Feds: Vennes' criminal past was problematic for bringing new investors to Petters Ponzi scheme

February 2012 trial could create Michele
Bachmann's own 'crony capitalism' problem

Frank Vennes Jr. flees the lens of Ripple in Stillwater.

By Karl Bremer

Pre-trial documents filed last week in the federal government’s 24-count indictment against Frank Vennes Jr. on fraud, money-laundering and false-statement charges suggest that Vennes’ motives in pursuing a presidential pardon to wipe his earlier criminal past clean through friends like Michele Bachmann, Norm Coleman and Tim Pawlenty weren’t quite as altruistic as his supporters claimed.

At an arraignment hearing this morning before Magistrate Judge Jeffrey Keyes in U.S. District Court in St. Paul, Vennes pleaded "emphatically not guilty" to all 24 counts in the indictment.

When Vennes began pursuing a pardon in 2000 for his 1987 convictions on federal money laundering and cocaine and gun running charges, he sought help from powerful Washington, D.C. lobbyist John D. Raffaelli. Raffaelli met Vennes several times and was impressed by his story.

“I was touched by him and thought it was certainly worth it to look at it,” Raffaelli told Ripple in Stillwater. Vennes told him he needed a pardon because “at that time, he was doing a prison ministry thing. He couldn’t go into any federal prison because of his conviction.”

When Bachmann lent the weight of her congressional office in 2007 to campaign for a presidential pardon for Vennes, her close friend and major campaign donor, she stated that Vennes was “not asking for a pardon that he may achieve personal success. By the grace of God, that has been done.” Rather, she wrote in a passionate letter to the Office of the Pardon Attorney, “Mr. Vennes is seeking a pardon so that he may be further used to help others.”

Bachmann wrote that she knew from “personal experience” how Vennes had used his success to help others. “Despite his success,” Bachmann continued, “Mr. Vennes still encounters the barriers of the past and especially in the area of finance loan documents. This hinders his ability to expand his business which places limits on his support to the neediest in society.”

But a response from U.S. attorneys to motions filed by lawyers for Vennes and co-defendant James Nathan Fry suggests that Vennes was seeking a pardon because it was causing him problems with banks and potential investors in the Ponzi scheme in which he allegedly was involved with Tom Petters.

Vennes collaborated with Fry, CEO of hedge fund investment advisors Arrowhead Capital Management, LLC, to raise money for Petters and Petters’ company, PCI. From 1999-2008, according to the indictment, Arrowhead arranged the investment of more than $500 million of its investors’ funds in PCI, for which Vennes was paid $60 million in commissions by PCI.

Joseph Friedberg and Robert Richman, lawyers for Fry, argued in a memorandum filed with the court September 1 that all allegations pertaining to Vennes’ prior conviction should be stricken from the indictment because “Vennes was not a principal in any of the transactions involving Fry” and “his 1987 criminal conviction is not material to any of the issues in this case.” Vennes was merely an “intermediary” between Fry and Petters’ company, they stated in a memorandum to the court.

Frank Vennes Jr.

"Mr. Vennes' criminal record is no more material than is the criminal record of the Federal Express courier who delivered packages from PCI to Arrowhead," Friedberg and Richman claimed.

They also argued that Fry “had no duty to disclose” Vennes’ criminal past and that allegations that Fry had “affirmatively concealed” this information from investors in the Arrowhead Funds was “irrelevant, prejudicial and inflammatory.”

“All he (Vennes) was, was an agent for Mr. Petters,” Vennes’ lawyer Jim Volling told Magistrate Judge Keyes at a hearing on the motions following the arraignment hearing this morning. The government bringing Vennes’ criminal history into the case, Volling said, is nothing more than an “attempt by the government to prejudice the jury” and tell them “Mr. Vennes is a crook.” 

U.S. Attorney’s Office lawyers Timothy Rank and Joseph Dixon challenged those assertions in their response.

To say that Vennes’ past convictions of federal crimes was irrelevant to his current fraud and money laundering charges “defies common sense,” Rank told the judge. Rank noted that one of Vennes’ crimes for which he served time in prison was a “conviction of money laundering.”

“Fry knew very well that Vennes’s criminal history was material to investors—and he learned this very early in their business relationship,” Rank and Dixon wrote. “The government will present evidence at trial that in 2000, the Bank of N. T. Butterfield & Son (“Butterfield”), the Bermuda bank which, for more than a year, had acted as the administrator and custodian bank for Arrowhead’s offshore fund which was invested in PCI Notes, discovered Vennes’s criminal history and terminated its relationship with Arrowhead.”

According to the government’s response, “Fry also had to persuade Arrowhead’s auditor, KPMG, to continue in that capacity after KPMG indicated its concern about continued dealings with Vennes without disclosure of his criminal history. In October of 2000, Fry represented to KPMG that ‘Vennes’ case is before the Executive Committee of the White House for expungement and complete discharge.’”

It's not clear what the "Executive Committee of the White House" was that Fry allegedly referred to. Vennes applied for his presidential pardon through the U.S. Office of the Pardon Attorney in July 2000.

When asked by Magistrate Judge Keyes whether the government knew Vennes’ claim that he was seeking an expungement of his record through the White House was true, Rank replied “I don’t know.”

The U.S. Attorney's response continues: “Vennes’s convictions were not ‘expunged,’ and so Fry represented to KPMG in March 2001 that 'ACF [Arrowhead Capital Finance, Ltd.] now deals direct with Petters and the previous arrangements involving MetroGem and Frank Vennes no longer apply.' This, of course, was false and designed to conceal Vennes’s involvement in the PCI transactions: while Fry had altered the transactions so that funds flowed directly from PCI to Arrowhead, Vennes remained contractually in place controlling the deals and the communications between Arrowhead and PCI.”

Rank told the judge that “Metro Gem is Frank Vennes” and that “Metro Gem acted as the agent that controlled the deal flow between Arrowhead and PCI.” Rank added: "The only way they could get those transactions was to contact Vennes.” At that point, Vennes laughed out loud.

Volling disagreed.

“Mr. Vennes was a conduit for information. He didn’t control the deal flow,” Volling told the court.

Friedberg, Fry's lawyer, explained that originally, Arrowhead sent investors' money to Metro Gem and then Metro Gem sent it to PCI. But after the investment structure was changed between 2001 and 2003, Arrowhead stopped sending funds through Metro Gem. "That left Frank Vennes as a salesman for PCI," Friedberg told the court.

The government’s attorneys stated in their response that they will "present additional evidence that Fry knew that disclosure of Vennes’s role and criminal convictions was material to investors. Indeed, an Arrowhead internal meeting agenda from early 2003, contains, under the heading “Goals,” the following items:

“1. Eliminate any legal/operational process that puts Metro Gem in the trail of money flow (big investors will do background checks on all parties, thus stopping money flow if felony convictions are discovered)

“2. Keep Metro Gem in the mix to obtain fee income on the amount invested

This Arrowhead memo, Rank told the court, shows that Fry was concerned about Vennes' troubled past "well after the structure had changed" and termed the failure to disclose Vennes' criminal past to investors a "classic fraudulent omission."

The U.S. Attorney noted in its response that “the government will adduce evidence at trial that Vennes began searching for other individuals to form hedge funds … because he himself had difficulty bringing in institutional investors due to his criminal history.”

Thus, it appears from the government’s argument that Vennes’ determination to secure a pardon to wipe his record clean was driven by his need to find new investors to steer to Petters' Ponzi scheme—not, as Raffaelli said Vennes told him, so he could bring his ministry into federal prisons. And certainly not, as Bachmann claimed, to help the “neediest in society.”

A jury trial for Vennes and Fry is currently set for Feb. 6, 2012.

Photos by Karl Bremer.