One of the curious features of the Ponzi scheme is that upon its collapse or the threat thereof, its victims often come to the defense of the fraudster. The real evildoer, they may conclude, is a wrongheaded prosecutor or judge.
In some cases, it’s because their money is still being held inside the house of cards and they need a fresh mark to come along and pay it off. In many, it’s because even with their money gone, they refuse to believe they’ve been deceived.
Ponzis typically fall into a category described by those who follow these things as affinity frauds, schemes that prey on interpersonal relationships or joint membership in a socioeconomic group. The affinity allows the mark to look past red flags that would otherwise be obvious.
Friday afternoon a final, mysterious chapter in the Tom Petters Ponzi saga skittered to an anti-climactic close when Frank Vennes, 55, pleaded guilty [PDF] to helping raise money for Petters’ $3.65 billion fraud.
Petters serving 50-year sentence
Petters was convicted in 2009 of orchestrating a scheme in which he borrowed money to finance fictitious transactions involving nonexistent consumer electronics. By the time the Ponzi scheme collapsed, he owned Polaroid, Sun Country Airlines, Fingerhut and a number of other prominent businesses. He is serving a 50-year sentence.
Vennes’ absence from the witness stand at that trial has been a lingering mystery. Described in court documents and testimony as Petters’ largest financier, Vennes had mostly managed to avoid showing up for any of the numerous subsequent bankruptcy and receivership proceedings.
His supporters, however, are another story. Some of those who lost their life savings were expected to show up next week to back Vennes at his trial in U.S. District Court in St. Paul. The intrigue that was to have been described by dozens of anticipated witnesses was expected to be every bit as dramatic as Petters’ 2009 trial.
By all accounts, people were persuaded to hand Vennes their life savings by the tale of his religious conversion during a five-year stint in a federal penitentiary for convictions on money laundering, drug and weapons charges. After he got out, many joined him in prison evangelism — and in business.
Multiple requests for pardon
Vennes was so convincing that between 2002 and the collapse of Petters’ empire, Rep. Michele Bachmann, former Sen. Norm Coleman and then Gov.-elect Tim Pawlenty all asked President George W. Bush to pardon Vennes.
Vennes’ plea was entered two years after his indictment on 26 charges and more than four years after Petters’ arrest. Sentencing has not been scheduled. A co-defendant, hedge-fund manager James Fry, is scheduled to stand trial starting today.
According to court documents, Vennes first came to investigators’ attention [PDF] in the mid-1980s, when he ran three pawnshops in North Dakota. As part of a money-laundering investigation, “an undercover IRS agent, posing as an investor from Chicago, asked Vennes to secretly transfer large amounts of cash into offshore accounts.” He would be paid 6 percent commission.
The investigation went on for months, with Vennes making two trips to Europe to deposit funds in secret accounts. When he returned from the second, to Switzerland, “he told the undercover agent that he had not deposited the money in a Swiss bank account as he had been instructed.
“Instead, Vennes claimed that he had delivered the $100,000 to associates in Switzerland, who had absconded with the money. The undercover agent sought to have Vennes recoup the ‘lost’ money by arranging for illegal gun sales and the purchase of cocaine.”
In August 1987, Vennes pleaded guilty and was sentenced to five years in prison, most which he served at the Federal Correctional Institution in Sandstone, Minn. There he got involved with the prison ministry Charis.
Began borrowing from Charis friends
After his release in 1990, Vennes moved to the Twin Cities and took a job from a Charis member who owned a metal fabrication company in Bloomington. He also began borrowing money from his friends in the ministry, which he used to buy gold coins and other valuables, which he then resold.
Vennes didn’t have much money when he met Petters in 1995. When Petters offered to pay him $10,000 to borrow $100,000 for 20 days, Vennes borrowed the money from his new boss.
Then he began borrowing money from other Charis volunteers and members of related Christian organizations, lending it to Petters in larger and larger amounts and taking a share of the interest each time. In less than a year, he was able to lend Petters upwards of $1 million at a time.
Edina retiree Janet Leck first met Vennes when he was imprisoned. After their early investments performed well, Leck withdrew $190,000 in equity from her home for Vennes to invest with Petters.
“We trusted Frank,” she said at Petters’ trial, at which point the then-79-year-old was facing foreclosure.
In 2004 on Vennes’ advice she withdrew her money from the investment. Vennes had become concerned with some of Petters’ personal conduct; by then he was known to be womanizing and using large quantities of drugs and alcohol. But Vennes was soon persuaded that Petters had cleaned up his act, she testified.
Investors funneled by Vennes
All of the individual investors scammed were funneled into the Ponzi scheme by Vennes. Because of the legal hierarchy that spells out how assets are recovered and debts and investments repaid in a bankruptcy, most stood to recover pennies at most.
And because the process was expected to take years and most of the destitute were elderly, Vennes several years ago asked the federal court overseeing the receivership to allow him to take a highly unusual step.
His attorneys and accountants were able to convince District Court Judge Ann Montgomery that his investors — many of whom packed the hearing — would reap a slightly better and quicker return if he were allowed to sell his properties, gold coin collections and other unusual assets and distribute the proceeds. The court was convinced and many of the scam’s victims reassured that Vennes, who at that point faced no criminal charges, was as taken in by Petters as anyone.
The U.S. Attorney’s Office disagreed, in April 2011 indicting Vennes, who was accused of pocketing $100 million in commissions over the course of 15 years. The indictment accused him of helping to establish hedge funds to funnel money to Petters from banks, institutional investors and — in an irony that speaks to the era’s fast-and-loose investment climate — other hedge funds.
Needed bigger fish
Here is another peculiar aspect of the Ponzi scheme: Unless the fraudsters behind them are caught for some reason, all will inevitably fail by outgrowing their money supply. Vennes needed to find bigger fish.
But when Vennes went to tap bigger sources of financing, his criminal convictions got in the way. In 2001, he applied for a presidential pardon and began seeking the support of elected officials.
“The stigma of a felony conviction has denied him free enterprise opportunities,” the FBI agent who interviewed Vennes in connection with the application reported. “Financial institutions do not even want to negotiate terms for loans. Consequently, he is forced to obtain capital from individuals.”
According to court filings, in the late 1990s Vennes met a former dentist named James Fry who had started a small investment concern called Arrowhead Capital Management. Fry, the documents assert, was so pleased with the 48 percent returns he got with Vennes that he began soliciting investments from more mainstream institutional investors who insisted on conducting background checks.
By 2002, Vennes’ background had become a liability to Fry, prosecutors allege. After several attempts by Fry to cut him out of the loop, Petters is said to have stepped in on Vennes’ behalf. Neither man was described as happy about it, but Fry and Vennes continued to collaborate.
Over the next few years the transfers of money into and out of Petters’ empire grew to eye-popping levels — levels that by late 2007 had become unsustainable. When investors’ promissory notes came due, many investors either engaged in a “note swap,” in which they traded the bad paper for one with a later due date, or agreed to wire money back and forth to make it appear payments were being made as scheduled.
Authoritative record compiled
Intrigued in part by the fact that the pardon-seeking Vennes donated money to Rep. Michele Bachmann, among others, the authors of the blog DumpMicheleBachmann.com have spent more than four years compiling the most authoritative public record of the strange case.
Along with Eva Young, Minneapolis artist Ken Avidor and his collaborator Karl Bremer amassed so much material they created a new blog, VennesInfo. Bremer’s Ripple in Stillwater blog is home to an exhaustive investigation of Vennes’ political ties, “Lawyers, Guns and Money.”
(Avidor sketched the Petters trial. The two were planning to cover Vennes’ trial, too, but Bremer died last month of complications of cancer.)
The FBI was onto Vennes as quickly as they were to Petters, who was finally exposed by his longtime aide and onetime mistress Deanna Coleman. “On September 24, 2008, federal agents raided Vennes’ $5 million Shorewood home on Lake Minnetonka,” VennesInfo reported.
Agents “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’ $6 million oceanfront home in Jupiter, Florida, was also raided.”
Like Petters, Vennes had donated to numerous politicians and charities. The raids touched off a frenzy as officials on both sides of the aisle rushed to return contributions, and charities — most notably the evangelical rehab facility Teen Challenge — sought to distance themselves from the scandal.
Bachmann quickly withdrew her recommendation of Vennes’ request for a pardon. Coleman, Pawlenty and Republican state party chair Ron Ebensteiner remained silent about theirs.
In the weeks after Petters’ arrest, a rogue’s gallery of forgers, bagmen and intermediaries pleaded guilty one after another to participating in the fraud. Unindicted, Vennes, who has since moved to Florida, began campaigning on behalf of his victims.
At trial, he had hoped to call some 45 character witnesses and present 196 exhibits describing his “good acts” and the charitable activities.
“The government anticipates that Defendant Vennes may attempt to offer evidence of his purported post-detection mitigation efforts, including his voluntary entry into a receivership after the fraud was discovered in September 2008,” Assistant U.S. Attorney Tim Rusk wrote in a pre-trial pleading asking that such testimony be disallowed.
“The central issue for the jury to decide in this case is whether Vennes intended to defraud his victims prior to the scheme’s detection,” the document states. “The self-serving actions Vennes undertook only after the fraud was detected are not relevant to his mindset prior to detection.”
Final motions were to be heard Friday morning, two years after his indictment and more than four after the Ponzi scheme was uncovered.
Instead, late in the day Vennes’ plea was entered into the court record. No sentencing date has yet been set, presumably to encourage Vennes to testify against Fry.
If his investors’ faith remains unshaken despite his potential return to a federal penitentiary, perhaps he will re-enter prison ministry.