Fry's Attorney Wants to Question Vennes at His Client's Trial

As if last week's sudden turn of events weren't surprising enough, today's hearing took a bizarre twist.

I walked over to the Federal courthouse this afternoon expecting to watch Frank Vennes's co-defendant James Fry plead guilty, but that was not the case as James Fry was not in attendance. Fry's attorney Joe Friedberg asked for a continuance in light of the changed landscape. Friedberg claimed the Government was being unfair "right up to the due process line".

Friedberg claimed the Government's case implied Fry had knowledge of the Ponzi scheme at the heart of PCI.

Freidberg insisted on being able to question Vennes before the jury about the charges against his client.

Friedberg rejected the Government's contention that their witnesses could supply the necesary testimony regarding the specific charges against Fry saying such testimony was hearsay and that only Vennes had "a monopoly of knowledge".

In  particular, Friedberg pointed to the Government's evidence regarding how Fry and Vennes allegedly used  Vennes's quest for a presidential pardon to lull potential investors concerns. Friedberg said:

"Vennes told my client Michele Bachmann supported his pardon to the White House" 

Friedberg was also concerned that Vennes would still be covered by Fifth Amendment protections against giving testimony that could incriminate himself.

The Government asked for a short continuance of a few weeks, Friedberg asked for months.

The judge said he'd rule on a continuance this week.

Clearly, this trial has entered a new phase... stay tuned.

MInnPost Article on the Long Strange Journey of Convicted Fraudster Frank Vennes

A must-read article in MinnPost:"Frank Vennes and the Petters Ponzi scheme: a long, mysterious tale" by Beth Hawkins.

Frank Vennes to Plead Guilty

Just learned it.

I will update this post after the hearing in an hour or two.

UPDATE: Vennes pled guilty to two counts. Will cooperate. Out on bond awaiting sentencing.

UPDATE:  The MN DOJ Press release:

Frank Vennes pleads guilty to lying to investors in Petters’ Ponzi scheme

MINNEAPOLIS—Late this afternoon in federal court in St. Paul, a business associate of Thomas J. Petters, the Minnesota businessman convicted in 2009 of orchestrating a $3.65 billion Ponzi scheme, pleaded guilty to fraudulently raising money from individuals and through hedge funds for investment in Petters Company, Inc. (“PCI”). Frank Elroy Vennes, Jr., age 55, of Stuart, Florida, was charged on July 11, 2011, in a Second Superseding Indictment. Appearing today before United States District Court Judge Richard H. Kyle, he specifically pleaded guilty to one count of securities fraud and one count of money laundering. 

Following the plea hearing, U.S. Attorney B. Todd Jones said, “This case exemplifies one of the highest priorities of this office — protecting our citizens from financial fraud. Because of the tremendous dedication of this office and our investigative partners, we successfully constructed a very strong case. We were able to convict Tom Petters, the biggest fraudster in Minnesota history, who is now serving a 50-year sentence in Leavenworth. We also successfully prosecuted many of his associates, and today, yet another individual pleaded guilty. We are taking action to recoup the financial losses suffered by so many because of this fraud and know the court will appropriately sentence Mr. Vennes for his related crimes.” 

FBI Special Agent in Charge Chris Warrener added, “This guilty plea today symbolizes the ongoing joint efforts between the FBI, the U.S. Attorney’s Office, IRS-CI, and the U.S. Postal Inspection Service to combat significant fraud in the State of Minnesota. It also reflects our continued joint commitment to ensuring that those responsible for the Petters fraud are held accountable.” 

From 1995 through September of 2008, Vennes and his company, Metro Gem, obtained money from others for investment in PCI notes. He also assisted in the formation of hedge funds, known as the Arrowhead Funds, to help raise additional investment funds for that same purpose. Beginning in 2001 and proceeding through September 24, 2008, he knew that individuals associated with the Arrowhead Funds were making misrepresentations and omissions to investors regarding investments in PCI, and he aided and abetted in those misrepresentations. 

“This complex investigation shows that the appearance of success can be a mask for a tangled financial web of lies,” said Kelly R. Jackson, Special Agent in Charge of the St. Paul Field Office of the IRS-CI. “Ponzi schemes can thrive for a long time because of the false representations about the investments that were made to investors. But that time is gone, and as Mr. Vennes’ plea shows, it’s time for those responsible to face judgment.” PCI was owned and operated by Tom Petters, who, in or before 1993, initiated the Ponzi scheme by representing that funds invested in PCI promissory notes would finance the purchase of electronics and other consumer merchandise. Purportedly, PCI would resell that 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 hundreds of millions of dollars for his own benefit and the benefit of his co-conspirators.
Petters’ Ponzi scheme unraveled in 2008, when federal agents executed search warrants at his business offices as well as other locations. He was subsequently prosecuted in federal court in the District of Minnesota and, in April of 2010, was sentenced to 50 years in federal prison. He is currently serving his sentence in the federal penitentiary in Leavenworth, Kansas. 

In his plea agreement, Vennes admitted that he raised funds for investment in PCI notes through third-party agents, particularly after 1998. Because he had a federal criminal record, having been previously convicted on federal narcotics, firearms, and money laundering charges, he had difficulty obtaining funding on his own. As a result, he regularly worked through others, especially when trying to solicit money from banks and institutional investors. Arrowhead Capital Partners II, L.P. and Arrowhead Capital Finance, Ltd., collectively known as the Arrowhead Funds, were among those third-party agents. 

From 1999 through September 2008, all paperwork and communication between PCI and the Arrowhead Funds went through Vennes or one of his employees. At the same time, Vennes received “commissions” from Petters for brokering deals involving the Arrowhead Funds. His commissions were based on the amount of money he raised for Petters and PCI. Between 2001 and 2008, Vennes received more than $48 million in commissions.

During that same time period, Vennes knew that those acting on his behalf were making material misrepresentations and omissions to investors in the Arrowhead Funds and did nothing to correct the situation. Investors were told, for example, 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. Thus, investors were falsely assured that all PCI transactions were, in fact, taking place, and all money was secure. However, Vennes, among others, was well aware that no payments were ever received from retailers and, instead, came from PCI alone. Furthermore, investors were never informed of Vennes’ criminal record or his involvement in the Arrowhead Funds’ transactions. And, finally, they were kept unaware that in late 2007 and early 2008, the PCI Notes held by the Arrowhead Funds were delinquent and were approaching default. Instead of disclosing that information to investors, Vennes and others arranged to secretly extend the due dates on the notes, the intent being to conceal the payment problems and to lull investors into believing their investments were secure and performing well. 

Vennes’s co-defendant in this case, James Nathan Fry, age 59, of Orono, Minnesota, was charged with five counts of securities fraud, four counts of wire fraud, and three counts of making a false statement to the U.S. Securities and Exchange Commission during its investigation of investments in PCI by hedge funds under the management of Fry’s company, Arrowhead Capital Management. His trial is scheduled to begin on February 5, 2013. For his crimes, Vennes faces a potential maximum penalty of ten years in prison on the money laundering count and five years on the securities fraud count. Judge Kyle will determine his sentence at a future hearing, yet to be scheduled. 

If convicted, 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. Two Florida hedge fund managers have pleaded guilty to committing fraud in connection to this scheme by making material misrepresentations to investors in their hedge funds concerning investments in PCI. David William Harrold, age 53, of Del Ray Beach, Florida, and Bruce Francis Prevost, age 52, of Palm Beach Gardens, Florida, await sentencing, each on four counts of securities fraud. 

This case is the result of an investigation by the Federal Bureau of Investigation, the Internal Revenue Service–Criminal Investigations, 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.

An Overview of the Trial of Frank Vennes

UPDATE: In a surprise move, Frank Vennes pled guilty Friday.

Frank Vennes goes on trial next week in a Federal court in St. Paul Minnesota for his role as financier for the $3.6 billion Ponzi scheme orchestrated by Tom Petters.

Former Senator Norm Coleman and Congresswoman Michele Bachmann wrote letters in support for a Presidential pardon of Frank Vennes to expunge prior convictions for money laundering, drug and gun trafficking. Other political figures including former Minnesota Governor and presidential candidate Tim Pawlenty supported the pardon.

In 2006, during orientation for freshman Congress members, a Star Tribune reporter asked Congresswoman Michele Bachmann (R, MN) what her goal was as a new representative. Bachman gave a puzzling answer: “My No. 1 goal is to not go to jail.”

Next week, February 5, 2013, we may finally understand why Representative Bachmann made that statement as the top donor in her first campaign for Congress goes on trial in Federal Court in St. Paul, Minnesota for his role as financier for the massive Ponzi scheme orchestrated by Tom Petters. Tom Petters was convicted in 2010 for his role in the Ponzi scheme and sentenced to 50 years in prison.

On April 20, 2011, convicted money launderer and cocaine/gun runner Frank Vennes Jr., a close personal friend and a major campaign contributor of Minnesota presidential candidates Michele Bachmann and Tim Pawlenty, was indicted on federal fraud and money-laundering charges for his alleged role in the Tom Petters Ponzi scheme.

The origins of this trial go back decades when Frank Vennes Jr. was charged in May 1987 and convicted in North Dakota on federal charges of money laundering, cocaine distribution, and illegal firearms sales, to which he pleaded guilty and no contest. He was sentenced to five years in prison. Vennes was sentenced to five years in the Sandstone (Minnesota) Federal Correctional Facility. He served thirty-eight months in prison; was released on parole on December 12, 1990; and completed his sentence on September 25, 1992. Vennes claims he found God in prison with the help of a prison ministry.

In subsequent decades, Frank Vennes found his criminal record was an impediment to his new role arranging financing for Tom Petters’ financial empire. Vennes asked several prominent politicians to help him expunge his criminal record by writing letters of support for a presidential pardon. These politicians also received hefty campaign contributions from Vennes, his business cohorts, family and friends. The timing of Frank Vennes’s largesse led many to speculate that it was part of a “pay-for-pardon” plot.

Court documents state that Vennes raised money from investors directly and also induced hedge funds to raise money from investors to purchase short-term, trade finance promissory notes in Petters’s company, PCI. In return, Vennes allegedly earned more than $105 million in commissions from 1995 to 2008. Prosecutors now claim the total take for Vennes may exceed $350 million. On September 24, 2008, federal agents raided Vennes’s $5 million Shorewood home on Lake Minnetonka in connection with the $3.5 billion Tom Petters Ponzi scheme and seized “boxes and buckets of silver and gold coins, trays of jewelry, five stacks of $100 bills, boxes of gem stones, silver plates and Rolex watches,” along with diamond rings and artwork. Two days later, Vennes’s $6 million oceanfront home in Jupiter, Florida, was also raided. Four years after the raid, Frank Vennes is finally getting his day in court.

In a pretrial document filed with the Federal Court February 14,2013, prosecutors argued that Frank Vennes' s 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 by 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.

In a pretrial document submitted to the Court January 23, 2013, 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 character witnesses – as many as 45 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 their recently released trail brief, the Government stated they may ask the character witnesses 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..."

A Bachmann quote from her letter to the Pardon Attorney supporting a pardon for Vennes (see letter at the end of this diary):

As a U.S. Representative, I am confident of Mr. Vennes’ successful rehabilitation and that a pardon will be good for the neediest of society. Mr. Vennes is seeking a pardon so that he may be further used to help others. As I know from personal experience, Mr. Vennes has used his business position and success to fund hundreds of nonprofit organizations dedicated to helping the neediest in our society....

If Bachmann is called as a character witness by the defense, will prosecutors ask her what she knew about Vennes from "personal experience"? She can't say she lied in her letter; her letter was addressed to an Assistant U.S. Attorney... and lying to a Federal law enforcement officer is a felony offense - just ask Martha Stewart who was fined and sent to a Club Fed for that crime.

Read a summary of the Government's recently released, 52-page trial brief at the Vennes Info blog.

See the interactive Frank Vennes Pardon Timeline at Dipity.

Much of the research for this diary comes from “The Madness of Michele Bachmann” by Ken Avidor, Karl Bremer and Eva Young, published by Wiley & Sons.

Additional information about the investigation and trial of Frank Vennes can be found at the Ripple in Stillwater blog:

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.