After more than 20 years of building and operating more than a dozen financial planning firms, tax attorney Daniel E. Carpenter, a Simsbury resident, tried his hand trading stock options in the go-go tech boom of the late 1990s.
But when the millennium turned, so did his luck.
Seven clients of his Newton, Mass.-based Benistar Property Exchange Trust Co. were left holding the bag — to the tune of more than $9 million.
Nearly three years later, Carpenter, whose companies list the city of Bridgeport and the Fairfield School District among its clients, is in heaps of trouble. Since the collapse of Benistar Property, Carpenter has lost a multimillion dollar civil suit in Massachusetts, was indicted by a federal grand jury in Massachusetts on 19 counts of mail and wire fraud, and faces disbarment in Connecticut.
To his attorneys, Carpenter is a victim of the stock market collapse who is being hounded by former clients disgruntled over the investment losses. “At most this is a breach of contract case,” said Carpenter’s longtime outside counsel, Richard S. Order, of Axinn, Veltrop & Harkrider’s Hartford office. “Mr. Carpenter has been devastated by all of this. I’m surprised he hasn’t had a heart attack with all the stress.”
Those who trusted him with their retirement savings and other funds, however, claim Carpenter converted their money to his personal use, lost it all and is now trying to hide behind attorneys and a web of shadow corporations.
Carpenter started handling so-called “1031″ transactions in 1998 after meeting Martin L. Paley of Newton. Paley, who was running his own company, joined with Carpenter and formed Benistar Property Exchange Trust Co.
Named after the section of the tax code that allows it, a 1031 is a way to avoid capital gains taxes when selling one investment property to buy another. To qualify, the original seller cannot have control of the money between the sale and the subsequent purchase. The money must go to a third party, an intermediary, where it remains until the replacement property is bought. The purchase must happen within 180 days.
Benistar Property’s mission was to be that intermediary. Clients had two options for their money while in Benistar’s care. They could pick a “Merrill Lynch Ready Asset Money Market Account,” which returned 3 percent interest and required 72 hours notice for a withdrawal, or they could choose a “Merrill Lynch Investment Account.” That account required 30 days notice and returned 6 percent.
Paley, president of Benistar Property, was the front man, bringing in clients and getting them to use Benistar as their intermediary. Carpenter was the company’s chairman. He worked in Simsbury and was responsible for investing the money entrusted to the firm.
“From the beginning, the money was going to be worked for the return of their percentage,” Order maintained. “All the documents indicated the money would be held and invested at the sole discretion of Benistar.”
The company, however, charged a flat fee based on the size of the transaction. Benistar marketing materials promised that, once the money was placed in the Merrill Lynch account, it could not be transferred out except by the depositor’s written authorization.
Instead, Carpenter transferred client funds to a different account at Merrill Lynch and traded stock options.
According to the testimony of a Merrill Lynch supervisor, had Merrill known the money was not Carpenter’s — that it belonged to his clients — Merrill would never have allowed Carpenter to trade in stock options.
For the latter part of 1998 and all of 1999, everything went smoothly. “Interest rates were down and he invested in stock options successfully,” Order said. “Remember, the late ’90s [was] a bull market and nobody could lose money in that market.”
But then came the collapse of the tech sector, beginning in April 2000. As with many day traders, Carpenter lost his shirt.
According to a May 30, 2000, memo from Merrill Lynch trader Gerald Levine to his supervisor, Carpenter had lost more than $1 million in the previous 60 days, exhibited “irrational exuberance” and had the mentality of a “‘riverboat gambler’ who was trying to make a huge killing to get even in just a few days.”
Levine asked management to monitor the account. When Carpenter’s loses topped $4 million in September 2000, Merrill Lynch officials closed it altogether.
Carpenter wasn’t happy.
In a letter dated Sept. 22, 2000, he threatened legal action against the brokerage for lost profits. “This decision is shortsighted at best and will likely cause us to miss trading profits of $2,000,000 or more in the coming months,” Carpenter wrote. “This type of volatility is perfect for us to earn back the losses we have suffered since April, which I must say many of which were caused by maintenance calls and trading blocks by Merrill. Several times in the past Merrill has blocked us from getting back our money in profitable trades.”
The threats didn’t work. But his brokers helped land him a new trading account at PaineWebber, where he proceeded to lose millions of more dollars.
Despite the losses, Benistar Property’s woes remained hidden to clients. In November 2000, Gail Cahaly picked Benistar Property for the sale of an apartment complex. She placed $2.4 million in escrow pending the purchase of three other properties.
About the same time, Joseph Iantosca of Braintree, Mass., as trustee of Faxon Heights Apartments Realty Trust and Fern Realty Trust, hired Benistar and turned over more than $3.5 million.
PaineWebber was increasingly uncomfortable with Carpenter’s losses, however. An internal Dec. 6, 2000, computer message showed Carpenter had already lost nearly $3 million. “This account has only been opened since 10/00 and has been charged with 3 liquidations and is indefinitely restricted,” the message said. “I think the options approval should be removed. Please Advise.”
By Dec. 18, 2000, Carpenter’s losses topped $5.5 million and were expected to go even higher, according to handwritten notes of a Dec. 19 meeting of PaineWebber officials. According to the note, three brokers held a conference call with Carpenter, who took the blame for the trading losses but hoped to recoup them. The note also mentions that Carpenter was surprised to learn his losses were so high.
After the call, PaineWebber terminated Carpenter trading accounts, allowing him only to close out the options he already had.
Another PaineWebber memo, dated Dec. 22, shows Carpenter wanted to open a day trading account to sell stock short, “hoping to make 10-20 M in a day.”
“The last quarter of 2000 was like a perfect storm in the market,” Order said. “There is usually a seasonal rally going into Christmas, plus the election year bounce — which didn’t happen because no one knew who won — and [Federal Reserve Board Chairman] Alan Greenspan was talking about dropping interest rates, but it did not occur until the first week of January.”
By then it was too late.
On Jan. 3, 2001, Carpenter drove to Newton, and with Paley, went to make visits on Iantosca and Ron Cahaly. Both clients had sizable closings scheduled in the next few days, and Carpenter needed time.
He explained that PaineWebber had swept the accounts and seized the money for margin calls.
Iantosca exploded, demanding his money bad.
The visit with Cahaly went a little better, but not well. Carpenter asked Cahaly to postpone the closing for a few days until he could straighten everything out. He also asked Cahaly if he could lend him additional money to help recover the losses.
Cahaly not only refused, he called his lawyer.
Carpenter managed to wire money to both closings, but it was the last money any client would see from Benistar Property.
On Jan. 19, 2001, the Cahalys filed suit in Massachusetts for breach of contract, breach of fiduciary duty and conversion, among other claims. They also filed suit in Connecticut to attach the assets of Carpenter and several Benistar companies. Eventually the six other clients joined the Massachusetts lawsuit.
For nearly two years, bitter pretrial maneuvering marked the case. Carpenter and other Benistar entities were enjoined from trying to use Connecticut courts to quash subpoenas issued in Massachusetts for depositions. Two different judges chastised the attorneys for the rancor of pretrial proceedings, and sanctions of attorneys’ fees were levied against Benistar’s attorneys.
On Dec. 11, 2002, after a three-and-a-half-week trial, the 12-member jury found for the plaintiffs on all counts, against all defendants. The plaintiffs were awarded $8.66 million.
PIERCING THE CORPORATE VEIL
According to Benistar’s web site, the company is “the nation’s largest administrator of multiple employer welfare benefits plans,” with offices in Stamford, Charlotte, N.C. and Las Vegas. Among the benefits and expertise offered by Daniel Carpenter, it says, is his experience in creating incorporated companies to limit tax and legal liability.
Carpenter practiced what he preached.
Public records reveal nearly 20 corporations controlled by Carpenter or his wife, Molly. At least a dozen of them share the Benistar name and, according to evidence entered in the civil case, they share many of the same corporate officers, offices and even employees. Or rather, one company has the employees and the others just “borrow” them to conduct their business, court records show.
Nearly all of them list one of three Connecticut addresses as their place of business or the address of the corporation’s agent. Two of the addresses are in Simsbury: 507 Hopmeadow Road and 100 Grist Mill Road. One is in Stamford at 2187 Atlantic Ave.
The Simsbury addresses are where Carpenter works. Benistar recently moved to the 100 Grist Mill site, a more modern building tucked in the woods out of sight of the road. The entrance shows nothing more than the address and several no trespassing signs.
Despite their being separate corporations, Suffolk Superior Court Judge Margot Botsford ruled last September that several of them were not worthy of protection as separate corporate entities. The decision was of particular importance to the plaintiffs because Benistar Properties folded within weeks of the first lawsuit being filed, and it’s unlikely the Carpenters could pay the multimillion-dollar verdict rendered against them.
Their residence in Simsbury is in Molly’s name and is valued at $367,000, according to Simsbury tax records. Those records also show that neither owns a car and that few of the other Benistar properties have any taxable assets.
The only company to file personal property tax returns is Benistar Insurance Group, which lists office equipment valued at less than $50,000. Motor vehicle tax records list Benistar Admin Services as owning two cars: a gray 2002 Jaguar XJR and a black 2003 Cadillac Escalade SUV.
Botsford’s scathing decision held four related corporations other than Benistar Property responsible for paying the jury award.
“Daniel Carpenter and Molly Carpenter used Benistar Property as a source of funds to support Daniel’s personal penchant for risky option trading …,” Botsford wrote. “The plaintiffs have been awarded very substantial verdicts from the jury, commensurate with the very substantial losses they suffered at the hands of the principal defendants. Those defendants should not be permitted to escape responsibility through the misuse of the corporate form.”
Among the companies named in Botsford’s decision is U.S. Property Exchange. It opened the day after Benistar Property closed, provided the same 1031 services and employed the same people who worked at the same desks on the same computers in the same office. The only difference, Botsford noted, is that Carpenter did not have an interest in the company. Paley was the sole owner.
ACTING AS AN ATTORNEY?
After the civil trial, Gail Cahaly filed a grievance against Carpenter in Connecticut alleging Carpenter used his status as an attorney to perpetrate a fraud. On April 8, the matter was heard before a disciplinary committee in New Britain.
Carpenter hired lawyer-ethics expert Ralph G. Elliot, of Tyler Cooper & Alcorn’s Hartford office. Elliot offered a voluntary suspension of Carpenter’s license until the criminal charges are cleared up, if the panel would postpone hearing the case until then so Carpenter would be able to defend himself. The panel refused and proceeded with the hearing.
Carpenter, Elliot argued, was not working as an attorney at the time. Just because the market went bad, doesn’t mean Carpenter did anything to violate the Rules of Professional Conduct, Elliot maintained.
Although he doesn’t practice law, Carpenter does identify himself in company literature and published articles as a tax attorney. As a member of the Connecticut Bar Association from 1979 to 2000, Carpenter listed himself as a partner at Carpenter & Robinson at 2187 Atlantic St., Stamford, the same address as Benistar corporate counsel Jack E. Robinson III. Robinson, who has appeared as the attorney of record for both Benistar and Carpenter in a multitude of federal lawsuits in several states, is also co-counsel in the ongoing civil suit and the pending, federal criminal case against Carpenter.
The reviewing committee has yet to issue its ruling in the matter.
Order said the grievance is just another example of the Cahalys’ seeking revenge against his client. “The grievance was filed the day after the [civil] verdict came in,” he said. “She just wants to destroy Mr. Carpenter’s life over money.”
The Cahalys make no apologies for pursuing Carpenter in so many arenas.
“The money is gone, stolen, just as if they put a gun to your head,” Ron Cahaly said. “The end result is the same, empty pockets. In this case, it was a ton of money and it was retirement money.”
In February, the U.S. Attorney’s Office for Massachusetts obtained a 19-count indictment on mail and wire fraud charges against Carpenter.
The 31-page indictment accuses Carpenter engaging “in a scheme to defraud that involved the misappropriation of millions of dollars of fund that [Benistar Property] clients had entrusted to the company” for the primary purpose of using those funds “to engage in aggressive, high risk trading in the options market, with the goal of leveraging the funds into a substantial profit for himself.”
As with the other accusations, Order dismisses it as another attempt by the plaintiffs to exact revenge. “The plaintiffs used the U.S Attorney’s Office,” he said. “They forced us to advise Mr. Carpenter not to testify to reserve his Fifth Amendment rights, so Mr. Carpenter had his hands tied behind his back because of fear of prosecution.
“Dan Carpenter never even spoke to these clients. He never represented anything, so how could he misrepresent something?” Order asked. “The failure to pay a debt is not conversion and his is intention was always to return the money. … I just don’t see there is anything criminal in what Dan Carpenter did,” he said.
A spokeswoman for the U.S. Attorney’s Office in Massachusetts declined to comment on the case.
In addition to Robinson and Order, two other attorneys have filed appearances in the criminal case: A. John Pappalardo of Greenberg Traurig in Boston, as lead counsel, and Edward A McDonald of Dechert’s New York office.
Even as the criminal case goes forward, it appears the civil case may be going back. Shortly after the civil verdict, the judge dismissed the jury verdict against Merrill Lynch on the charge of aiding and abetting conversion and breach of fiduciary duty. The court found there was no evidence Merrill knew of Benistar’s fiduciary duty, and therefore could not have aided or abetted Carpenter.
The plaintiffs recently presented new evidence that Merrill brokers did know about the Benistar’s fiduciary duty and are asking Judge Botsford to reinstate the jury verdict.
Now Benistar and Carpenter are using that evidence to move for a new trial. “Their remedy of reinstating the jury verdict isn’t appropriate,” Order said. “Our view is there has to be a new trial and there has to be a new trial for everybody.”
And even if that doesn’t work, there is always the possibility of an appeal, which worked well for them in the Connecticut asset attachment case filed by Gail Cahaly. After three years of legal wrangling, the state Supreme Court ruled in Benistar’s favor.
Order said Carpenter “in his heart of hearts believes he will be vindicated. As we demonstrated in the Connecticut case, sometimes it takes years to be vindicated.”
That means the plaintiffs are unlikely to see a penny of any final judgment anytime soon. But that doesn’t bother Cahaly.
“I have great litigators and I have great fortitude. I won’t be going away,” he said. “If it takes 10, 12 years, that’s OK. … But, I’d love to see what he’s spent on lawyers — you’d think he would have paid us back instead.”