Federal Jury Finds Mound Hedge Fund Manager Guilty of Lying to Investors in Connection with Investment in Petters Co.
|U.S. Attorney’s Office June 12, 2013|
MINNEAPOLIS—Earlier today in federal court in St. Paul, a jury found a hedge fund manager from Mound guilty of fraudulently raising money from individuals and through mutual funds for investment in Petters Company Inc. (PCI). After a four-week trial, the jury convicted James Nathan Fry, age 59, on five counts of securities fraud, four counts of wire fraud, and three counts of making false statements to the United States Securities and Exchange Commission (SEC).
According to the evidence presented at trial, Fry raised hundreds of millions of dollars from investors using two hedge funds known as the Arrowhead Funds, which he then provided to PCI in exchange for substantial interest payments. Fry collected more than $30 million in fees from the money he raised from investors and provided to PCI.
Fry formed the Arrowhead Funds in collaboration with Frank Elroy Vennes, Jr. Vennes began raising money to invest with Petters in 1995, only a few years after he was released from federal prison, where he had been serving a sentence for money laundering, firearms, and narcotics charges. Fry used the Arrowhead Funds to solicit money from investors to invest exclusively in financing for PCI. All the Arrowhead Funds’ transactions with PCI were done through Vennes, and any communication between Fry and Petters or his company had to go through Vennes.
Despite Vennes’s intimate involvement in all of the Arrowhead Funds’ dealings with Petters and PCI, Fry concealed Vennes’ involvement in the PCI transactions because he knew that investors would learn about Vennes’ criminal background and be deterred from investing. Over approximately eight years, Fry obtained hundreds of millions of dollars from investors, which he then provided to PCI, purportedly to finance the purchase of consumer electronics that Petters would later resell at a profit. All the transactions between Arrowhead and PCI went through Vennes. And, although Vennes was in the middle of every single transaction between Arrowhead and PCI, Fry concealed Vennes’ role and criminal background from investors.
Fry also lied to investors by telling them that the Arrowhead Funds were getting paid directly by the big box retailers, which gave investors the false impression that there were real transactions underlying the PCI investments. In fact, the Arrowhead Funds never received a single payment from a retailer, and all payments on the PCI promissory notes came from PCI, which allowed the Petters Ponzi scheme to expand for years until it finally collapsed.
Finally, Fry lied to investors about significant problems with the PCI investments in 2007 and 2008. Fry told investors that the notes were “90-day notes,” meaning that they were paid off in 90 days. Beginning in the fall of 2007, payments on all the PCI notes held by Arrowhead became substantially later than 90 days, and almost half the notes were not paid after 180 days and had to be extended to avoid going into default. Fry concealed this information from his investors. The concealment of this information was significant to new investors, who were deciding whether to place money with Arrowhead, and existing investors, who were assessing whether to withdraw from Arrowhead.
Fry also lied to federal authorities after the collapse of the Petters Ponzi scheme. In 2010, Fry gave sworn testimony before the SEC, and during that testimony, he claimed that he was unaware that the Arrowhead Funds were not paid directly from the retailers and that marketing materials containing false information were distributed.
Vennes pleaded guilty to aiding and abetting Fry in connection with these misrepresentations to the Arrowhead Funds’ investors.
For his crimes, Fry faces a potential maximum penalty of 20 years on each count of wire fraud and five years on each count of securities fraud and making false statements. United States District Court Judge Richard H. Kyle will determine Fry’s sentence at a future hearing, yet to be scheduled.
This case was the result of an investigation by the Federal Bureau of Investigation, the Internal Revenue Service–Criminal Investigation, and the U.S. Postal Inspection Service. It was being prosecuted by Assistant U.S. Attorneys Timothy C. Rank, Kimberly A. Svendsen, and Robert M. Lewis.
This law enforcement action is in part sponsored by the interagency Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. It includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch and, with state and local partners, investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.