Monday, June 20, 2016

No. 167: STOLI Fraud and Daniel Carpenter—A Federal Judge Hands Down a Verdict of Guilty on 57 Criminal Counts

On June 6, 2016, after a bench trial, U.S. District Judge Robert N. Chatigny found Daniel E. Carpenter guilty on all 57 counts of an indictment charging him with criminal activity in connection with stranger-originated life insurance (STOLI). The judge scheduled sentencing for August 26, 2016. (See U.S.A. v. Carpenter, U.S. District Court, District of Connecticut, Case No. 3:13-cr-226.)

The STOLI Case
In December 2013 the U.S. Attorney in Connecticut filed a 33-count grand jury indictment charging Carpenter and his brother-in-law, Wayne Bursey, with conspiracy, mail fraud, wire fraud, illegal monetary transactions, and money laundering in connection with STOLI transactions. The defendants pleaded not guilty on all counts. Carpenter was already in prison as the result of another case, which I discuss below, and he remained in custody. Bursey was released on bail.

In May 2014 the U.S. Attorney filed a 57-count superseding indictment. The defendants pleaded not guilty on all counts. In May 2015 the charges against Bursey were dismissed following his death.

Carpenter waived his right to a jury trial. On February 16, 2016, the trial began. On March 21, after 19 trial days, the trial ended. On June 6 Judge Chatigny handed down a 91-page "Verdicts and Special Findings." Here is the introduction, with footnotes and citations omitted:
This criminal case is before the Court for decision following a bench trial. Defendant Daniel Carpenter is charged with devising and executing a scheme to defraud life insurance companies by using misrepresentations to induce them to issue high-value universal life insurance policies to straw insureds, which the companies would not have issued had they known the policies constituted "stranger-originated life insurance" ("STOLI") policies. This document sets forth the Court's verdicts and special findings in accordance with Federal Rule of Criminal Procedure 23(c).
A STOLI policy differs from a regular policy in that it is obtained not for estate planning purposes but for transfer to an investor with no insurable interest in the life of the insured. "[E]ssentially, it is a bet on a stranger's life." Life insurance providers are opposed to STOLI business and have taken steps to ensure that STOLI policies will not be issued. But STOLI policies can be obtained through misrepresentations concerning the insured's intent to resell the policy, the existence of third-party funding of premiums, and other matters, which are characteristic of "stealth STOLI" or "STOLI in disguise."
Schemes to defraud life insurance providers by causing them to issue STOLI policies based on misrepresentations have recently been the subject of federal prosecutions. In this case, the 57-count superseding indictment charges Mr. Carpenter with mail and wire fraud, conspiracy to commit mail and wire fraud, illegal monetary transactions, money laundering, conspiracy to commit money laundering and aiding and abetting the foregoing substantive offenses. The indictment alleges that the fraudulent scheme involved several steps. Insurance agents recruited older persons to act as straw insureds, often with the promise of free insurance for two years and a share of the profits from the sale of the policy. The agents then completed life insurance applications that contained misrepresentations concerning the insured's motivation for procuring the policy, along with false denials concerning the possibility of a policy sale, third-party funding of premiums and the performance of life expectancy reports. The indictment alleges that the applications were submitted and caused to be submitted to the life insurance providers by Mr. Carpenter and others.
At the trial, Mr. Carpenter testified that he was aware of the "evils of STOLI" when the applications underlying the indictment were submitted to providers. He did not dispute that the applications contained STOLI-related misrepresentations. He testified, rather, that he was deceived concerning the nature of the policies by people he trusted.
The evidence establishes beyond a reasonable doubt that from the outset of the conspiracy charged in the indictment, Mr. Carpenter knew the policies were being procured for resale to investors after the two-year contestability period expired. It also establishes that at his direction and on his behalf, misrepresentations were made in applications in order to thwart the providers' attempts to ensure that STOLI policies would not be issued. For these and other reasons explained below, I conclude that the government has sustained its burden of proving Mr. Carpenter's guilt beyond a reasonable doubt as to each count in the indictment.
Other Cases Involving Carpenter
Carpenter has been involved in several other criminal cases relating to his activities. In No. 54 (posted June 23, 2014) I wrote about the STOLI case and three other Carpenter-related cases. Here I provide an update on those other cases.

The Section 1031 Case
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 ("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 speculative program of options trading in the hope of generating large gains for himself.

Initially his plan worked well, but early in 2000 he began suffering large trading losses. In February 2004 a federal grand jury in Massachusetts returned a 19-count indictment charging Carpenter with mail fraud and wire fraud, and identifying seven exchangors who had lost a total of about $9 million. Carpenter pleaded not guilty on all counts. In September 2004 the grand jury returned a 19-count superseding indictment. Carpenter pleaded not guilty on all counts.

In July 2005 the jury trial ended with Carpenter's conviction on all counts. He filed a motion for a new trial, and the district court granted his motion. The government appealed the ruling to the U.S. Court of Appeals for the First Circuit, which, in a split decision, affirmed the district court ruling. The government appealed to the U.S. Supreme Court, which declined to review the case.

In June 2008 the new jury trial ended with Carpenter's conviction on all counts. He again filed a motion for a new trial. After a long delay, the district court again granted his motion. This time, however, after the government appealed the district court ruling, the First Circuit reversed the district court ruling, reinstated the conviction, and sent the case back to the district court for immediate sentencing. Carpenter appealed to the Supreme Court, which declined to review the case.

In February 2014 the judge sentenced Carpenter to 36 months in federal prison on each count, with the terms to run concurrently, followed by 36 months of supervised release. The judge also ordered Carpenter to pay restitution of about $310,000, and fined him $100,000. In May 2014 the judge denied Carpenter's motion for a stay of imprisonment pending appeal. Carpenter's appeals went nowhere. In June 2014 Carpenter began serving his prison term. (See U.S.A. v. Carpenter, U.S. District Court, District of Massachusetts, Case No. 1:04-cr-10029.)

The Section 419 Case
Carpenter marketed multi-employer welfare benefit plans. For many years the Internal Revenue Service (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 was assigned to Judge Chatigny.

On March 18, 2016, the government filed a stipulation of dismissal without prejudice (subject to possible reprosecution). On March 21 the judge approved the dismissal. (See U.S.A. v. Carpenter, U.S. District Court, District of Connecticut, Case No. 3:08-mc-111.)

The Waesche Case
Joseph Edward Waesche IV was an insurance agent who worked with Carpenter. In December 2013 the U.S. Attorney in Connecticut filed an "Information" charging Waesche with one count of conspiracy and describing the false answers Waesche and others gave in five applications submitted to life insurance companies. Waesche pleaded guilty. After a hearing, a magistrate judge ruled the guilty plea should be accepted. Waesche has not yet been sentenced. In response to my inquiry, a spokesman for the U.S. Attorney said Waesche will be sentenced after Carpenter is sentenced in the STOLI case. (See U.S.A. v. Waesche, U.S. District Court, District of Connecticut, Case No. 3:13-cr-224.)

General Observations
The decision by Judge Chatigny in the STOLI case is interesting in at least two ways. First, the judge seems to have a thorough understanding of STOLI transactions and the tactics employed by participants in those transactions. In other words, I think he "gets it." Consequently, I believe that his decision is strong.

Second, the judge does not use initials to represent the "straw insureds" and other individuals mentioned in the decision. Instead he identifies everyone involved in the case.

My only reservation stems from my belief that, during the STOLI heyday from 2004 to 2007, senior officials at some major life insurance companies encouraged the massive growth of STOLI through lax underwriting. In other words, I think the companies knew what was happening and therefore were responsible for the STOLI disaster.

Available Material
I am offering a complimentary 91-page PDF containing Judge Chatigny's decision in the STOLI criminal case against Carpenter. Email and ask for Judge Chatigny's June 6, 2016 decision in the Carpenter STOLI case.