes, much as I have transcribed in this Vennes Info post.

The brief goes on to describe some close calls in 2002 for the alleged scamsters when a bank, an Arrowhead employee and caught a whiff of the fraud. Sadly, the information was buried and Vennes and Fry continued to raise money without mentioning it to investors.

The prosecutors give a preview of the testimony of Harrold and Prevost with a glimpse of how Vennes impressed his clients with his ostentatious home and lifestyle as well as an anonymous donation of a million dollars (of other people's money) to a religious institution.

The brief goes on to describe the unravelling of the Petters Ponzi scheme in 2007 and how Vennes scrambled to conceal the inability of PCI to make good on its obligations. to pay investors - by May 2008, the PCI notes held by Metro Gem were being paid more than 50 days after they went into default. Vennes was using new investor money to pay off old investors (“lulling payments”). It got so bad by August, 2008 that Vennes used hundreds of thousands of dollars from "investor C.H." that was supposed to be invested in PCI, but was instead used to pay for his mortgage on two of his mansions, as well as car payments, credit card payments, and “lulling” interest payments to other Metro Gem investors.

The brief also addresses witness and evidentiary issues. Among the more interesting bits of information is that emails and other correspondence from Metro Gem and Arrowhead employees will be introduced as evidence. - including "prior statements" emails and correspondence from Craig Howse, Frank Vennes's attorney.

More interesting is the Government's position regarding character witnesses. They may ask about "...specific instances of the defendant’s past conduct relevant to the character trait at issue. In particular, a defendant’s character witnesses may be cross-examined about their knowledge of the defendant’s past crime..."

In anticipation of a defense use of the post-fraud, post-raid efforts of Vennes to mollify his victims with a voluntary receivership (see this Ripple in Stillwater post), the Government seeks to exclude that evidence as irrelevant and distracting from the charges and likely prolonging the trial. The trial begins a week from today - stay tuned.