Greed motivated Twin Cities hedge fund manager James Fry when he sent his investors’ funds to former Wayzata businessman-turned-felon Tom Petters, federal prosecutors argued Monday.
A mansion on Lake Minnetonka, three Mercedes-Benz automobiles, a powerboat and a personal jet were just some of the goods the government said Fry purchased with the money he made in fees and commissions while doing business with Petters, the mastermind of a $3.65 billion Ponzi scheme that collapsed in 2008.
“Jim Fry lied to investors for almost a decade in order to take in millions of dollars to invest with Tom Petters,” said Assistant U.S. Attorney Kimberly Svendsen, noting that Fry collected $30.2 million in cutting the deals. “He lied to investors to make money.”
But defense attorney Joe Friedberg said the government’s case against Fry is based on hindsight and second guessing of Fry’s business decisions.
“There is no evidence that Jim Fry knew Petters was running a Ponzi scheme,” Friedberg said. “His investors knew an awful lot of what he knew and believed an awful lot of what he believed.”
The case went to a federal jury in St. Paul on Monday afternoon.
Fry is charged with 12 counts of fraud and of lying to the Securities and Exchange Commission.
Specifically the government says Fry hid from investors the relationship between ex-convict Frank Vennes Jr. and Fry’s Arrowhead Capital Management; misled them about big-box retailers being the source of profits on their investments, and failed to inform them when payments on investments became late and delinquent.
The heart of Petters’ Ponzi scheme was a ruse to investors that they were financing the purchase of surplus consumer electronic goods at a discount for release to big-box retailers like Costco and Sam’s Club for a profit. Most of the investments were in the form of short-term promissory notes. But there were no electronic goods and no big-box retailer customers. Instead, money from new investors was used to make payments to old investors.
Svendsen told the jury in closing arguments that Fry’s Arrowhead funds never once received a payment from a big-box retailer from 2001 until 2008 even though Arrowhead said that was the source of the payouts.
“That was a critical part of the pitch Jim Fry gave to investors,” Svendsen said.
By late 2007 and in early 2008, the Petters operation was coming up short on new investors, and paying off those promissory notes in a timely manner became a problem.
At Arrowhead, extensions were approved for some notes to keep them out of default. The government claims that Fry was liable for not telling his investors about the late payments.
“He could tell investors about the late payments and let them make their own decisions about their investments,” Svendsen said.
Friedberg countered that Fry was betrayed by Vennes, who allegedly discovered that the Petters operation was fictional before it collapsed but failed to inform Fry. Instead, Vennes continued to act as a middleman between Fry and Petters in 2008 as the end neared, Friedberg said.
If Vennes had told Fry in April 2008 that the hedge fund manager could have gotten all of the notes paid by May, Friedberg told the jury, then Fry “would never have reinvested the money from May on.”
The Petters Ponzi scheme collapsed in September of 2008.
“We concede that Mr. Fry was negligent as he dealt with Petters — as were hundreds of others. But you can’t convict on negligence, carelessness or a mistake,” said Friedberg.