Monday, June 23, 2014

No. 54: Daniel Carpenter and a Host of Criminal Allegations

Daniel E. Carpenter (Simsbury, CT), attorney and businessman, was scheduled to report to a federal prison on Friday, June 20. His saga involves cases over more than a decade in federal district courts, circuit courts of appeal, and the Supreme Court. Among the federal agencies involved in the cases are the Department of Justice, the Department of Labor, the Department of the Treasury, and the Internal Revenue Service (IRS). Several cases are ongoing despite Carpenter's incarceration.

The Section 1031 Fraud Allegations
Carpenter owned and operated Benistar, Ltd. and its subsidiaries. One Benistar function was to act as an intermediary in Section 1031 property exchanges. That section of the Internal Revenue Code allows the owner of investment property to defer capital gains taxes on the sale of the property by rolling the proceeds of the sale into the purchase of replacement property. However, the tax deferral is lost if the owner (the "exchangor") takes possession of the sale proceeds. Therefore, companies such as Benistar offer to act as an intermediary by holding the proceeds in escrow until the exchangor is ready to close on the replacement property.

Carpenter promoted the services of Benistar by offering to hold the funds safely, pay a small amount of interest, and provide the funds when needed. However, without the knowledge or consent of the exchangors, Carpenter embarked on a highly speculative program of options trading in the hope of generating large gains for himself.

Carpenter at first used an account at Merrill Lynch, which warned him about the dangers of options trading. He then switched to Paine Webber, which also warned him about the dangers. Initially his plan worked well, but early in 2000 he began suffering large trading losses. By late 2000 the losses had mushroomed to about $9 million.

In February 2004, a federal grand jury in Massachusetts returned a 19-count indictment charging Carpenter with 14 counts of wire fraud and five counts of mail fraud. The indictment identified seven exchangors who lost a total of about $9 million. Carpenter pleaded not guilty on all counts. In September 2004, the grand jury returned a superseding 19-count indictment. Carpenter again pleaded not guilty on all counts.

In July 2005, a 13-day jury trial ended with conviction on all counts. In December 2005, the judge granted Carpenter's motion for a new trial on the grounds that the government used inflammatory language in its closing argument. The First Circuit, in a split decision, upheld the district court's ruling. The Supreme Court declined to review the case.

In June 2008, a second 13-day jury trial ended with conviction on all counts. Carpenter again filed a motion for a new trial. After a three-year delay, the judge granted the motion on the grounds that the government erred in various ways in the closing argument. This time, however, the First Circuit reversed the judge's ruling, reinstated the conviction, and remanded the case for immediate sentencing. The Supreme Court again declined to review the case.

In presentencing memoranda, Carpenter asked for probation and the government asked for 60 months' imprisonment. In February 2014, the judge sentenced Carpenter to 36 months in federal prison on each count, with the terms to run concurrently. That is to be followed by 36 months of supervised release, with the terms to run concurrently.

In the presentencing memoranda, Carpenter said there should be no restitution because the victims had won settlements from Merrill Lynch and Paine Webber, and the government asked for about $14 million in restitution. The judge ordered Carpenter to pay restitution of about $310,000, fined him $100,000, and assessed him $1,900. Initially the judge ordered Carpenter to report to prison on April 25, but later changed the reporting date to June 6, and still later to June 20.

On May 23, 2014, the judge denied Carpenter's motion for a stay of imprisonment pending appeal. The judge reasoned that Carpenter's business activities present a danger of "pecuniary or economic harm" to the public. On June 11, Carpenter filed a notice of appeal to the First Circuit. (U.S.A. v. Carpenter, U.S. District Court, District of Massachusetts, Case No. 1:04-cr-10029.)

The Section 419 Angle
Carpenter marketed multi-employer welfare benefit plans. For many years the IRS has been investigating such plans, through which participants may qualify for favorable federal income tax treatment under Section 419 of the Internal Revenue Code. Contributions to Section 419 plans may be deductible for federal income tax purposes. The IRS considers some of the plans to be abusive tax shelters.

Since 2004, the IRS has been trying to obtain from Carpenter detailed information about his Section 419 plans. He provided some documents, but has fought hard against releasing all the requested documents. In 2008, the IRS filed a lawsuit in an effort to obtain the documents. The case is ongoing. (U.S.A. v. Carpenter, U.S. District Court, District of Connecticut, Case No. 3:08-mc-111.)

The STOLI Fraud Allegations
In December 2013, the U.S. Attorney in Connecticut filed a 33-count indictment against Carpenter and his brother-in-law, Wayne Bursey, relating to stranger-originated life insurance (STOLI). There were 23 counts of wire fraud, nine counts of mail fraud, and one count of conspiracy. Another person mentioned in the indictment was Joseph Edward Waesche IV, an insurance agent who worked with Carpenter. Waesche was charged in a separate case described later.

The indictment provides background on life insurance in general and STOLI in particular. It alleges that Carpenter and his associates provided materially false information to life insurance companies ("providers") regarding the purpose of the insurance, the income and net worth of the insured, the presence of premium financing, and the intent of the applicant to sell the policy in the secondary market for life insurance.

The indictment describes how providers are harmed by earlier and greater payout of death benefits, reduced premium income, financial projections rendered unreliable, delayed premium payments, and payment of large commissions. The providers mentioned are American National, AXA Equitable, Jefferson Pilot, Lincoln National, Metropolitan Life, Penn Mutual, Phoenix, Sun Life of Canada, and Transamerica.

Because Lincoln National received funds under the Treasury Department's Troubled Asset Relief Program (TARP), TARP's special inspector general is involved in the case. Also, because of the multi-employer welfare benefit plans, the Department of Labor is involved.

The indictment describes a Section 419 plan in which Bursey was plan sponsor and trustee of the plan and the accompanying trust. The plan purported to provide death benefits to employees of employers who adopted the plan. An adopting employer designated one or more employees ("straw insureds") on whom the trust purchased life insurance policies.

The indictment mentions 12 straw insureds ranging in age from 69 to 78. The straw insureds were promised free life insurance for two years and a share of the proceeds when the policies were sold in the secondary market after two years. The straw insureds were not obligated to pay anything and were told the premiums were being borrowed from a third party, which was a Benistar affiliate. Each straw insured was told the loan would be repaid from the death benefit if the insured died within two years or from the proceeds when the policy was sold in the secondary market after two years. Although the indictment mentions Section 419 plans, there is no mention of whether the income tax advantages of those plans were a factor in promoting the STOLI arrangements.

Carpenter and Bursey pleaded not guilty on all counts and were released on bond. The jury trial was set for March 11, 2014.

On January 30, 2014, Carpenter filed a motion to delay the trial. On February 4, Bursey filed a motion to delay the trial. On March 5, the U.S. Attorney filed a motion to delay the trial. On March 10, the judge granted the motions and reset the trial for March 10, 2015.

On May 14, 2014, the U.S. Attorney filed a 57-count superseding indictment against Carpenter and Bursey. The added counts were one count of conspiracy to commit money laundering, 13 counts of engaging in illegal monetary transactions, and ten counts of money laundering. The superseding indictment also added details about one additional straw insured. On May 17, Carpenter pleaded not guilty on all counts. On June 5, Bursey filed a motion to delay his arraignment because of illness. On June 6, Carpenter filed a motion to dismiss the superseding indictment for lack of federal jurisdiction. (U.S.A. v. Carpenter, U.S. District Court, District of Connecticut, Case No. 3:13-cr-226.)

The Waesche Case
In December 2013, the U.S. Attorney filed an "Information" charging Waesche with one count of conspiracy. Waesche pleaded guilty, was released on bond, and has not yet been sentenced. (U.S.A. v. Waesche, U.S. District Court, District of Connecticut, Case No. 3:13-cr-224.)

The Information describes the false answers Waesche and others gave in a total of five applications submitted to Lincoln National, Phoenix, and Penn Mutual. Here is what Waesche said in his own handwriting in his plea petition:
Beginning in 2006 and continuing until around 2013, I agreed with others with whom I worked in Simsbury, Stamford and Norwalk to take steps to get insurance companies to issue life insurance policies under false pretenses that would be financed by others and sold on the life settlement market. I caused to be submitted to life insurance companies false applications that stated that the policies were not being financed by outside investors, that there were no discussions about the sale of the policies, and that the policies were for legitimate estate planning needs. Specifically, I submitted such an application on July 3, 2008 to Penn Mutual. I knew what I was doing and I knew that it was wrong.
In a June 6 motion to dismiss the superseding indictment in the STOLI case, Carpenter calls Waesche "now an admitted felon" and blames Waesche for the problems. Carpenter denies knowing what was going on and claims to have been a victim of Waesche's activities.

General Observations
The one Massachusetts case and the three Connecticut cases described in this post are not all the ongoing cases relating to Carpenter. For example, documents in those cases refer to cases involving Carpenter in New York and Wisconsin. However, the cases described here provide insight into the scope of the alleged criminal activities in which Carpenter has been engaged for more than a decade.

The 21-page sentencing memorandum filed by Carpenter and the 18-page sentencing memorandum filed by the government in the case concerning the Section 1031 property exchanges provide interesting contrasts about the views of the parties. I offer the two memoranda (without exhibits) as a complimentary 39-page PDF. Send an e-mail to and ask for the Carpenter package.