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Minnesota lottery winner wins legal battle over mismanagement of charitable foundation funds

Largest arbitration of its kind in Minnesota.

Paul and Sue Rosenau.
Paul and Sue Rosenau. Photograph credit to the Rosenau Family Research Foundation.
Todd Betzold

Paul Rosenau bought a lottery ticket exactly five years after his beloved granddaughter passed away. When he won the $180 million Powerball jackpot, he took it as a sign of divine providence.

However, he and his wife Sue put their trust in a financial adviser to handle their money, and, as it turns out, they weren't to be trusted, and now Rosenau's charitable foundation won a $7.3 million arbitration judgment, reportedly the largest of its kind in Minnesota.

The big win

Rosenau, a bulldozer and backhoe operator with three children, won $180 million in the Powerball lottery on May 3, 2008. He told the StarTribune he only played the Minnesota Lottery when the jackpots were high. At the time, it was the largest Powerball prize ever in Minnesota. He took the cash option, receiving $88 million, which was reduced to about $60 million after taxes.

Rosenau said:

We pretty much gave everything but $10 million away.

After making large donations to a local hospital, his church, and a community fund for Waseca, he and his wife used $26.4 million and established a foundation, the Rosenau Family Research Foundation, to fight Krabbe disease, which was the disorder that took his granddaughter's life at age 2.

Rosenau said they kept asking God what they could do, and nothing happened for five years, but then 2008 came, and the Powerball win. He said:

It was divine intervention. God said, 'You asked for it, here you go, but don't screw it up.'

That is what he tried to do

Rosenau attempted not to screw it up, as he enlisted a financial adviser, John Priebe, from Waseca, Minnesota, who happened to be associated with Principal Financial Group, to help manage the money. With no investment experience, he trusted Priebe and Principal. Principal even flew the Rosenaus to Des Moines for a meeting with senior managers.

Rosenau said:

They were trying to impress us that they were a big company and that they could handle us. Priebe "seemed to be an honest person you could trust.

Rosenau even traveled with Priebe, who was named Principal's Agent of the Year in 2012, sometimes. They even took trips to Hawaii and Jamaica with their wives, on Rosenau's dime though.

Then things went bad

While the trust was there to begin with, the trust started to go away by spring 2017. A disagreement started regarding the viatical sale of an insurance policy on Sue's life, which was held by the foundation. A viatical sale provides cash while the policyholder is still alive.

Sue was diagnosed with cancer in October 2015 and died in 2018. Without that viatical sale being made, the foundation would have collected the policy's full value of $3 million. Instead, they got about $1.4 million from the viatical sale, while the investor who bought the policy got the full $3 million.

In 2022, attorneys from Minneapolis filed a complaint with FINRA on behalf of the foundation. They alleged that Principal Securities violated rules and laws by making unsuitable and costly investments. They stated the foundation's portfolio was almost entirely in variable nonqualified annuities and life insurance policies. These options are tax-deferred, but the attorneys said they carried high costs and fees and were unsuitable for the tax-exempt foundation.

The court's decision

While the foundation sought $22 million for lost potential gains or at least $6.8 million for unnecessary annuity and insurance transactions, a panel of FINRA arbitrators came up with their own number. On June 5, they ordered Principal Securities to pay $7.34 million in compensatory damages, but they did deny any requests for punitive damages and attorneys' fees.

In addition, the foundation and Rosenau family sued Principal Financial and two subsidiaries in Waseca County District Court in 2022, alleging negligence and fraud. This involves a separate case involving family life insurance trusts.

Priebe died in 2020, so he was not named in the lawsuits. He was fired by Principal in late October 2019 over “concerns with his business practices and the lack of documentation supporting them,” the StarTribune reported. Three months later, Priebe died by suicide.

A positive note

The Rosenau Family Research Foundation, which is guided by a scientific advisory committee, gives out $1.5 million to $2 million annually to researchers across the United States. The foundation has helped fund pre-clinical work, which has led to a Krabbe disease treatment that is currently in trials with federal drug regulators.

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