Minnesota lottery winner wins judgment over his charitable foundation's money

Paul Rosenau bought a winning lottery ticket five years to the day his beloved granddaughter died. He saw divine providence at work.

Rosenau and his wife, Sue, set aside $26.4 million — a big chunk of their net winnings — to find a cure for the rare genetic disorder that took their granddaughter's life. To manage the money, Rosenau enlisted a Waseca, Minn., financial adviser affiliated with Des Moines-based Principal Financial Group.

Rosenau claims the adviser and Principal negligently invested in unsuitable and expensive insurance products, causing financial harm. Last week, Rosenau's charitable foundation won a $7.3 million arbitration judgment against an arm of Principal, apparently the largest of its kind in Minnesota.

"We are kind of old-fashioned people, and we trusted our advisers," said the 70-year-old Rosenau. "When they told us to 'sign here,' that is what we did, and in the end, it was not in our best interest."

Principal did not return several requests for comment. The Principal representative who directly managed the Rosenaus' money, John Priebe, died in January 2020.

Rosenau only played the lottery when jackpots were big — and the kitty was at record levels on May 3, 2008, when he bought one Powerball ticket.

He and Sue were watching the 10 o'clock news in their Waseca home when the anchorman said somebody in Minnesota was a big winner. Rosenau fished out his ticket and listened as the newscaster relayed the magic numbers. He and Sue's lives had suddenly and dramatically changed.

Rosenau, a bulldozer and backhoe operator with three children, won $180 million. At the time, it was the largest Powerball prize ever in Minnesota. Rosenau took the money in a present value-adjusted cash payout of $88 million. After taxes, he and Sue had a nest egg of about $60 million.

"We pretty much gave everything but $10 million away," Rosenau said. A Lutheran pastor's son, Rosenau made a large donation to his church. A local hospital and a community fund for Waseca also benefited from his largesse.

With the $26.4 million, the couple funded a foundation the Rosenaus created to fight Krabbe disease, a fatal disorder that attacks the nervous system, usually of young children. The Rosenaus' first grandchild, Makayla, died at the age of 2.

"We asked God what we could do," Rosenau said in an interview at his current home in Prior Lake. "He was quiet for five years."

Then came the lottery windfall. "It was divine intervention," Rosenau said. "God said, 'You asked for it, here you go, but don't screw it up.'"

The Rosenau Family Research Foundation, which has its own scientific advisory committee, awards $1.5 million to $2 million annually to researchers around he U.S., he said. The foundation funded pre-clinical work leading to a Krabbe disease treatment now in trials with federal drug regulators.

Soon after the Rosenaus confirmed they held the winning lottery ticket, Rosenau said he called his accountant. With no investment experience, he had to figure out how to handle all that money.

Rosenau signed on with Priebe and Principal. In a show of appreciation, Principal sent a company plane to fly the Rosenaus from Waseca to Des Moines for a meeting with its senior managers.

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

Rosenau and Priebe, who was named Principal's agent of the year in 2012, sometimes traveled together.

They visited Omaha twice to attend Berkshire Hathaway's annual meeting, featuring, of course, Berkshire's legendary CEO Warren Buffett. Along with their wives, they went to Hawaii and Jamaica on the Rosenaus' dime, Rosenau said.

But by spring 2017, the Rosenaus' trust in Priebe and Principal had eroded, according to filings in a Minnesota lawsuit against Principal Financial Group and a proceeding against the related Principal Securities before the Financial Industry Regulatory Authority (FINRA).

There was a dispute over the viatical sale of an insurance policy, which Priebe had arranged, the filings said. The policy was on Sue's life and was held by the foundation. Viatical deals are discount sales aimed at freeing up cash while a person is alive.

Sue was diagnosed with cancer in October 2015 and died in 2018. If the viatical sale had not been made, the foundation would have collected the policy's full value of $3 million on her life. Instead, the foundation got about $1.4 million from the viatical sale, while the investor who bought the policy got the full $3 million.

On the Rosenau foundation's behalf, Minneapolis attorneys Don McNeil and Patrick O'Neill filed a complaint with FINRA in 2022, alleging that Principal Securities violated FINRA rules and U.S. securities laws. FINRA is a federal government-authorized organization that enforces rules for security brokers and brokerage firms.

The foundation claimed that Priebe and Principal had made unsuitable and expensive investments, sinking 99% of the Rosenau foundation's portfolio in variable nonqualified annuities and eight life insurance policies.

A nonqualified variable annuity is like a portfolio of mutual funds with a stream of payments that are tax deferred. But it carries high costs and fees and offers no better returns than more inexpensive mutual funds, the foundation argued.

Plus, the foundation was tax-exempt, so the annuities' tax benefits weren't beneficial. But the annuities "generated huge commissions for Priebe and Principal," according to the foundation's FINRA complaint. "The foundation's assets were wasted."

The Rosenau foundation claimed it would have earned more if not for the alleged mismanagement.

It sought to recover $22 million for "loss of use of capital" — for example, estimated gains from a portfolio of stocks and bonds — or at least $6.8 million for money lost to unnecessary annuity and life insurance transactions.

On June 5, a panel of three FINRA arbitrators found Principal Securities liable without elaborating on its reasoning. It ordered Principal to pay $7.34 million in compensatory damages but denied the foundation's request for punitive damages and payment of attorneys' fees.

The foundation and Rosenau family members also in 2022 sued Principal Financial and two of its subsidiaries in Waseca County District Court, alleging negligence and fraud. That case, which is pending, involves two Rosenau family life insurance trusts separate from the foundation.

Priebe is not personally named in the suit and the FINRA proceeding as they were filed after his death.

The Rosenau foundation terminated its relationship with Priebe in 2017.

Principal "discharged" Priebe in late October 2019 over "concerns with his business practices and the lack of documentation supporting them," according to a FINRA document. Priebe, 49, died by suicide less than three months later.