Petters money man Vennes takes the stand in Fry trial

Frank Vennes Jr., a central figure in the fundraising activities for Tom Petters' $3.65 billion Ponzi scheme, testified Wednesday that he believed the Petters operation was legitimate up to and even after federal authorities staged a major raid in 2008 to bring the decadelong fraud to a halt.

Testifying for the first time in a Petters-related case, the elusive born-again ex-convict insisted that he fell for a series of lies and excuses offered by Petters and his associates about the health of investments made with Petters Companies Inc. (PCI) involving the sale of purported electronic goods.

"I was in total disbelief that anything like this was happening," Vennes said during more than four hours on the witness stand.

Vennes was called as a hostile witness by attorneys representing another Petters investor, James Fry, who is on trial on accusations of wire and securities fraud and of giving false statements to the Securities and Exchange Commission.

Vennes was Fry's conduit to Petters as Fry funneled millions of dollars into the Wayzata businessman's company.

Vennes has already pleaded guilty to fraud charges for his role in the Petters operation. He is awaiting sentencing.

Wednesday's testimony marked the first time Vennes was questioned extensively about his version of events, and the courtroom of U.S. District Judge Richard Kyle was filled with spectators — many of them government agents — who wanted to see him.

During the noon lunch break, Vennes attempted to avoid a photographer by turning his back, donning dark glasses and holding a cellphone up to his face.

Dressed in a light sport coat with dark slacks, white shirt and a necktie, Vennes was mostly soft-spoken with an almost-monotone voice during his testimony.

The one time he did become animated was when Fry defense attorney Joe Friedberg suggested that Vennes knew about the Petters fraud months before its collapse.

"Mr. Friedberg, I resent that remark. I lost more money than anyone," Vennes said.

The heart of Fry's defense is that Fry and the hedge funds he managed through his Arrowhead Capital Management relied on Vennes' representations that the investment with Petters was solid and for most of the 10 years that Fry invested in PCI it was.

But in late 2007 and 2008 the short-term promissory notes that constituted the investment started to pay later than usual and several needed extensions in time to avoid default status.

Vennes testified Wednesday that PCI gave him a host of reasons for those late payments, including customs problems caused by Homeland Security, manufacturing problems in Korea and China and a shortage of trucks to transport goods from warehouses to big-box retailers.

When Vennes asked for letters from retailers Sam's Club and BJ's about amounts owed to Petters, PCI produced forged letters stating they owed PCI more than $1 billion for merchandise sitting in a warehouse.

"It [the letter] magically appeared two days later, and it didn't make you suspicious?" Friedberg asked.

"Information can be received up to the second. It wasn't a surprise to me," Vennes replied.

After another question about assurances that everything was OK, Vennes said, "Interim payments continued to be paid. I heard explanations from [Petters'] attorney, from Tom Petters, from Deanna Coleman. They seemed to be plausible to me."

The defense is expected to call Coleman as its final witness on Thursday. Coleman was Petters' top lieutenant, but she eventually went to federal authorities and exposed the fraud to them.

Earlier Wednesday, Vennes explained how he started a business relationship with Petters, by investing in small merchandise deals in 1995.

Vennes then met Fry, a hedge-fund manager, one or two years later and enlisted Fry to invest funds together with Petters in the profitable, short-term retail transactions.

"The deals eventually got bigger,'' Vennes testified. But Vennes' criminal background with money laundering, firearms and drug charges made it difficult for Vennes and Fry to continue to raise money together.

Fry turned to other sources for his hedge funds and Vennes served as an agent for Fry's ongoing investments with Petters' company — PCI.

Fry denies government allegations that he hid the role of Vennes in the Petters relationship from investors because of his criminal background The government also alleges that Fry failed to notify investors when payments from Petters were later than usual. The Petters operations collapsed in September, 2008.

Fry, 59, faces 12 counts of wire and securities fraud and giving false statements to the SEC.

David Phelps • 612-673-7269