Last witness in Fry trial testifies

Deanna Coleman, the woman who brought down the largest financial fraud in Minnesota history, made a brief but dramatic appearance Thursday at the criminal trial of James Fry, a hedge fund manager who invested millions with former Wayzata businessman Tom Petters as he bilked investors of $3.65 billion.

Called as the last witness on behalf of Fry, Coleman testified that Fry's middleman in his dealings with Petters — Frank Vennes — knew the operation was a fraud at least a year before it blew up in September 2008.

Coleman's statement on Vennes came after two days of denials on that topic by Vennes, the ex-convict who first introduced Fry to Petters in the mid-1990s.

"When did Mr. Vennes know" that the Petters merchandise selling operation was a fraud, asked defense attorney Joe Friedberg.

"Probably 2007," Coleman responded. "He'd ask for spreadsheets with shipping reports and schedules of payments. He said we needed to show more [goods] in trucks [for delivery] and less in warehouses."

"He's asking you to make more phony documents?" Friedberg said.

"Yes," Coleman replied.

In fact, the funds invested with Petters were used to finance his other business dealings, which included the likes of Sun Country Airlines and Polaroid, and to pay off earlier investors.

Also admitted as evidence Thursday was an e-mail that Coleman sent to Petters in April 2008, when the operation was looking for new investors to shore up its shaky finances. That e-mail said: "Frank is trying to sell the game we're playing."

Whether Coleman's assertions will resonate with jurors in the three-week-old trial is uncertain.

Vennes, who also raised money to invest with Petters, has already pleaded guilty to fraud charges for his role in the Ponzi scheme and the government has argued that it doesn't matter if Fry knew or didn't know that Petters was running a fraud. The case against Fry, prosecutors argue, involves what he did and did not tell investors.

The government alleges that Fry failed to tell investors in his funds about Vennes' criminal background; that some promissory notes were paid late, and that investment returns were paid out of a Petters-controlled bank account and not directly from big-box retailers as had been promoted.

"Arrowhead was not receiving money from retailers, and that's not what investors were told," Rank said.

"Yes," Vennes answered.

"Could he [Fry] have said that is unacceptable and shut down the fund and given the money back to investors?" Rank continued.

"I would think so," Vennes replied.

U.S. District Judge Richard Kyle sent the jury of nine women and six men home after Coleman's testimony closed the witness phase of the trial. Jurors will return to court on Monday to hear closing arguments from attorneys for the U.S. attorney's office representing the Justice Department and Fry's defense team. After that, they will begin deliberations.