In federal court in St. Paul, Frank Elroy Vennes, Jr. was sentenced to 180 months in prison in connection with fraudulently raising money from individuals and through hedge funds for investment in Petters Company Inc. (PCI).
Vennes was a long-time associate of Thomas J. Petters, the Minnesota businessman who was convicted in 2009 of orchestrating a $3.65 billion Ponzi scheme. United States District Court Judge Richard H. Kyle sentenced Vennes, age 56, of Stuart, Florida, on one count of securities fraud and one count of money laundering. On July 11, 2011, Vennes was charged in a second superseding indictment, and on February 1, 2013, he pleaded guilty to those charges.
From 1995 through September of 2008, Vennes, individually and through 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 funds for that same purpose. Beginning in 2001 and proceeding through September 24, 2008, he aided and abetted individuals associated with the Arrowhead Funds in making fraudulent misrepresentations to investors regarding investments in PCI.
PCI was owned and operated by Tom Petters, who operated the Ponzi scheme by representing that money 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 office and other locations.
Beginning in 2000, Vennes worked to form hedge funds to solicit investors in PCI, including Arrowhead Capital Partners II L.P. and Arrowhead Capital Finance Ltd., collectively known as the Arrowhead Funds; and Palm Beach Finance Partners L.P. and Palm Beach Finance II Ltd., collectively known as the Palm Beach Funds. 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 worked through the Arrowhead Funds and the Palm Beach Funds when trying to solicit money from banks and institutional investors.
From 1999 through September 2008, all paperwork and communication between PCI and the Arrowhead Funds and Palm Beach Funds went through Vennes or one of his employees. At the same time, Vennes received “commissions” from Petters for brokering deals involving both Funds. His commissions were based on the amount of money he raised for Petters and PCI. Between 2001 and 2008, Vennes received more than $100 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 and Palm Beach 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 and Palm Beach Funds’ transactions. And, finally, they were kept unaware that in late 2007 and early 2008, the PCI notes held by the Arrowhead and Palm Beach Funds were delinquent and were approaching default.
On October 11, 2013, Vennes’ co-defendant in this case, James Nathan Fry, age 60, of Orono, Minnesota, was sentenced to 210 months in prison on 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. Fry was convicted on June 12, 2013.
On October 25, 2013, sentencing is scheduled for the investment managers of the Palm Beach Funds, who 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 54, of Del Ray Beach, Florida, and Bruce Francis Prevost, age 53, of Palm Beach Gardens, Florida, await sentencing, each on four counts of securities fraud.
This case was the result of an investigation by the Federal Bureau of Investigation, the Internal Revenue Service–Criminal Investigation, and the U.S. Postal Inspection Service. It was 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.
The task force and the Minnesota U.S. Attorney’s Office want to remind people to protect themselves from securities fraud. For more information, visit http://www.stopfraud.gov/protect-securities.html.