United States v. Carpenter

• Decision Date: 25 November 2013
• Docket Number: No. 11–2131.,11–2131.
• Citation: 736 F.3d 619
• Parties: UNITED STATES, Appellant, v. Daniel E. CARPENTER, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

736 F.3d 619

UNITED STATES, Appellant,

v.Daniel E. CARPENTER, Defendant, Appellee.

No. 11–2131.

United States Court of Appeals,First Circuit.

Nov. 25, 2013.

Kelly Begg Lawrence, Assistant U.S. Attorney, with whom Carmen Ortiz, United States Attorney, was on brief, for appellant.

Martin G. Weinberg, with whom Robert M. Goldstein was on brief, for appellee.

Before LYNCH, Chief Judge, STAHL and HOWARD, Circuit Judges.

LYNCH, Chief Judge.

The question in this case is whether comments in the government's closing argument at a second criminal trial were improper and whether they accordingly warranted a new trial, as the district court held. See United States v. Carpenter, 808 F.Supp.2d 366, 380–85 (D.Mass.2011).

Defendant Daniel Carpenter has now been tried twice on charges of wire fraud and mail fraud. Both times, the jury returned a conviction. After the first trial in 2005, the district court upset the conviction and ordered a new trial on the grounds that the government's closing argument was improper and may have tainted the jury's verdict. See United States v. Carpenter, 405 F.Supp.2d 85, 101–03 (D.Mass.2005). We upheld that decision by a divided panel. See United States v. Carpenter, 494 F.3d 13, 29 (1st Cir.2007).

The case was retried in 2008 and the government made a different closing argument. The jury again convicted. The district court again granted a new trial, finding that the different closing argument led the jury to convict on an improper basis. See Carpenter, 808 F.Supp.2d at 385–86. Because the government's comments in its closing argument at the second trial were not improper, we reverse, reinstate the jury's verdict of conviction, and remand for sentencing.

I.

A. Background

During the late 1990s, Carpenter ran a business, Benistar,¹ which specialized in conducting “ § 1031 exchanges” for investment property owners. Section 1031 exchanges take their name from a provision of the federal tax code, 26 U.S.C. § 1031, which allows an owner of investment property to defer paying capital gains taxes upon the sale of the property if the property is “exchanged” for property “of like kind.” The funds from the initial sale may be held temporarily in cash form with no tax penalty as long as they are used to purchase new property within 180 days and as long as the investor designates the replacement property within 45 days. See26 U.S.C. § 1031(a)(3). Under federal regulations, the exchangor may not take possession of the funds before purchasing the new property. See26 C.F.R. § 1.1031(k)–1(a). As a result, exchangors typically rely on “qualified intermediaries” to hold and invest the funds until the exchange is completed.

B. Benistar's Marketing Materials

Benistar offered its services as a qualified intermediary, managing the proceeds from an exchangor's initial sale until the § 1031 exchange was completed. In advertising itself to potential exchangors, Benistar provided a set of marketing materials, including a PowerPoint slide show, a set of “Frequently Asked Questions about 1031 Property Exchange,” an article on § 1031 exchanges authored by Benistar's principal marketer and published in the New England Real Estate Journal, and other information. When exchangors decided to work with Benistar, they would also receive a set of forms setting out the terms of the accounts they would hold with Benistar.

Carpenter did not directly solicit exchangors, nor did he create the marketing materials. However, he did review all of the marketing materials and approved their use.² He also executed for Benistar many of the contracts the exchangors entered with the company.

On the government's theory of prosecution, the marketing materials effectively promised at multiple points that exchangors' funds would be kept safe and secure. One of the PowerPoint slides, for example, was entitled “Choosing an Intermediary” and listed several factors that clients should consider. The fourth factor was labeled “Security of Funds” and stated that exchangors should “[a]sk about the security of your funds, and find out what guarantees are offered.” The next slide went on to state: “Merrill Lynch Private Bank is used for all our escrow accounts. This provides a 3%—6% interest on the escrow.”

Likewise, the “Frequently Asked Questions” document included a question asking “What will the intermediary do with my money?” The answer provided:

[Benistar] has a long-standing reputation for trustworthiness, and is ... the largest 419 trust plan administrator in the nation.

Benistar has accounts with major banking and investment firms, such as Merrill Lynch.... Escrow accounts are restricted to paying out funds only for a subsequent closing, or to return funds to the original property owner.

A similar set of “IRC § 1031 Property Exchanges: Frequently Asked Questions” on Benistar's website listed the question, “Can I Trust [Benistar] with My Money?” The answer explained:

[W]e protect your assets:

• We have accounts with major banking and investment firms—accounts under our sole control, as required for these exchanges....

• Our accounts are restricted to paying out funds only for a subsequent closing, or to return funds to the original property owner.

• We distribute funds only at your written request.

Several other components of the promotional materials bore out similar themes.

Exchangors using Benistar as an intermediary were given the choice to have their money invested during the pendency of their exchanges for either a 3% or 6% annualized return. After sending in their funds from the initial sale, exchangors received a confirmation letter stating: “We have received $____ of sales proceeds, which we are holding for your benefit. These funds are accruing interest at %___.” The second blank would be filled in with either 3% or 6%. The 3% choice, which was selected for the majority of the funds in the case, was initially called a “Merrill Lynch Ready Asset Money Market Account” in several of the documents, including the account selection form and the Escrow Agreement that exchangors signed, until Merrill Lynch suspended Carpenter's trading priveleges and he opened new accounts at PaineWebber.

The government alleges that these materials, taken together, led exchangors to believe that their funds would be invested in “safe,” interest-bearing “escrow” accounts guaranteeing a 3% or 6% return, when in fact their funds were not kept in safe investments.

C. Carpenter's Trading Strategy and Losses

In reality, Carpenter used the exchangors' funds to trade in risky assets, including stock options. Carpenter primarily sold “put” options, which allow the option-holder to sell shares of stock to the option seller in the future at an agreed-upon price within an agreed-upon timeframe. Generally, the holder of a put option will make money when the price of the underlying stock decreases during the option period, while the seller of the option will make money when the price of the underlying stock increases during the option period. Many of Carpenter's trades were “naked” or “uncovered,” meaning that Carpenter did not own the underlying shares or take an offsetting position. Naked or uncovered option trading increases a trader's risk of loss.

Carpenter's trading strategy succeeded at first, from 1998 to 2000, and the additional gains beyond the promised 3% or 6% annualized return increased the company's, and his own, profit. During that time, Benistar's clients were paid the amounts promised to them. But Carpenter's investments began to turn in the spring of 2000. From late March to late May 2000, Carpenter lost approximately one million dollars from Benistar's Merrill Lynch trading account as various stocks fell significantly during the option periods. Carpenter's strategy ultimately failed completely when the NASDAQ stock market crashed in late 2000. By the end of September 2000, Carpenter had lost about four million dollars.

The period covered by the indictment started to run after Carpenter had already suffered significant losses. Even as Carpenter's losses mounted, Benistar continued soliciting business using the same marketing materials with the same language about safety, escrow accounts, and promised rates of return, even though Carpenter continued to employ the same trading strategy. By the beginning of 2001, Carpenter had lost approximately nine million dollars belonging to seven exchangors who had contracted with Benistar between August and December 2000. Those exchangors were never paid the promised 3% or 6% interest and lost the vast majority of their principal.

D. Procedural History1. First Trial

On February 4, 2004, Carpenter was indicted with nineteen counts of wire fraud and mail fraud in violation of 18 U.S.C. §§ 1343 and 1341, respectively. The government alleged that Carpenter had fraudulently induced the exchangors to use his company to perform their exchanges in part through false promises that their money would be kept in safe, interest-bearing accounts.

Each of the counts charged in the indictment relates only to those exchangors who engaged Benistar's services in the period after Carpenter began incurring losses in spring of 2000. The earliest deposit charged in the indictment occurred in August 2000, and the majority occurred in November or December 2000. The charges were based in part on the theory that Carpenter intended to deceive the exchangors as shown by his continuing to make the same representations to them about the handling of their money even after he knew of his investment strategy's failures.

Carpenter's defense centered on the arguments that the marketing materials never promised that the funds would be kept in “safe” accounts, that these were sophisticated investors, and that while Carpenter did want to make money, there was nothing wrong with his motives and he never had the requisite intent to defraud at the time any representations were made. Carpenter noted in particular that the contracts the exchangors...