Latest Guilty Plea in Petters Ponzi Scheme Comes as Orono Resident's Trial Starts

Editor's note: The following is a statement released last week by the U.S. Department of Justice and posted in its entirety.

A business associate of Tom Petters, the Minnesota businessman convicted in 2009 of orchestrating a $3.65 billion Ponzi scheme, pleaded guilty Friday afternoon in federal court to fraudulently raising money from individuals and through hedge funds for investment in Petters Company, Inc. (“PCI”).

Frank Elroy Vennes, Jr., 55, of Stuart, FL, was charged July 11, 2011 in a Second Superseding Indictment.

Vennes’s co-defendant in this case, Orono resident James Nathan Fry, 59, was charged with five related 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.

His trial is scheduled to begin Feb. 5.

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Appearing Friday before United States District Court Judge Richard H. Kyle, Vennes specifically pleaded guilty to one count of securities fraud and one count of money laundering. 

“This case exemplifies one of the highest priorities of this office—protecting our citizens from financial fraud," U.S. Attorney B. Todd Jones said following the plea hearing. "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 that last week's guilty plea 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,” Agent Warrener said.

According to the Vennes guilty plea:

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 Sept. 24, 2008, Vennes 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.

“Ponzi schemes can thrive for a long time because of the false representations about the investments that were made to investors," Kelly R. Jackson, Special Agent in Charge of the St. Paul Field Office of the IRS-CI, said. "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.

Fry's companies 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. 

For his crimes, Vennes faces a potential maximum penalty of 10 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. 

Two other 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, 53 of Del Ray Beach, and Bruce Francis Prevost, 52 of Palm Beach Gardens, are both awaiting 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 bring to bear a powerful array of criminal and civil enforcement resources.