Government Intends to Introduce Audio & Testimony of Religious Affinity Fraud

According to a pretrial document released today, some of the government’s witnesses are going to testify that they trusted Vennes because he prayed with them.

Some witnesses will testify that they failed to pursue due diligence in part because of his ardent professions of faith - if they asked questions about PCI, he treated the questions as evidence of a lack of faith.

Although they are not charging Frank Vennes with "affinity fraud",  that's what it's called:

Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are - or pretend to be - members of the group. They often enlist respected community or religious leaders from within the group to spread the word about the scheme, by convincing those people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the fraudster's ruse.

These scams exploit the trust and friendship that exist in groups of people who have something in common. Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often fail to notify authorities or pursue their legal remedies, and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment.

Many affinity scams involve "Ponzi" or pyramid schemes, where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. This ploy is used to trick new investors to invest in the scheme and to lull existing investors into believing their investments are safe and secure. In reality, the fraudster almost always steals investor money for personal use. Both types of schemes depend on an unending supply of new investors - when the inevitable occurs, and the supply of investors dries up, the whole scheme collapses and investors discover that most or all of their money is gone.

Here's some audio of a talk in 4 parts of  Frank Vennes mixing God & money:

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.

Vennes Attorney Warns Prosecutors Use of Prior Conviction Will Be Countered With "Numerous Additional Witnesses and Exhibits"

In a pretrial document submitted to the Court yesterday, attorney for Frank Vennes Jim Volling made a last-ditch argument to have his client's 26-year-old prior felony convictions excluded  from the trial. Volling goes on to disclose his strategy to counter the prejudicial evidence of his client's past criminality- he will call on additional evidence and witnesses testifying to Frank Vennes's "good acts" and rehabilitation. Whether Mr. Volling is referring to letters supporting a pardon for Mr. Vennes written by former Senator Norm Coleman and Representative Michele Bachmann remains to be seen, but there is no doubt that those letters and witnesses would be powerful evidence in the hands of a good defense attorney.

In another motion, Volling also asked the Court to exclude other evidence of the character of Frank Vennes he deemed prejudicial. Also included is a  document with redactions from a lawsuit Frank Vennes filed in 1996.

Remembering Karl Bremer - Journalist Who Investigated Frank Vennes

Nearly a year ago, my colleague, co-author and friend Karl Bremer was diagnosed with pancreatic cancer. I am sad to report that Karl passed away yesterday.

Much of the research  I draw from on this blog comes via Karl  Bremer's articles at the Minnesota Independent, Dump Bachmann and  his Ripple in Stillwater blog. Much of Karl's award-winning research about Frank Vennes is also included in "The Madness of Michele Bachmann" (Wiley & Sons, 2010).

Karl Bremer also took one of the few recent photos of Frank Vennes taken in from of the Federal Courthouse in St. Paul (see below).

My thoughts and condolences go out to Karl's family and many friends.

Articles & posts about Karl Bremer:

Firedog Lake: "Ave Atque Vale, Karl Bremer" - Phoenix Woman

Pioneer Press: "Obituary: Stillwater journalist Karl Bremer dies" by Mary Divine.

Star Tribune: "Obituary: Blogger Karl Bremer kept Stillwater on its toes" Kevin Giles.

Stillwater Patch: "Ripple in Stillwater Writer Karl Bremer Dies" - Shawn Hogendorf

FDL: "Come Saturday Morning: Here’s to You, Karl Bremer" - Phoenix Woman (February 18, 2012)

Star Tribune: "Stillwater-based political blogger keeps ire stoked" - Kevin Giles (February 20, 2012).

Karl Bremer's photo of Frank Vennes 

Prosecutors Claim Frank Vennes Made Over $350 Million From the Petters Ponzi Scam

In a pretrial document filed yesterday, Federal prosecutors claim Frank Vennes made over $350 million working with Tom Petters. At issue was a defense request to exclude photos of the posh homes once owned by Vennes, valued at $6,000,000 and $4,850,000, The Government alleges Vennes purchased the mansions to impress investors.

There's a little sketch of one of the mansions of Frank Vennes on this map showing the mansions that used to belong to some of the Petters Ponzi cohorts - click on map to make it bigger:

Video: Preview for Trial of Frank Vennes

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.