Feds seek 25 years for Petters ally James Fry

James Fry, one of the chief sources of funding for the Ponzi scheme engineered by Tom Petters, is scheduled to be sentenced Wednesday and faces a possible prison term of 30 years or more.

However, the attorney for the Mound hedge fund manager contends that his client should receive a sentence of no more than six years based on the sentences given to others in the largest financial fraud in Minnesota history.

"Jim Fry was not a core member of the Petters fraud," wrote defense attorney Joe Friedberg in a sentencing memo to U.S. District Judge Richard Kyle. "He was convicted of what he did. He lied to investors about several components of their investments. … Both the government and the defense seem to agree that Mr. Fry was not aware of the Ponzi scheme."

But federal prosecutors have argued for a 25-year sentence for Fry, which would be the second-longest meted out among defendants in the Petters case.

"Fry had choices. Fry made the wrong choices. In short, Fry's greed trumped the truth," wrote prosecutors at the U.S. attorney's office in Minnesota.

Fry was found guilty in June of 12 counts of fraud and making false statements to the Securities and Exchange Commission.

A federal jury convicted Fry on charges that he misled his clients about the nature of investments they were making in a company owned by Petters, including failure to tell them that an ex-convict, Frank Vennes Jr., was involved in the Petters relationship and that returns on investments were not coming from retailers as promised but were coming from a Petters-owned company.

The Petters scheme collapsed in 2008 and investors in Fry's Arrowhead funds lost $120 million.

Prosecutors noted that Fry became a rich man through the Petters relationship, earning about $40 million in fees for placing investors' funds in the Petters operation.

According to prosecutors, Fry's wealth allowed him to build a multimillion-dollar house on Lake Minnetonka as well as purchase vacation homes, boats, expensive cars and a jet airplane.

"Jim Fry conducted a cost-benefit analysis on the truth and he decided that making money — lots of money — was more important than telling the truth to the people who placed their trust in him," the government said.

But there was no evidence or testimony presented during the trial that Fry knew the Petters operation was a scam.

"The people aware of the real nature of the investment were of a different mind-set than those who, although guilty of securities type fraud, operated with the belief that the Petters investment vehicle was legitimate and that it would always continue to produce an investment return," Friedberg wrote.

Friedberg noted that there were other hedge fund managers who invested with Petters and lost more, including Gregory Bell of Chicago, whose Lancelot Investment Management fund lost more than $1 billion. Yet, Friedberg, argued, Bell received a six-year prison sentence. "Fry's loss was minuscule compared to Bell," Friedberg said.

But prosecutors have no sympathy for such a comparison, asserting that Fry was the first hedge fund manager to provide relatively large sums of money to Petters.

"Jim Fry was the architect of the hedge fund structure that permitted the Petters Ponzi scheme to grow from a million-dollar fraud to a billion-dollar fraud," the government wrote.

Petters, who is seeking a sentence reduction, is serving a 50-year prison term for his role in the investment fraud that convinced investors that they were purchasing electronic consumer goods at wholesale to sell to big-box retailers for a profit. But the goods never existed and the investments were used to pay off early investors and fund other business enterprises.

David Phelps • 612-673-7269