GEORGE A. O'TOOLE, JR., District Judge.
The defendant, Daniel E. Carpenter, was, for the second time, tried before a jury on a Superseding Indictment that alleged 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. Following his first trial and conviction in July 2005, this Court granted the defendant's motion for a new trial pursuant to Federal Rule of Criminal Procedure 33 on the basis of several prejudicial inflammatory remarks made by the government during its closing argument. United States v. Carpenter, 405 F.Supp.2d 85, 101-03 (D.Mass.2005). That order was affirmed on appeal, United States v. Carpenter, 494 F.3d 13, 24 (1st Cir.2007), and subsequently the defendant was re-tried. After a very brief period of deliberation, the second jury found the defendant guilty on all counts. He then moved again for a judgment of acquittal or in the alternative for a new trial.
For the reasons discussed below, the evidence was sufficient to sustain a conviction on all counts, and therefore the defendant is not entitled to a judgment of acquittal. However, because there is a very substantial possibility that the jury's verdict was based on a theory of the case that was not sufficient to support a conviction on any count, the interest of justice requires that the defendant's conviction be vacated and a new trial be ordered.
The defendant was the Chairman of Benistar, Ltd., a corporation headquartered in Simsbury, Connecticut. Benistar Property Exchange Trust Company, Inc. was a Benistar subsidiary located in Newton, Massachusetts. Martin Paley was its President. Because the corporate formalities are not significant for the issues at hand, these entities will both be referred to as "Benistar." The defendant and Paley formed the subsidiary to serve as a qualified intermediary in property exchanges
The functions necessary to Benistar's property exchange business were divided between the Newton office and the Simsbury office. Paley and the Newton office handled the marketing of Benistar's property exchange services to potential exchangers, as well as the logistical details of arranging the property exchange transactions. The defendant and the Simsbury office then handled the exchange funds, once obtained. These funds were placed in accounts at Merrill Lynch and, later, at PaineWebber, through which the defendant invested in securities, including stock options.
A property exchange, also known as a "like kind exchange," allows the seller of property—in this case, real estate—to defer the payment of capital gains tax when that property is exchanged for property of like kind—here, another piece of real estate. See id § 1031(a)(1). When properly completed, this exchange allows the exchangor to delay recognizing a gain on the property sold. See id. The tax basis of the relinquished property carries forward to the replacement property, and the recognition of a gain and payment of the attendant capital gains tax are thereby delayed until occasioned by some future event. See id § 1031(d).
For the replacement property to qualify as "like kind" it must be identified within forty-five days and be purchased within one hundred and eighty days of the sale of the relinquished property. See id. § 1031(a)(3). The exchangor also must not receive the proceeds from the sale of the relinquished property, either actually or constructively, during the prescribed period. See 26 C.F.R. § 1.1031(k)-1(a). A qualified intermediary can be used to hold the sale proceeds in the interim, preventing the exchanger's receipt of the funds. See id. § 1.1031(k)-1(g)(4). The tax provisions contain no requirement or restriction as to how the qualified intermediary is to hold the proceeds, and, so far as the tax code is concerned, the intermediary may invest the proceeds or not in ways that it may see fit. The attributes of the relationship between the qualified intermediary and the exchangor are generally set by their private agreement.
The Superseding Indictment charged the defendant with 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. These statutes proscribe substantially the same conduct, the difference generally being in the use of either the mails or interstate wire communications. To convict the defendant of mail or wire fraud, the government had to prove beyond a reasonable doubt the defendant's knowing and willful participation in a scheme to defraud, or to obtain money or property by means of false or fraudulent pretenses, representations, or promises as to a material matter or matters, with the specific intent to defraud, and the use of the mails or interstate wire communications in furtherance of the scheme. See United States v. Woodward, 149 F.3d 46, 54 (1st Cir.1998) (quoting United States v. Sawyer, 85 F.3d 713, 723 (1st Cir.1996)).
Generally, the government alleged in the Superseding Indictment, and argued to the jury, that although Benistar represented to seven exchangers that their exchange funds would be held safely and securely in an interest-bearing account, instead the defendant was investing the exchange funds in risky stock options. It was a necessary part of the government's case to argue that the defendant specifically intended to obtain the exchangers' money by
Each of the nineteen counts of mail or wire fraud alleged represents an instance when funds were obtained by Benistar for a property exchange transaction between August 8, 2000 and December 14, 2000 with one of seven exchangors: Bellemore Associates, Joseph lantosca, Byron Darling, Eliot Snider, Gail Cahaly, Brian Fitzgerald, and Jeffrey Johnston. Most of the exchangors entered into more than one transaction during this period, hence the nineteen counts.
When soliciting potential exchangors, Paley routinely presented them with Benistar's standard marketing materials (the "marketing materials"). When Paley's marketing pitch proved successful, he presented the exchangors with the agreements necessary to effectuate the property exchange (the "exchange documents") and executed them on behalf of Benistar. The marketing materials and exchange documents, and the allegedly false representations contained therein, were crucial pieces of evidence in the government's case against the defendant. Although the defendant was never directly involved in presenting these documents to the exchangors, the government connected these documents to him by evidence that he reviewed and approved all of the documents used by Paley, had authored some parts of them, and therefore had knowledge of and authorized the representations being made to the exchangors. An examination of the content of these documents is important.
Paley prepared a PowerPoint presentation entitled "Benistar Presents: 1031 Tax-Deferred Property Exchanges," which explained the mechanics of a § 1031 exchange, its tax advantages, and the role of a qualified intermediary. It also provided guidance in choosing an intermediary and suggested why Benistar should be an exchangor's choice:
(Trial Ex. 1 at 14-15.) These slides were shown or provided in paper form to Eliot Snider, (id.; Trial Tr. 2:113-114), Brian Fitzgerald, (Trial Ex. 59; Trial Tr. 4:119-124), an advisor to Bellemore Associates, (Trial Tr. 6:19), Jeffrey Johnston, (Trial Ex. 119; Trial Tr. 12:96-97), and Joseph lantosca's attorney, (Trial Ex. 75; Trial Tr. 5:51-52). There was no evidence at trial that these slides were provided to Byron Darling or Gail Cahaly.
Paley provided to exchangers a document entitled "Frequently Asked Questions About 1031 Property Exchanges," which provided brief answers to such questions as "Why can't I just do this myself?," "Can't my attorney act as my Qualified Intermediary?," "My attorney or accountant isn't familiar with 1031. What can I do?," "Why shouldn't I use a title company to do my exchange?," "Will a Property Exchange flag me as Audit Bait?," "What type of property can I use as a replacement?," and "What if I cannot complete the exchange, or if the value of the replacement property falls short of the requirements?" (Trial Ex. 2 at 19-20.) It also answered the question, "What will the intermediary do with my money?":
(Id. at 20.) Paley provided this document to Eliot Snider, (Trial Ex. 2; Trial Tr. 2-114), the advisor to Bellemore Associates, (Trial Ex. 26), Brian Fitzgerald, (Trial Tr. 4:127), Joseph lantosca's attorney, (Trial Ex. 76), and Jeffrey Johnston, (Trial Ex. 118). There was no evidence at trial that this document was provided to Byron Darling.
Gail Cahaly was provided with a different version entitled "IRC § 1031 Property Exchanges: Frequently Asked Questions." (Trial Ex. 37.) This document similarly provided brief answers to questions such as "Why Can't I Do This Myself?," "How is BENISTAR Property Exchange Different from a Title Company Intermediary?," "Is Exchanging an `Audit Trigger'?," "Can I Buy Any Type [sic] Investment Property as a Replacement?," "What If My Attorney or Accountant Is Not Familiar with Exchanges?," "Why Can't My Attorney or Accountant Act as My Qualified Intermediary?," "Where is Nationwide Property Exchange? Who is BENISTAR Property Exchange?," and "What If I Cannot Complete an Exchange, or Fall Short of the Required Amount of Replacement Value?" (Id. at 1-2.) It posed the question "Can I Trust BENISTAR Property Exchange
(Id. at 1.) There was no evidence at trial that this document was provided to any other exchangor than Gail Cahaly.
A one-page document entitled "1031 Property Exchange: An Overview" explained the various circumstances under which one could benefit from a § 1031 exchange. It explained the benefits of a § 1031 exchange in summary form, and stated that "Benistar, Property Exchange Trust Company has a proved [sic] track record in all forms of property exchange.... Our solid experience and depth of knowledge makes Benistar the premier choice as qualified intermediary..." (Trial Ex. 3.) This was provided to Eliot Snider, (id.), the advisor to Bellemore Associates, (Trial Ex. 24), Joseph lantosca's attorney, (Trial Ex. 79), and Jeffrey Johnston, (Trial Ex. 120). There was no evidence at trial that it was provided to Byron Darling, Gail Cahaly, or Brian Fitzgerald.
Paley provided some of the exchangors a document entitled "1031 Property Exchange: Legal Authority," which contained a list of cases it suggested provided legal authority for the exchanges, and a brief explanation of the relevant IRS Code provisions and regulations. (See Trial Ex. 4.) This document was provided to Eliot Snider, (id.), Brian Fitzgerald, (Trial Ex. 62), Joseph lantosca's attorney, (Trial Ex. 77), and Jeffrey Johnston, (Trial Ex. 122). There was no evidence that this document was provided to the other exchangors.
Some of the exchangors were given a document entitled "Identifying a 1031 Exchange Opportunity," which gave examples of various scenarios in which one might want to use a § 1031 property exchange. (See Trial Ex. 5.) This was provided to Eliot Snider, (id.), the advisor to Bellemore Associates, (Trial Ex. 25), Brian Fitzgerald, (Trial Ex. 63), Joseph lantosca's attorney, (Trial Ex. 78), and Jeffrey Johnston, (Trial Ex. 121). There was no evidence at trial that it was given to Byron Darling and Gail Cahaly.
Copies of an article entitled, "These are the ABCs of Tax Deferred Exchanges," which was written by Paley and published in the New England Journal of Real Estate, were provided to some of the exchangors. This article explained what a property exchange was, why one would consider doing an exchange, the different types of exchanges that are possible, the rules surrounding an exchange, and the mechanics of an exchange. (See Trial Ex.
(Id. at 29.) This article was provided to Eliot Snider, (id.), the advisor to Bellemore Associates, (Trial Ex. 27), Brian Fitzgerald, (Trial Ex. 61), and Joseph lantosca's attorney, (Trial Ex. 80). There was no evidence at trial that the article was given to Byron Darling, Gail Cahaly, or Jeffrey Johnston.
Evidence was presented at trial that, other than Gail Cahaly, each exchangor was given, and signed, a document entitled "Exchange Agreement." During the period in which Benistar placed the exchange funds in accounts at Merrill Lynch, Eliot Snider, Bellemore Associates, Byron Darling, and Joseph lantosca signed substantially identical versions of the Exchange Agreement. (See Trial Exs. 10, 29A, 52, 84A.) Paley testified that paragraph ten was authored by the defendant. (Trial Tr. 11:14-15.) In the Merrill Lynch version of the Exchange Agreement, that paragraph stated:
(Trial Exs. 10 ¶ 10,
After the accounts were moved to PaineWebber, paragraph ten of the Exchange Agreement read:
(Trial Exs. 66 ¶ 10, 90 ¶ 10, 95 ¶ 10, 100 ¶ 10, 105 ¶ 10, 123 ¶ 10.) The PaineWebber version of the Exchange Agreement was signed by Brian Fitzgerald, Joseph lantosca, and Jeffrey Johnston. (Trial Exs. 66, 90, 95, 100, 105, 123.)
(Trial Exs. 11, 29B, 51, 84B.)
The PaineWebber version of the Escrow Agreement was signed by Brian Fitzgerald, Joseph lantosca, and Jeffrey Johnston, and stated:
(Trial Exs. 67, 96, 101, 106, 124.) There was no evidence introduced at trial that Gail Cahaly signed or was given an Escrow Agreement.
Most of the exchangors also signed a document entitled "Exchange Fee Agreement."
(Trial Exs. 12, 68.)
The PaineWebber version of the Exchange Fee Agreement was signed by Gail Cahaly and Jeffrey Johnston. It similarly stated:
(Trial Exs. 40, 125.) There was no evidence at trial as to an Exchange Fee Agreement signed by Bellemore Associates or Byron Darling.
With the exception of Gail Cahaly, a document entitled "Account Selection Form" was presented as having been filled out and signed by each exchangor. The Merrill Lynch version of this form was signed by Eliot Snider, Albert Bellemore, Byron Darling, and Joseph lantosca. (Trial Exs. 13, 29C, 84C, 89.) On the Account Selection Form, each exchangor indicated a choice of either a "(3% per Annum) Merrill Lynch Ready Asset Money Market Account" or a "(6% per Annum) Merrill Lynch Investment Account." (See Trial Exs. 13, 29C, 84C, 89.) The PaineWebber version of this form was signed by Brian Fitzgerald, Joseph lantosca, and Jeffrey
There was also some evidence about Paley's oral statements to exchangors. Byron Darling testified that Paley told him "that they were honorable people, he repeated that several times, and the money would be perfectly safe." (Trial Tr. 3:104; see also id. at 3:107, 124.) Joseph lantosca's testimony from the first trial was read into evidence, and included his testimony that Paley told him "give the money and his people can double the money from whatever we have done." (Id. 6:10.) Paley, however, testified that the defendant never authorized him to say anything other than what was in the written agreements. (Id. 11:95.) The government did not rely on these statements in its opening statement or closing argument, and instead focused on the representations contained in the documents as well as the context of a § 1031 exchange.
When the exchangors sold a property, the proceeds from the sale were wired or mailed to Merrill Lynch and, later, to PaineWebber, for deposit into an account maintained by Benistar. At each institution, the exchange funds were transferred into a trading account from which they were invested by the defendant.
The defendant's trading included investing in stock options, most of which constituted selling a particular kind of stock option known as a "put." The buyer of a put acquires an option to sell a stock at an agreed-upon exercise price. For this right, the put buyer pays a premium to the put seller, or "writer," who then becomes obligated to purchase that stock for the agreed-upon price at the put buyer's direction (i.e., to have the stock "put" to him). If the stock's market value remains above the exercise price, the holder of the put option will not exercise it, and when the option expires, the put seller retains the premium. If the stock's market value dips below the exercise price, the holder of the put option would likely exercise it, thus requiring the put seller to purchase the stock at a price greater than its market value, or to instead simply pay the difference without acquiring the stock. Accordingly, the seller of put options hopes that the particular stock will maintain or increase its price, but stands to lose money if the stock price declines.
The defendant's trading strategy was successful for a time, but as the stock market began to decline in March 2000, his losses began to mount. In mid-September 2000, Merrill Lynch notified the defendant that he would no longer be able to open any new option positions. The defendant then moved his accounts to PaineWebber, where he continued similar trading and sustained increasing losses. On December 19, 2000, PaineWebber notified the defendant that his trading privileges were discontinued.
Some evidence of the defendant's trading loss was admitted at trial. This evidence was not directly relevant to crimes charged. The crimes alleged in the Superseding Indictment—each count alleged a particular instance of use of the mails or wires to execute a scheme to defraud—were complete upon Benistar's having obtained the exchangor's funds in response to Benistar's solicitation and advertising. In each count, the relevant wire or mail transaction alleged was either the transfer of the exchanger's funds to Benistar's custody as intermediary or a related ancillary communication. When the exchangors
The trial transcript reflects that the jury recessed to the jury room to deliberate following the Court's instructions at 2:35 p.m. (Trial Tr. 13:142.) At 4:41 p.m. the jury re-entered the courtroom and delivered its verdict, finding the defendant guilty on all nineteen counts. (Id.) Thus, the maximum amount of time that the jury could have been deliberating was slightly more than two hours.
The defendant has moved for a judgment of acquittal pursuant to Federal Rule of Criminal Procedure 29(c) and, in the alternative, for a new trial in the interest of justice under Federal Rule of Criminal Procedure 33(a).
The defendant argues that the government presented insufficient evidence to prove beyond a reasonable doubt the elements of mail and wire fraud as to each count alleged in the Superseding Indictment.
A district court's "power to set aside a jury verdict [is] very circumscribed." United States v. Rothrock, 806 F.2d 318, 320 (1st Cir.1986). Rule 29 of the Federal Rules of Criminal Procedure requires that a judgment be entered acquitting the defendant "of any offense for which the evidence is insufficient to sustain a conviction." Fed.R.Crim.P. 29. In considering whether the evidence at trial was sufficient, the Court must view all of the evidence in the light most favorable to the verdict. United States v. Duclos, 214 F.3d 27, 32 (1st Cir.2000). In doing so, the
The evidence at trial was sufficient to sustain the conviction as to all counts charged in the Superseding Indictment. A rational jury could have concluded, based on the evidence, that the defendant knew that Paley was soliciting exchangors for Benistar using the marketing materials and exchange documents; that he knew of and approved the contents of those documents; that he intended that a material false representation made in those documents would induce the exchangors to enter into a property exchange transaction using Benistar as their qualified intermediary; and that a reasonably foreseeable consequence of the scheme to defraud was the use of the mails or interstate wire communications.
More specifically, there was evidence that each exchangor was given one or more documents that the jury could have found contained false representations that the exchange funds would be placed in a specifically identified account at Merrill Lynch or PaineWebber. On the basis of such representations, the exchangors would have been justified in inferring that it was Merrill Lynch or PaineWebber, and not Benistar, who would be supervising the investment and paying the stipulated rate of interest. For example, Paley's PowerPoint presentation stated that "Merrill Lynch Private Bank is used for all our escrow accounts. This provides 3%-6% interest on the escrow." (Trial Ex. 1 at 15.) The Merrill Lynch version of the Exchange Agreement stated that the exchange funds "shall be held and invested with Merrill Lynch Private Client Group in either 3% per annum in a Merrill Lynch Ready Asset Money Market Account, or 6% per annum in a Merrill Lynch investment account." (Trial Ex. 10 ¶ 10.) The PaineWebber version stated that the exchange funds "shall be held and invested with PaineWebber at either 3% per annum, or 6% per annum in a PaineWebber account." (Trial Ex. 66 ¶ 10.) The Escrow Agreement stated that Benistar "shall open an Escrow Custodial Account under BENISTAR's name" at either Merrill Lynch or PaineWebber, respectively. (Trial Exs. 11, 67.) The Merrill Lynch version stated that Benistar "shall have full control over the Exchangor's funds to invest as the Exchangor directs in either the 3% Ready Asset Money Market Fund or the 6% Investment Account." (Trial Ex. 11.) The PaineWebber version similarly stated that the funds would be invested in "either the 3% or the 6% Account." (Trial Ex. 67.) The Exchange Fee Agreements stated that the exchange funds would be "held and invested with Merrill Lynch Private Client Group in either a 3% per annum account or 6% per annum account" or "with PaineWebber in either a 3% per annum account or 6% per annum account." (Trial Exs. 12, 40.) The Account Selection Form asked exchangors to choose between a "(3% per Annum) Merrill Lynch Ready Asset Money Market Account" and a "(6% per Annum) Merrill Lynch Investment Account," and later between a "(3% per Annum) Account" and a "(6% per Annum) Account." (Trial Exs. 13, 69.)
The defendant argues that he is entitled to a judgment of acquittal because the government failed to disprove his good faith. The concepts of good faith and the specific intent to defraud are opposite sides of the same coin. See United States v. Mueffelman, 470 F.3d 33, 36 (1st Cir. 2006) (specific intent to defraud "excludes false statements honestly believed to be true and promises or predictions made in good faith"); United States v. Dockray, 943 F.2d 152, 156 (1st Cir.1991); Carpenter, 405 F.Supp.2d at 93. If the defendant held an honest belief in the truth of the representations, then he necessarily lacked the specific intent to defraud that must be proven to convict him. Good faith is therefore a complete defense to the charges of mail and wire fraud, and, once raised, must be disproved by the government beyond a reasonable doubt. See Dockray, 943 F.2d at 156; Carpenter, 405 F.Supp.2d at 93.
The defendant offers several reasons why he believes the government failed to sustain its burden of disproving his good faith, but none of them is persuasive. He argues that the evidence established his honest belief that under the terms of the exchange documents he had unfettered discretion to invest the funds as he wished. The Court rejected this same argument following the defendant's first trial, and rejects it again for the same reasons. See Carpenter, 405 F.Supp.2d at 93-94. The defendant's intent to deceive the exchangors would not necessarily be negated by an honest belief that, as a purely contractual matter, he had unlimited discretion to invest the funds. For example, it would not be necessarily inconsistent for the defendant to have intended the marketing and exchange documents to mislead the exchangors while at the same time providing him with investment discretion as a matter of contract law. The defendant also points to evidence that he believed in his trading strategy. This is neither relevant nor remarkable. The government did not have to prove that the defendant intended to harm the exchangors by losing their money, and it was not disputed that the defendant wanted the scheme to succeed. Indeed, the defendant's desire to successfully invest the exchange funds so as to enrich himself was a central part of the government's theory. See infra pp. 379-80.
The defendant further contends that the government failed to disprove his good faith because the defendant "believed in good faith that he had made no misrepresentations to the investing Exchangors, and did not cause any representations other
The defendant cites evidence at trial that tended to support his good faith argument. (See Def.'s Mem. 19, 24-28, 35-38.) For example, there was evidence that the defendant was forthright in answering questions posed to him by David Patterson, an attorney representing an exchangor in an earlier (uncharged) transaction, and that he put Patterson directly in touch with Benistar's primary broker at Merrill Lynch. Although the defendant was never asked how the funds would be invested, his willingness to answer other questions and to put Patterson in touch with Merrill Lynch where he ostensibly could have learned the details of Benistar's trading were circumstantial evidence of his good faith. This, and other similar circumstantial evidence, could have supported, but did not require, an inference that the defendant acted in good faith and lacked the specific intent to defraud. But the jury could have determined that any inference raised by this evidence was disproved by the other evidence from which the defendant's specific intent to defraud could be inferred.
Lastly, the defendant points out that part of the government's theory was that the shortfall in the Benistar accounts caused by the trading losses was probative of the defendant's specific intent to defraud. The government suggested that because the defendant obtained the exchange funds despite knowing that he had lost substantial amounts, he was, by extension, aware that it was becoming increasingly less likely that Benistar would be able to make good on its obligations to the new exchangors. This, in turn, would make crucial whether that obligation was Benistar's or the much larger financial institutions. The defendant argues, however, that the government never introduced evidence that the defendant was aware of any specific shortfall at the precise time the funds were obtained from each exchangor.
As the government points out in its opposition to the defendant's motion, the defendant overstates the importance of this evidence. (See Gov't's Opp'n to Def.'s Mot. for Acquittal and Alternatively for a New Trial 10.) It was relevant only as circumstantial evidence of the defendant's specific intent to defraud. The defendant's knowledge of a shortfall was probative of his more general knowledge that his trading strategy subjected the funds to substantial risk. Ample other evidence established that the defendant understood his own trading strategy. There was sufficient evidence to sustain a conviction on all counts without any evidence of trading losses or the defendant's awareness of those losses and the resulting shortfall.
The government presented evidence sufficient to sustain each count of conviction
The defendant alternatively seeks an order granting a new trial pursuant to Rule 33 of the Federal Rules of Criminal Procedure. That rule provides that a court may grant a new trial "if the interest of justice so requires." Fed.R.Crim.P. 33(a). Here, the interest of justice does require a new trial—again—because the government encouraged the jury to convict based upon impermissible reasons in addition to its proper theory that would support a conviction of mail or wire fraud.
The interest of justice requires a new trial where there has been improper comment and argument by the government and the improper comments have so "poisoned the well" that the trial's outcome was likely adversely affected. United States v. Azubike, 504 F.3d 30, 38-39 (1st Cir.2007); Carpenter, 494 F.3d at 22-23. In making the latter assessment, factors to be considered include the extent of the improper remarks, the context, the likely effect of any curative instructions, and the weight of the evidence against the defendant. Carpenter, 494 F.3d at 23; see also Azubike, 504 F.3d at 39.
Previously, this Court ruled after Carpenter's first conviction that confidence in that verdict was undermined by the prosecution's repeated use of gambling references and metaphors to the degree that a new trial was necessary. Carpenter, 405 F.Supp.2d at 103. In the second trial, the prosecution stayed away from the gambling references,
The government stated on numerous occasions that Benistar had represented to
This was an overstatement of the evidence. There were no explicit representations of safety and security in the marketing materials or the exchange documents.
In support of its contention that Benistar had promised the exchangors safety and security, the government placed undue reliance on assumptions about what the inherent attributes of a § 1031 property exchange or an escrow account must necessarily be. This encouraged the jury to convict based on those assumptions rather than on a careful consideration of the exchange documents which set forth the attributes
Similarly, the government theorized that the use of the word "escrow" amounted to a representation that the funds would be held in a particular way. The government even attempted to elicit testimony from Eliot Snider and David Eaton as to the typical attributes of an escrow account, but the defendant's objections were sustained. (See id. 3:18, 6:22.)
The implication throughout was that by using the titles "Escrow Account" and "Escrow Agreement" Benistar had effectively represented to the exchangors that the exchange funds would be "parked" and not invested. This played upon a common general understanding of the word "escrow," but the actual documents established specific terms for the escrow accounts that the exchangors and Benistar contracted for. Those attributes included the payment of interest on the exchange funds, which necessarily meant the funds would have to be invested, whether by Benistar or one of the brokerage houses.
The problem stems from the imprecise way that people sometimes speak about money and bank accounts. It is common to say that there are X dollars in one's account. This is a manner of description that sacrifices accuracy for convenience. It has a tendency to create the false impression that the bank holds each person's money in some sort of safety deposit box, where perhaps once a month a teller makes the rounds depositing a few dollar bills into each box as interest. In reality, the number of dollars in an account simply quantifies the amount that the bank promises to pay the account holder. It is easy to forget that the very reason a bank is willing and able to pay interest on the account is that it is taking the money and putting it to other uses. The exchangors, all relatively sophisticated in business, must all have expected that their funds would be invested during the period they were in Benistar's custody. Indeed, they were given the choice between a lower return (three percent) and a higher (six percent). It was an obvious inference that the latter would be invested more aggressively than the former. In any event, the funds were not "parked" in the sense that they would not be invested at all.
In giving these general assumptions about escrow accounts undue emphasis, the government invited the jury to ignore the Court's instruction that the tax code placed no limitations or restrictions on how a qualified intermediary may invest the exchange funds, and further, that in the absence of a promise not to invest the
More important than the government's glib overcharacterization of the nature and contents of the documents described above, however, was the prosecution's repeated invitation to the jury to be outraged at the defendant's desire and attempt to profit from Benistar's investment of the exchangors' funds. The government emphasized the defendant's selfish motive to make a fortune investing the exchange funds while only paying the exchangors a three or six percent return.
In particular, the government stated in its opening that if the defendant's scheme "had kept up, he would have made a fortune while still paying the people who entrusted their money to him three or six percent," (Trial Tr. 2:80), and that "[w]hat he was after was an opportunity to strike it rich in the options market without any risk to his own personal funds and while paying the people whose money he was trading a measly three or six percent," (id. 2:83). In closing, the government repeated this argument that the defendant "decided to take the exchangors' money and give them a measly 3 or 6 percent while using that money to speculate, to make a killing for himself in the options market." (Id. 13:70.)
The government specifically highlighted as one aspect of the fraud, aside from "the way in which the exchangors were misled as to the true risks Carpenter was taking with their funds," that "Mr. Carpenter was secretly using the funds to enrich himself and Mr. Paley." (Id. 13:55-56.) In support of this point the government referred to a letter sent by the defendant to Paley explaining why the options trading strategy was necessary for them to profit. In
Like the gambling metaphors used by the government in the defendant's first trial, these arguments encouraged the jury to convict Carpenter for a reason unrelated to the wire and mail fraud charges, namely, that he was trying to reap a benefit for himself by investing the exchangors' funds. The government chastised him for acting selfishly. Whatever moral judgment might be made about the defendant's trading behavior, that trading was not expressly foreclosed by the parties' agreements or otherwise and therefore was not itself unlawful. The agreements with the exchangors purported to give Benistar discretion over the investment of the exchange funds while in Benistar's custody. (E.g., Trial Exs. 11, 29B, 51, 67, 84B, 96, 101, 106, 124 (Escrow Agreements giving Benistar "full control" over the exchangors' funds); see also Trial Exs. 2 ("[T]hese accounts are under [Benistar's] sole control."), 37 ("We have set up accounts... under our sole control....").)
The government's focus on the disparity between the defendant's intended profits and the "measly" return to the exchangors was thus doubly wrong. It was not an accurate depiction of the contracts between Benistar and the exchangors, and it was not relevant to the defendant's intent to defraud at the most relevant time—when the contracts were entered into. Nevertheless, the argument that the defendant was trying to make lots of money for himself by misusing the exchangors' funds had a significant potential to inflame the passions of the jury.
This argument about the defendant's greed dovetailed with the argument, at least implied by the government, that Benistar breached its promise to the exchangors to deposit the funds into the interest-bearing accounts at Merrill Lynch or PaineWebber. Such a breach alone could not be the basis for criminal liability on the charges set forth in the indictment, and the government did not suggest otherwise. But it is easy, especially for lay jurors, to miss the significant difference between a failure to live up to a promise after it has been made and a fraudulent intent in making the promise never to live up to it. The latter would be the basis for a finding of specific intent to defraud; the former would not be. The government's approach in emphasizing the defendant's intent to profit, instead of his intent to deceive, very likely supported and encouraged any confusion the jury might have had between the two.
A jury is not required to deliberate for any specific amount of time before reaching a verdict. The speed of the jury's deliberations certainly could not be an independent factor justifying the grant of a new trial motion. However, the brevity of the deliberations in this case raises a serious concern that the jury was led into adopting a global theme that allowed it to resolve all nineteen counts in a short time. There were no doubt some parts of the evidence that applied with equal force to each of the counts. But each count also required consideration of evidence specific to that count. For example, different exchangors were exposed to different Benistar marketing materials and signed different exchange documents. Some exchangors entered into the transactions
As in the first trial, the government focused too much on what the defendant did with the exchangors' money, rather than how he obtained it from them. Evidence of his risky trading strategy was certainly relevant to whether he had the specific intent to defraud the exchangors and mislead them into entering the exchange transactions. Even so, however, its probative force likely varied from transaction to transaction. If knowledge of trading losses tended to highlight to the defendant the contrast between the "safety" being assured to a potential exchangor and the reality of the actual risk, and thus serve to support an inference of willful deception on his part, the force of the inference was stronger in December than it was in August because the losses were so much greater and more sustained.
It is possible the jury carefully focused on the proper questions and thoroughly examined the evidence in its variations with respect to each of the exchange transactions. If so, the verdict would be soundly based. It is also possible, however, that the government's repeated emphasis on the defendant's having broken his promises to the exchangors in order to enhance his own wealth by using their money distracted the jury from their proper inquiry and led them to render a quick verdict that was not based on the necessary conclusions about fraud, most especially specific intent to defraud. Reluctantly, this Court concludes that the government's arguments "poisoned the well" to the extent that the verdict was likely affected. It must be set aside.
Because the evidence at trial, viewed in the light most favorable to the verdict was sufficient to sustain a conviction for each count of mail and wire fraud alleged in the Superseding Indictment, the defendant is not entitled to a judgment of acquittal.
The Defendant's Supplemental Motion for Judgment of Acquittal (dkt. no. 311), the Supplemental Motion for a New Trial (dkt. no. 312), the Defendant's Motion for a New Trial Based on Newly Discovered Evidence Involving the Federal Trade Commission (dkt. no. 324) and the Defendant's Motion for a New Trial Based on Newly Discovered Evidence Regarding lantosca's "Availability" (dkt. no. 333) are DENIED.
It is SO ORDERED.
(Id. 13:54.) As a practical matter, this type of investment may have been outside the bounds of common sense if there were not other funds available to satisfy obligations to exchangors. But there was no legal reason why the exchange funds could not be invested in a building unless a reason was provided by the agreements between Benistar and the exchangors.
The government's argument might have been a good one had Congress or some regulatory authority restricted the manner in which a qualified intermediary could hold the funds. If that were the case, then simply offering to act as a qualified intermediary in a § 1031 exchange could be considered to be a representation that the money would be held according to those restrictions. But in the complete absence of any statutory or regulatory restrictions, no such representation can be implied.
