Part 3: Tom Petters: Giving that hurts

Minnesota charities scrambling to recover millions of dollars invested with businessman Tom Petters violated a basic duty to be prudent with donated money, according to experts in nonprofit finance.

For at least five years, religious nonprofits, led by Fidelis Foundation, based in Plymouth, made large, unconventional loans to businessman Tom Petters' company -- supposedly secured by merchandise -- in return for interest payouts of 19 to 22 percent.

Six charities had more than $27 million invested with Petters when federal authorities alleged last month that he and others had run a massive Ponzi scheme that bilked investors out of more than $3 billion.

Petters, an entrepreneur with major holdings in Sun Country Airlines, Polaroid and other companies, is now jailed on federal fraud and money-laundering charges. He maintains he is innocent, though four others implicated in the alleged scheme have pleaded guilty to related charges.

As the criminal case developed, several of Petters' companies were put into receivership and 10 filed for Chapter 11 bankruptcy protection.

Private investors lent far more to Petters' companies than did charities. But experts in nonprofit management say that charity boards of directors have special responsibilities to be financially prudent with donated, tax-exempt money.

And they say the charities dropped the ball for years by making the Petters' investments.

According to financial statements and charity officials, Fidelis Foundation invested most of its assets in Petters' companies, more than doubling its exposure over the past five years. It also made investments in Petters' company for six other charities, including Minnesota Teen Challenge, a drug treatment program, and Mars Hill Media, which produces faith-based advertising, Christian books and recordings.

Steve Klingaman, a Minneapolis nonprofit consultant and author of an upcoming book on running them, said it is highly unusual for a nonprofit to concentrate its investments in such high-interest loans. Most charities park money in conventional, secure investments offering modest returns, he said.

"Frankly, it doesn't even pass the smell test -- you look at it and how could they possibly make those kinds of returns?" Klingaman added.

That view is shared by Kate Barr, executive director of the Nonprofits Assistance Fund, which advises charities on management and finance. She said the charities' investments in Petters Co. Inc., a financing vehicle, and other Petters entities constitute a case study in how not to run a nonprofit.

"If you are going to ... put all your eggs in one basket and it is a basket that has no liquidity and no market value, how could that possibly be a prudent investment?" Barr said.

Joseph Smith, president of Fidelis Foundation, said the nonprofit has retained a lawyer to attempt to recover the money. Mars Hill already has filed a lawsuit seeking to recover its $800,000 investment.

Over the years, the Petters investments generated millions of dollars of income that helped ministries, Smith said. Merchandise-backed loans to Petters "seemed to be a logical transaction" and everyone assumed the products existed, he added.

"I recognize it has been devastating to the ministries -- it has been harmful to us, there is no doubt about it. We're all saddened by this, but it wasn't like it has always been that way," he added.

He and Fidelis board chairman Craig Howse declined to answer questions about how the board got involved in the Petters investments.

One of Fidelis' major supporters is Frank Vennes Jr. of Shorewood. He became a millionaire philanthropist by brokering investment deals for Petters' businesses, according to court papers. Vennes has not been charged in the fraud, but is identified in court papers as being part of it. He has 1987 convictions for money laundering and other crimes, and has said he underwent a religious conversion in prison.

Although Fidelis, like most charities, doesn't identify its donors, Vennes is known to have been a major contributor to the foundation and other religious charities.

Rep. Michele Bachmann, R-Minn., last year cited his philanthropy, including his backing of Fidelis Foundation, in a letter supporting a presidential pardon for him. She withdrew the letter after the federal fraud case was disclosed, saying she "may have too hastily accepted his claims of redemption."

Vennes is listed in corporation records of a company that donated a St. Louis County property to Fidelis. And he was part of a group that purchased a building from the Minneapolis schools in 2006 and donated it to Fidelis for use by Hope Academy, an inner-city school, and other nonprofits, according to Russ Gregg, the school's executive director.

Vennes' other connection to Fidelis is through his lawyer, Howse, who is the foundation's board chairman and a member of its finance committee. Howse cited attorney-client privilege as the reason he couldn't answer questions about Vennes, his contributions to Fidelis, or Howse's role in the foundation's investments with Petters. Vennes also declined to comment.

Vennes has told his friends in the Christian community that he is innocent of wrongdoing. Smith, the president of Fidelis, said he believes Vennes is a victim of the Petters fraud. Vennes' companies are listed as major creditors in the Petters' bankruptcy cases.

Brian Gudmundson, a Minneapolis attorney who represents a group of ministers and nonprofits suing to recoup their investments with Petters, said: "For now they are giving Frank [Vennes] the benefit of the doubt."

Jon Pratt, executive director of the Minnesota Council of Nonprofits, said relationships between donors and nonprofit officials generally have raised concerns with the IRS, which is changing disclosure requirements on tax forms.

He said he didn't have enough facts to comment on whether the Vennes-Fidelis-Howse connections are a conflict of interest. But he added: "It makes you want to know more."

David Shaffer • 612-673-7090