U.S. v. Carpenter
| Decision Date | 18 July 2007 |
| Docket Number | No. 06-1488.,No. 06-1374.,No. 06-1373.,06-1373.,06-1374.,06-1488. |
| Citation | 494 F.3d 13 |
| Parties | UNITED STATES of America, Appellant, Cross-Appellee, v. Daniel E. CARPENTER, Defendant-Appellee, Cross-Appellant. |
| Court | U.S. Court of Appeals — First Circuit |
Michael J. Pineault, Assistant U.S. Attorney, with whom Michael J. Sullivan, U.S. Attorney, was on brief, for appellant, cross-appellee.
Martin G. Weinberg, with whom Robert M. Goldstein was on brief for appellee, cross-appellant.
Before LYNCH, Circuit Judge, CAMPBELL, Senior Circuit Judge, and LIPEZ, Circuit Judge.
In an appeal brought by the government, we must decide whether the district court erred when it granted Daniel Carpenter a new trial because the government's use of inflammatory language during its closing and rebuttal arguments prejudiced the jury and denied Carpenter a fair trial. In a cross-appeal, Carpenter asserts that the district court erred in failing to grant his motion for judgment of acquittal. We affirm the new trial ruling. We conclude that we lack jurisdiction to hear Carpenter's cross-appeal.
We briefly rehearse the relevant facts, which are largely undisputed. In October 1998, Daniel Carpenter and Martin Paley formed Benistar Property Exchange Trust Company, Inc. ("Benistar") for the purpose of performing property exchanges pursuant to section 1031 of the Internal Revenue Code, 26 U.S.C. § 1031. § 1031(a)(1) allows a seller of "property held for productive use in a trade or business or for investment" to avoid capital gains on the sales proceeds if they are used to purchase a replacement property meeting the same criteria. In order to qualify, the seller must complete the exchange within 180 days of the original sale and must not take control of the proceeds in the interim, § 1031(a)(3). Accordingly, property owners typically entrust their sales proceeds to a qualified intermediary until they purchase replacement property; Benistar was created to play this role.
Benistar's clients signed standard form agreements providing that property sale proceeds be transmitted by wire or check directly from the closing attorney into a Benistar account. Clients chose between a Merrill Lynch Ready Asset Money Market Account, yielding a 3% return on investment per annum (which allowed clients to access their funds upon 48 hours' notice), and a Merrill Lynch Investment Account, yielding 6% interest (which required 30 days' notice before funds could be accessed).
According to the agreement between Paley and Carpenter, Paley marketed Benistar's services to clients while Carpenter maintained sole authority over the financial aspects of the business. Carpenter opened two accounts at Merrill Lynch in October 1998: the "B01 account," into which client funds were deposited; and the "B10 account," into which Carpenter transferred client funds which he then invested. When he opened the B10 account, Carpenter characterized his risk tolerance as "aggressive" and he informed Merrill Lynch that he intended to engage in options trading. As is their practice, Merrill Lynch counseled Carpenter on the riskiness of these investments and required him to sign a form acknowledging his understanding of those risks.
From October 1998 until late September 2000, Carpenter transferred funds from the B01 account to the B10 account and traded extensively in stock options. While his trading strategy was successful at first,1 Carpenter lost significant sums when the stock market began to decline in March 2000. As the market continued to decline thereafter, his Merrill Lynch brokers repeatedly counseled Carpenter to adopt a more conservative trading strategy. After Carpenter sustained roughly $4 million in losses, Merrill Lynch suspended his trading privileges.
Carpenter then moved his trading activity to PaineWebber, where he again opened linked accounts: client funds were deposited by mail or wire into one account and he engaged in stock option trading from the other account. As had Merrill Lynch, PaineWebber counseled Carpenter on the risks inherent in options trading; Carpenter acknowledged these risks and continued his aggressive investment strategy. Carpenter continued to sustain heavy trading losses at PaineWebber and, despite his broker's urging that he adopt a more conservative investment strategy, Carpenter increased the size and riskiness of his trades as his fortunes declined. PaineWebber discontinued Carpenter's trading privileges in December 2000. Although Benistar had been losing client funds since March 2000, incoming funds had covered the losses. However, by January 2001, Benistar was forced to tell its clients that their money was gone. Benistar subsequently ceased operations, having lost roughly $9 million in client funds.
Carpenter was indicted in February 2004 by a federal grand jury in the District of Massachusetts on fourteen counts of wire fraud, in violation of 18 U.S.C. § 1343, and five counts of mail fraud, in violation of 18 U.S.C. § 1341. In particular, Carpenter was charged with having devised and implemented a scheme to defraud investors by representing that their money would be invested prudently in conformity with the property exchange requirements of the Internal Revenue Code while he intended to pursue an investment strategy at odds with such representations. Critically, clients transferred funds to Carpenter and Benistar by mail and wire in response to the investment scheme. Because both mail and wire fraud require an intent to defraud, the trial focused largely on Carpenter's state of mind when he obtained the funds of Benistar's clients through the representations made to them.
In his defense, Carpenter portrayed his lack of interaction with clients and his lack of knowledge about Benistar's promotional materials. He contended that any assurances made to clients about the risks to their funds were made by Paley alone and without his knowledge.2 In addition, Carpenter emphasized that the client agreements placed no restrictions on how funds would be managed in order to produce the 3% or 6% return selected by the clients. Carpenter argued that he never misled clients into believing their funds would be safe. Rather, he insisted that he acted with the good faith belief that he had unfettered discretion to invest client funds. He attributed Benistar's losses not to an unwise trading strategy but to a generalized stock market crash well beyond his control.
The government focused on the incongruity between the nature of a § 1031 property exchange (a transaction structured to avoid capital gains while allowing investors to use the proceeds of one property sale to purchase a replacement property within a short period of time) and the aggressive nature of Carpenter's investment behavior. It contended that this incongruity demonstrated Carpenter's intent to mislead Benistar's clients into depositing their real estate proceeds with a supposedly safe intermediary so that he could leverage the funds into a substantial profit for himself through risky options trading. To prove this agenda, the prosecution sought to introduce extensive evidence regarding Carpenter's investment behavior, relying chiefly on testimony from his brokers at Merrill Lynch and PaineWebber.
Carpenter's counsel objected to such evidence before its introduction and throughout the trial, arguing that testimony regarding Carpenter's trading strategy and losses was both irrelevant to establishing his state of mind at the time he obtained client funds and also highly prejudicial. The court denied counsel's motions in limine and his repeated objections, ruling that the brokers could testify as to factual matters for the limited purpose of allowing the jury to "consider[] the historical fact of the kind of trading that was done so the jury can decide . . . whether [Carpenter] had the requisite criminal state of mind" when investors were assured that their funds would be kept safe. The court also determined that, because no foundation had been laid to treat them as experts, these witnesses could not provide opinion testimony. In addition, the court repeatedly expressed its concern that such evidence not be used to distract the jurors from the elements of the charged offenses of mail and wire fraud. These witnesses's testimony dominated three of the ten days of Carpenter's trial.
During its closing and rebuttal arguments,3 the government emphasized that the riskiness of Carpenter's trading strategy conflicted with the purposes for which Benistar's clients entrusted their money to Carpenter's management. In making this argument, the government embellished its description of Carpenter's trading strategy with gambling metaphors and terminology intended to show Carpenter's recklessness.
A jury convicted Carpenter on all counts. Shortly thereafter, Carpenter filed motions for a new trial under the Federal Rules of Criminal Procedure 33(b)(2) and for judgment of acquittal under Rule 29(c), each raising several grounds. The district court granted the motion for a new trial, ruling that the government's repeated use of gambling metaphors during its closing arguments "may [] have induced a verdict based on the jury's moral disapproval of the `gambling'" rather than on the jury's conclusion that Carpenter had committed mail and wire fraud. United States v. Carpenter, 405 F.Supp.2d 85, 102 (D.Mass.2005). The court denied the motion for acquittal and subsequently denied Carpenter's motion for reconsideration. The government appealed the new trial ruling pursuant to 18 U.S.C. § 37314 and Carpenter filed a cross-appeal, arguing that the court wrongly decided his motion for acquittal.
The government contends that the district court abused its discretion in granting the motion for a new trial because: (1) it did not apply plain error review despite Carpenter's failure to...
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