United States v. Carpenter (190 F. Supp. 3d 260, 2016)

VERDICTS AND SPECIAL FINDINGS

Robert N. Chatigny, United States District Judge

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. “[Ejssentially, it is a bet on a stranger’s life.” United States v. Binday, 804 F.3d 558, 565 (2d Cir.2015); petition for cert. filed, (U.S. Mar. 10, 2016) (No. 15-1140). 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 “STO-LI 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. See id. In this case, the 57-count superceding 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. See, e,g., Super. Ind. (EOF No. 53) ¶ 38.

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 as to each count in the indictment.

I. Elements of the Charged Offenses

A. Mail and Wire Fraud

The . superceding indictment charges Mr. Carpenter with thirty-two counts of mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343. Because these statutes use the same relevant language, they are analyzed the same way. United States v. Schwartz, 924 F.2d 410, 416 (2d Cir. 1991). The essential elements of both offenses are “(1) a scheme to defraud, (2) money or property [as the object of the scheme], and (3) use of the mails [or wires] to further the scheme.” Fountain v. United States, 357 F.3d 250, 255 (2d Cir.2004) (alterations in original).

The first element, a scheme to defraud, requires the government to prove “(i) the existence of a scheme to defraud, (ii) the requisite scienter (or fraudulent intent) on the part of the defendant, and (iii) the materiality of the misrepresentations.” United States v. Pierce, 224 F.3d 158, 165 (2d Cir.2000) (citations omitted). With regard to the fraudulent intent requirement, “[i]t need not be shown that the intended victim of the fraud was actually harmed; it is enough to show defendants contemplated doing actual harm, that is," something more than merely deceiving the victim.” Schwartz, 924 F.2d at 420. To satisfy the materiality requirement, the government must establish that the misrepresentations or omissions “ha[d] the natural tendency to influence or [were] capable of influencing the [victim] to change its behavior.” United States v. Rybicki, 354 F.3d 124, 147 (2d Cir.2003) (en banc).

With regard to the second element, money or property as the object of the scheme, it is well-established in the Second Circuit that the “interests protected by the statutes include the interest of a victim in controlling his or her own assets.” United States v. Carlo, 507 F.3d 799, 802 (2d Cir.2007); see also United States v. Rossomando, 144 F.3d 197, 201 n. 5 (2d Cir.1998). The government can satisfy this element by proving that the defendant’s scheme “den[ied] the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions.” Rossomando, 144 F.3d at 201 n. 5. The information in question “either must be of some independent value or must bear on the ultimate value of the transaction.” Id. (quoting United States v. Dinome, 86 F,3d 277, 284 (2d Cir.1996)) (internal quotation mark omitted).

To satisfy the third element, the “in furtherance” requirement, the government must establish that the.mails and wires were used “incident to an essential part of. the scheme.” Schmuck v. United States, 489 U.S, 705, 711, 109 S.Ct. 1443, 103 L.Ed.2d 734 (1989) (quoting Pereira v. United States, 347 U.S. 1, 8, 74 S.Ct. 358, 98 L.Ed, 435 (1954)) (internal quotation marks omitted). That the defendant did not personally participate in a mailing or wiring does not insulate him from liability if it was “reasonably foreseeable that the charged transmission would occur in the execution of the scheme.” United States v. Bahel, 662 F.3d 610, 642 (2d Cir.2011). Moreover, the timing of a mailing or wiring is of no moment if it “further[ed] the scheme.” United States v. Slevin, 106 F.3d 1086; 1090 (2d Cir.1996).

B. Money Laundering

Mr. Carpenter is charged with ten counts of money laundering in violation of 18 U.S.C. § 1956(a)(l)(A)(i). These counts require the government to prove that the defendant, “knowing that the property involved in a financial transaction represented] the proceeds of some form of unlawful activity, conducted] or attempted] to conduct ... a financial transaction which in fact involve[d] the proceeds of specified unlawful activity ... with the intent to promote the carrying on of specified unlawful activity.” 18 U.S.C. § 1956(a)(l)(A)(i). The statute defines “financial transaction” as “a transaction which in any way or degree affects interstate or foreign commerce” or “a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate' or foreign commerce in any way or degree.” 18 U.S.C. § 1966(c)(4). “Specified unlawful activity” includes mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343. See 18 U.S.C. § 1956(c)(7)(A); 18 U.S.C. § 1961(1).

C. Illegal Monetary Transactions

Mr. Carpenter is charged with thirteen counts of illegal monetary transactions in violation of 18 U.S.C. § 1957(a). To establish a violation of this statute, the government must show that the defendant “knowingly engage[d] or attempted] to engage in a monetary transaction in criminally derived property of a value greater than $10,000,” and that the property was derived from “specified unlawful activity.” 18 U.S.C. § 1957(a). The statute defines a “monetary transaction” as “the deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds ... by, through, or to a financial institution.” 18 U.S.C. § 1957(f)(1). “Criminally derived property” means “any property constituting, or derived from, proceeds obtained from a criminal offense.” 18 U.S.C. § 1957(f)(2). And, like the identical phrase in the money laundering statute, “specified unlawful activity” includes mail and wire fraud. See 18 U.S.C. § 1957(f)(3); 18 U.S.C. § 1956(c)(7)(A); 18 U.S.C. § 1961(1).

D.Conspiracy

Mr. Carpenter is charged with conspiracy to commit mail and wire fraud in violation of 18 U.S.C. § 1349 and conspiracy to commit money laundering in violation of 18 U.S.C. § 1956(h). These statutes impose liability on “[a]ny person who ... conspires to commit” the substantive offenses. 18 U.S.C. §§ 1349, 1956(h). “To prove, conspiracy, the government must show that the defendant agreed with another to commit the offense” and “that he knowingly engaged in the conspiracy with the specific intent to commit the offenses that were the objects of the conspiracy.” United States v. Huezo, 546 F.3d 174, 180 (2d Cir.2008) (quoting United States v. Monaco, 194 F.3d 381, 386 (2d Cir.1999)) (internal quotation mark omitted). It must be established “that there was a conspiracy to commit a particular offense and not merely a vague agreement ‘to do something wrong.’ ” United States v. Provenzano, 615 F.2d 37, 44 (2d Cir.1980) (quoting United States v. Rosenblatt, 554 F.2d 36, 38 (2d Cir.1977)). It must also be established that the defendant “agree[d] on the essential nature of the plan.” United States v. Salameh, 152 F.3d 88, 151 (2d Cir.1998) (alteration in original) (quoting United States v. Gleason, 616 F.2d 2, 16 (2d Cir.1979)) (internal quotation marks omitted). Unlike other conspiracy statutes, neither § 1349 nor § 1956(h) requires proof of an overt act in furtherance of the conspiracy. See Whitfield v. United States, 543 U.S. 209, 219, 125 S.Ct. 687, 160 L.Ed.2d 611 (2005); (§ 1956(h)); United States v. Roy, 783 F.3d 418, 421 (2d Cir. 2015)(§ 1349).

II. Findings of Fact

A. Stranger' Originated Life Insurance

1. The Nature of STOLI Policies'

An insured who acquires a policy for estate planning purposes may ultimately decide to sell it for various reasons, for example, if the premiums have become too costly or the insurance is no longer needed. Under state law, it is well-established that such an insured may freely sell his policy, in which case the buyer becomes the beneficiary and assumes responsibility for paying the premiums. See Binday, 804 F.3d at 565. An insured who wants to sell his policy may be able to find a buyer through what is referred to as the “life settlement” or “secondary” market. The existence of this market has given rise to STOLI policies.

At the trial in this case, witnesses defined a STOLI policy with reference to the circumstances existing at the time of the policy’s “origination.” If the policy holder applied for the policy with a prior understanding to cede control of the policy to an investor, it is a STOLI policy. Or if the purchase was financed by an investor who intended to take ownership of the policy at the end of a period of time, it is a STOLI policy. A typical policy, in contrast, is purchased to mitigate economic loss expected to occur as a result of the death of the insured.

2. Life Insurance Providers’ Opposition To STOLI

In the mid-2000s, life insurance companies began to notice that policies were being purchased for investment by persons with no insurable interest in the life of the insured:

[I]ndividuals are being recruited to consent to the purchase of life insurance and annuities on their lives. In some instances, the individual is told that a charity will receive part of the death benefit at no cost to the charity. In other instances, the individual is told that they can receive “free” insurance coverage for a year or two, with the option to , retain the policy by repaying [the] loan. Some concepts also contemplate a life settlement of the policy. Because the “strangers” or “investors”- financing these programs are not interested in long-term investments, these programs typically target an older individual with high net worth that can qualify for large amounts of insurance.

Gov’t Ex. 2001 at 2. These practices were indicators of STOLI.

The life insurance industry responded by emphatically opposing STOLI policies. Typical of this unequivocal stance was the opposition to STOLI by companies that sold policies involved in this case — The Phoenix Companies, Lincoln National Corporation, and Penn Mutual Life Insurance Company. Phoenix refused to “engage in [STOLI] business” and was “opposed to any transactions that ‘manufacture’ life insurance specifically to position it for early sale.” Gov’t Ex. 2126 at 1. Lincoln announced that it “[did] not want its life insurance and annuity products used as part of a ‘strange-originated life insurance’ program.” Gov’t Ex. 2171 at 2. Jefferson Pilot Financial, which ultimately became part of Lincoln, notified its agents that it would “no longer accept applications for life or annuity policies sold under [STOLI] programs” and warned that “violation of this policy will result in disciplinary action, up to and including, termination for cause.” Gov’t Ex. 2001 at 2. Other companies took the same position. For example, the ING Life Companies “strongly opposed] arrangements designed to obtain life insurance for the benefit of a third party that lacks an insurable interest in the insured” and advised their agents that they were “prohibited from selling any ING Life insurance product” if certain indicators of STOLI were identified. Gov’t Ex. 2108 at 2. Mr, Carpenter, a lawyer and longtime participant, in the life insurance field, knew the companies were opposed to STOLI.

3. Reasons For The Anti-Stoli Stance

Insurance company witnesses testified at trial that STOLI policies differ from traditional policies in a number of material respects as set forth in the indictment. Two differences were highlighted. The first relates to the way policies are funded; the second involves lapse rates. To appreciate these differences, it is necessary to understand certain aspects of the life insurance business.

As shown by the evidence in this case, universal life insurance policies produce two sources of revenue: (1) charges assessed against each insured’s account, principally a “cost-of-insurance” charge, which is calculated based on the mortality risk of the insured; and (2) investment income. The amount of investment capital available to a company is a function of the amount of premium it receives relative to the charges assessed with regard to each insured’s account. If the premium exceeds the charges, the carrier can invest the excess “cash value.”

Life insurance companies must pay a variety of expenses. The most important of these are sales commissions and death benefits. Commissions paid to agents can range- between 70 and 130 percent of the “target” premium for the first year. For policies with face values in excess of $2 million, the first-year commission can be several hundred thousand dollars. In addition to paying commissions, companies are responsible for paying death benefits. Generally, this expense will cost the company the difference between the policy’s death benefit and its cash value.

Returning to the differences between STOLI policies and regular policies, and dealing first with policy funding, companies have learned from experience that insureds typically will pay a “level premium” during the life of a policy, one that exceeds the charges and fees assessed against the insured’s account. When level premiums are paid, the company is able to invest the excess cash value, earning investment income. And when the insured dies, the company can use the policy’s cash value to offset the amount of the death benefit.

STOLI policies do not conform to this pattern of level premium payments. Instead, after payment of a “target” premium in the first year (one the company will use to pay a significant commission), STO-LI policies are funded at the minimum level required to keep them in force. Because STOLI policies do not build up cash value, they do not provide a source' of investment capital for the company. Moreover, when the insured dies, there may be no cash value to offset the death benefit required to be paid.

With regard to lapse rates, companies have learned to expect that a certain percentage of insureds will allow their policies to lapse for various reasons. When a policy lapses, the carrier is no longer responsible for paying the death benefit, which usually results in a net gain to the earrier^-i.e,, the savings produced by not having to pay the death benefit exceeds the loss in premiums and investment income. STOLI policies have a lower lapse rate than regular policies.

The carriers also had more basic reasons to oppose STOLI. The underwriting process for life insurance seeks to ensure that the beneficiary has an interest in -the continued life of the insured. Investors in STOLI policies have no such interest and stand to benefit if the insured dies prematurely. Life insurance companies do not want to be perceived as being in the business of enabling others to bet against the lives of their insureds.

The carriers also worried that STOLI could call into question the favorable tax treatment of life insurance. If life insurance policies were to become just another vehicle for speculative investment, like stocks or bonds, lawmakers might well decide to change the applicable tax laws. A change in the tax laws could make life insurance less attractive to consumers, adversely affecting the carriers’ business.

4. The Providers’ Attempts to Detect and Avoid STOLI

The insurance companies took various steps to ensure that STOLI policies would not be issued. They formulated and disseminated the anti-STOLI policies described above and circulated information ■regarding STOLI indicators. For example, Lincoln provided a list of “common ‘red flags’” that the carrier believed were “present in many of the more common [STOLI] arrangements.” Gov’t Ex. 2097 at 4. These included: (1) offers to the insured .or applicant of “some financial inducement for applying for the life insurance policy,” (2) the insured or applicant “borrowing all of the premiums and ,.. not making any personal investment in the life insurance program,” (3) unreasonable interest rates (greater than LIBOR plus 300 basis points), loan terms, and fees, (4) an understanding that “the lender will accept ownership of the policy in full satisfaction of any outstanding premium financing,” and (5) if a trust is involved, the existence of a relationship between the trustee and a lender or life settlement company. Id. The carriers required their agents to protect them against STOLI business. See id. (“[Lincoln] expect[s] that our producers and representatives will understand, and actively support, our efforts to not issue any new life insurance policies where any of the parties are considering, or actually intend, the eventual transfer of the life insurance policy to a life settlement company or other investors.”).

In addition, companies required prospective insureds and others involved in the application process to provide information that would expose “red flags” associated with STOLI programs. Forms and questions developed by Phoenix and Lincoln are illustrative. In November 2006, Phoenix began to require all applicants age 65 and over seeking a policy with a face value of $2 million and up to complete a Statement of Client Intent (“SOCI”) form. A notice at the top of the form explains the form’s purpose: “Phoenix will not knowingly participate in sales programs or strategies, including premium financing arrangements, designed primarily to facilitate the eventual sale or transfer of the policy to investors. The purpose of this form is to provide Phoenix with the information it needs to implement that policy.” Gov’t Ex. 2009 at 1. This notice is followed by several questions requiring an answer of either “yes” or “no.” These include:

Will any of the first year or subsequent premiums for the policy be borrowed by the proposed owner or proposed insured or by any other individual, trust, partnership, corporation or similar or related entity?

Is the policy being purchased in connection with any formal or informal program under which the proposed owner or insured have been advised of the opportunity to transfer the policy to a third party within five years of issuance? Do the proposed insured or proposed owner have any understanding or agreement providing for a party, other than the owner, to obtain any legal or equitable right, title or interest in the policy or entity owning the policy?

Has any entity, including, for example, any life expectancy valuation company or premium financing company, conducted (or made plans to conduct in the future) a life expectancy evaluation of the insured within the past two years? Have either the proposed insured or the proposed owner, in the past five years, sold a policy to a life settlement, viatical, or other secondary market provider? Have the proposed insured or proposed owner, or any individual, trust, partnership, corporation or similar. or related entity received cash or other financial inducements in connection -with this application or the purchase of this insurance?

Id. at 1-2. The form also asks the proposed insured or proposed owner to “state in detail” their “bona fide need ... for [the] insurance.” Id. at 2. Phoenix required the form to be signed by the proposed insured, the proposed owner, and the life insurance agent. The testimony at trial established that “yes” answers would have raised concerns that the policy was being procured for STOLI purposes. If the form contained a number of “yes” answers, or if an investigation revealed additional concerns, Phoenix could decline to issue the policy. It is undisputed that Phoenix relied on the information provided in the SOCI form to detect and avoid STOLI policies.

Lincoln’s agents were required to fill out an Agent’s Report with the following questions:

Is this policy being paid for with a premium financing loan?

Is this policy being paid for with funds form any person or entity whose only interest in the policy is the potential for earnings based on the provision of funding for the policy?

Gov’t Ex. 801 at 14. For insureds age 70 and up seeking a policy with a face value of at least $2 million, Lincoln expected its agents to fill out the Required Producer and Representative Certification Regarding Stranger Originated Life Insurance, which asks:

Will the Insured/Annuitant or Owner/Applicant receive any compensation as a result of the issuance of this policy, other than the benefits provided by the policy?

Is any premium financing contemplated to pay the initial or future premiums for this policy? If “Yes,” ... [a]re you aware of any understanding (whether written or oral) that the lender or other party will accept ownership of the policy in full satisfaction of any outstanding premium financing .., [or] any discussion that the premium financing is based on a projected or estimated future fair market value of the life insurance policy in excess of the illustrated cash surrender values?

Have you been involved in any discussion with the Insured/Annuitant and/or Owner/Applicant about the possible sale or assignment of a beneficial interest in a trust, limited liability company, or other entity created or to be created on the Insured/Annuitant’s and/or Owner/Applicant’s behalf?

If the policy will be owned by a trust, limited liability company, or other entity created or to be created for the Insured/Annuitant’s behalf, are you aware of any business or financial relationship between the trustee or entity managers and any premium financing, life settlement, viatical, or other secondary mar- . ket provider?

Gov’t Ex. 801 at 8-4. The agent was required to sign the form after certifying that he or she had read the attached Lincoln Policy Regarding Stranger Originated Life Insurance. See id. at 4-5.

As part of the application process, Lincoln also required insureds age 70 or over to complete a Defined Age Questionnaire. Among other things, this asked the insured:

Have you, the proposed insured, been involved in any discussion about the possible sale or assignment of this policy to an unrelated third party, as an inducement to purchase the life insurance policy? Have you been involved in any discussion about the possible sale or assignment of a beneficial interest in a trust, limited liability company or other entity created or to be created on your behalf which will have an ownership or beneficial interest in this policy?

Have you, the proposed insured, been involved in any discussion about the projected value of this policy in a future sale to an unrelated third party?

Have you, the proposed insured, ever sold a policy in a life settlement, viatical or other secondary market provider, or are you in the process of selling a policy?

Gov’t Ex. 1411 at 4. This form also required the proposed owner of the policy, if different from the proposed insured, to answer the same questions. See id. In addition, the proposed owner was required to identify whether “this policy [is] being funded via a premium financing loan or with funds borrowed, advanced or paid from another person or entity?” Id. Lincoln’s standard life insurance application, which required input from both the proposed insured and the proposed owner, contained similar or identical questions,

Lincoln relied on the representations made by or on behalf of applicants to determine whether a policy was being obtained for the purpose of resale in the life settlement market. If Lincoln determined that there was such an intent, the application would be declined.

In addition to relying on the information provided in the application and related forms, companies hired investigators to conduct “inspection reports.” An investigator doing an inspection report was expected to contact the agent and prospective insured to verify the information provided in connection with the application, including the answers to the STOLI-related questions discussed above. The investigator would then prepare a report. If the report disclosed material discrepancies, the carrier could conduct a further review or decline to issue the policy.

To combat STOLI, policies were monitored for changes in ownership, which could be indicative of STOLI. Companies also brought lawsuits to rescind what they believed to be STOLI policies, in some instances after the contestability period expired. Agents caught doing STOLI business were terminated.

B. The Scheme to Defraud the Insurance Providers

1. The Defendant’s Background

. The evidence establishes that Mr. Carpenter is a sophisticated businessman with considerable expertise in life insurance matters.. Soon after graduating from law school in 1979, he began working for the Northwestern Mutual Life Insurance Company. After working in underwriting, he became a licensed life insurance agent. In 1983, he became an agent for the New England Life Insurance Company, an affiliation that continued until 2004, Witnesses testified that he demonstrated a high level of knowledge regarding life insurance, which is unsurprising given his legal education and career in the insurance field. Based on the evidence, it is reasonable to conclude that his level of expertise with regard to life insurance matters surpassed that of most, if not all, of the other people involved in this case.

During his career, Mr. Carpenter was prominently involved in welfare benefit plans involving life insurance. A welfare benefit plan is a mechanism by which an employer can provide employees with various types of benefits. Welfare benefit plans are usually organized under one of two sections of the Internal Revenue Code. See 26 U.S.C. § 419; 26 U.S.C. § 419A. Certain welfare benefit plans, like the ones discussed during the trial, provide only death benefits. These plans generally operate in the following way: An employer adopts the plan and contributes to a trust, which purchases a life insurance policy on the covered employee and acts as the-owner and beneficiary of the policy. The employer pays the premiums to the trust, which pays the insurance carrier. When the insured dies, the trust receives the death benefit and distributes it to the beneficiary. ■ '

While still employed by Northwestern Mutual, Mr. Carpenter started a company called Benefit Conceptá and eventually became the trustee for several of the largest welfare benefit plans in the United States.

2. The Benistar Entities

During the time period relevant to this case, Mr. Carpenter controlled a number of business entities located in offices at 100 Grist Mill Road in Simsbury, Connecticut and 300 First Stamford Place in Stamford, Connecticut (the “Benistar Entities”). Of the numerous different entities that operated out of these locations, the most significant for purposes of this case are Benistar Admin Services, TPG Group, Grist Mill Trust, Grist Mill Capital, Avon Capital, and the Charter Oak Trust.

Benistar Admin Services (“BASI”) provided administrative services to the Benis-tar Entities. Most of the individuals who worked for the Benistar Entities received their paychecks from BASI. Don Trudeau was the President of BASI, and the defendant’s wife, Molly Carpenter, was its Chairman.

TPG Group (“TPG”) was responsible for collecting commission payments from life insurance carriers and disbursing them to agents associated with Benistar. TPG was often referred to as “the House.” Mr. Carpenter testified that his wife Molly and Mr. Trudeau controlled TPG.

The Grist Mill Trust was a multiple employer trust providing death benefits to covered employees of participating employers. Gov’t Ex. 1917 at 17. The corporate structure of Grist Mill Trust is somewhat unclear, but the signatories- on its bank account at JP Morgan Chase'were the defendant’s wife and Wayne Bursey, his late brother-in-law. . .

Grist Mill Capital (“GMC”) and Avon Capital were financing companies that loaned money to other Benistar Entities. Mr. Carpenter acknowledged at trial that he controlled GMC, and documents admitted into evidence show that he signed on its behalf as “Chairman of Managing Member.” The structure of Avon Capital is less clear. Many of the documents bear Mr. Trudeau’s signature.' However, Mr. Carpenter is listed as the signatory on both of Avon Capital’s bank accounts.

' The Charter Oak Trust was formed by the defendant to serve, and did serve, as a vehicle for obtaining STOLI policies, as will be discussed in detail below.

3. The Defendant’s Control of the Benistar Entities

The superceding'indictment alleges that Mr. Carpenter “was in control of the [relevant] Entities both in effect and, in many cases, through direct or indirect ownership interests.” Super. Ind. (ECF No. 54) ¶2. Mr. Carpenter denies that he was in control, But the evidence at trial establishes that the allegation in the indictment is well-founded. Four witnesses who worked for or with the Benistar Entities credibly testified that Mr. Carpenter was in- control. Though one of these witnesses had an incentive to implicate Mr. Carpenter in criminal wrongdoing, the others did not. All foui’ were consistent in testifying that everyone reported to him.

Mr. Carpenter’s denial is also refuted by documentary evidence, which demonstrates that he and Benistar employees consistently acted as though he was in charge. With regard to TPG Group, for example, the record includes an email sent by Molly Carpenter to Jenny Valedaserra and Jason Concatelli, employees of BASI, directing them to “hold up any payments” by TPG to agents “until Dan approves.” Gov’t Ex. 1926 at 1. The defendant was copied on the email, and there is. no doubt that “Dan” is a direct reference to him. In another email, the defendant told Ed Waesche, an internal life insurance agent and BASI employee, that a particular allocation of commissions between TPG and the internal agents was appropriate. Gov’t Ex. 1947 at 1. Finally, in a memorandum to employees of the Benistar Entities, the defendant mandated that TPG receive 40 percent of the commission or “no deal.” Gov’t Ex. 2033 at 2. The defendant added that “all deals” had to be “approved” by him. Id.

In addition, the evidence shows that the formal corporate structure of the various Benistar Entities had little meaning for the people involved. For instance, in a document sent by Mr. Carpenter to several Benistar employees, Mr. Waesche was listed as both the Chairman of a company called Benefit Plan Advisors, LLC and as the President of Grist Mill Capital. Gov’t Ex. 1922 at 2-3. But Mr. Waesche indicated that he did not recall holding these titles until he saw the document at trial. The evidence also shows that in communications with an insured, Mr. Waesche held himself out as Vice President of Advanced Markets of NOVA Benefit Plans, LLC, another Benistar Entity. Gov’t Ex. 1210 at 1. Mr. Waesche admitted on cross-examination that he created the title for himself.

The evidence also shows that corporate entities were created and discarded at Mr. Carpenter’s direction when it suited his purposes. For example, in a chain of emails between the defendant, Mr. Waesche and Missy Vallerie, the office manager in Stamford, Ms. Vallerie was directed to “[g]et rid of [Benefit Plan Ad-visors, LLC] everywhere.” Gov’t Ex. 1923 at 1. The defendant also reminded Mr. Waesche to “remember you are US Benefits Group, Inc now” and directed him to “[w]ork ... on new stationary etc etc[.] No more BPA.” Id. at 2. The last email in the chain is Ms. Vallerie’s response to the defendant: “OK We’ll deep six BPA.” Id. at 1. Mr. Waesche testified that the purpose of creating US Benefits Group and discarding Benefit Plan Advisors was to help create the impression that the Stamford office was not associated with the other Benistar Entities. I credit this testimony.

4. The Charter Oak Trust

a. Formation and Purpose of the Charter Oak Trust

The genesis of the Charter Oak Trust (“COT”) was a life insurance policy held by an insured named Marvin Carrin. Mr. Carrin, who at the relevant time was in his late seventies or early eighties, was a successful businessman. He was interested in life settlements and had sold a number of policies on the secondary market before being introduced to Mr. Carpenter through a connection at Phoenix. The defendant helped Mr. Carrin obtain a policy that was placed in the Grist Mill Trust. The premiums for the policy were financed entirely by GMC, and the defendant understood that Mr. Carrin intended to sell the policy on the secondary market. This policy provided the defendant with an introduction to STOLI business. As the defendant would later remark to Mr. Waesche, Mr. Carrin was more than “just a client,” he was a “partner” who “taught us a lot when we began this journey together two years ago.” Gov’t Ex. 2169 at 1.

The defendant’s experience with Mr. Carrin led him to create the Charter Oak Trust as a vehicle for doing STOLI business. On its face, COT appeared to be a multiple employer death benefit-only welfare benefit plan organized under § 419 of the Internal Revenue Code. But COT was formed to engage in transactions like the one involving Mr. Carrin. Mr. Carpenter denies this. According to his testimony, the purpose of COT was to fund, by means of what he calls a “modified split-dollar arrangement,” life insurance policies that the insureds themselves would purchase from the trust after two years.

Overwhelming evidence refutes the defendant’s account. Several witnesses credibly testified that COT was formed to serve as a vehicle for acquiring life insurance policies for resale to investors. Stefan Cherneski, an employee of the 'Benistar Entities, testified that COT was structured to appear like an ordinary welfare benefit plan but that its true purpose was to procure policies on elderly insureds for resale in the life.settlement market. His testimony is corroborated by the testimony of Ed Waesche and Charley Westcott, a licensed life insurance agent with Lincoln who recruited insureds to participate in COT. In addition, the evidence establishes that individuals recruited to participate in COT as straw insureds believed their policies would be sold to third parties after two years.

Documentary evidence corroborates the witnesses’ testimony. As éarly as December 2006, Mr. Carpenter and others at Benistar began to discuss a business model predicated on obtaining high-value life insurance policies for resale on the secondary market. On December 14, 2006, Jack Robinson, an attorney who held the title of General Counsel of Benistar, sent an email to the defendant and others to which he attached a “CONFIDENTIAL spreadsheet on our costs and profit for discussion tomorrow.” Gov’t Ex. 2014 at 1 (emphasis in original). The spreadsheet illustrates what GMC could earn by financing and selling a hypothetical life insurance policy with a face value of $5 million and an annual premium of $300,000. The spreadsheet provides an estimate of the debt GMC would incur by borrowing funds to pay the premiums. It then calculates the total proceeds from a sale of the policy at different percentages of the face value. Various costs and fees are then subtracted from the total. These include the cost of repaying GMC’s debt and an Origination Fee (20 percent of total premiums paid), a Placement Fee (5 percent of the policy’s face value), a Premium Funding Fee (3 percent of the policy’s face value), and a Termination Fee (1 percent of the policy’s face value). The spreadsheet indicates that any remainder would be distributed to the insured.

Following revisions by Mr. Robinson, this spreadsheet was resubmitted to the defendant on December 17, 2006. Mr. Robinson wrote that, after factoring' in the changes, GMC could “make a $200K profit on each $5MM deal,” and the client would “hit[ ] a home run[ ]” if the policy was sold above 23 percent of its face value. Gov’t Ex. 2017 at 1. The email concluded that there was a lot of money to be made using the welfare benefit plan “approach,” and referred to “Plainfield,” meaning Plainfield Asset Management LLC, a hedge fund. Id. As discussed below, Plainfield would ultimately provide a $35 million credit facility to fund premiums for COT policies. The spreadsheet attached to this email revises the fees that GMC would collect out of the total proceeds of the sale. Gone are the Premium Funding Fee and the Termination Fee; only the Origination Fee and Placement Fee remain. The change is significant because these two fees, and no others, were ultimately integrated into the COT documents.

It is apparent that Mr. Robinson’s revised spreadsheet, which became the basis for COT, contemplated the resale of life insurance policies on the secondary market after the contestability period. There is no indication of an intent to sell policies to the insureds themselves. Indeed, the Origination and Placement fees contemplated by Mr. Robinson’s revised spreadsheet could be expected to act as a deterrent to a purchase by an insured. For example, Henry Cooper,- who became a COT insured, held a Phoenix life insurance policy with a face amount of $5 million. To buy his policy from COT, he would have to pay fees of nearly $300,000, in addition to reimbursing COT for approximately $230,000 in premiums. This is the functional equivalent of paying an interest rate greater than 100 percent.

The record also contains written communications regarding the sale of COT policies on the secondary market, many of which involved the defendant. The following are illustrative: On March 12, 2007, the defendant received an email from- Mr. Waesehe that compared the profitability of policies on the lives of “MC” and “DS.” Gov’t Ex. 2032 at 1. The testimony at trial established that “MC” was Marvin Carrin and “DS” was David Siewert, another COT participant. Attached to the email is a set of profit analyses that mirrors the revised spreadsheet discussed above.

The same day, the defendant sent a number of Benistar employees a memorandum addressing COT “underwriting and compensation issues.” Gov’t Ex. 2033 at 2. In this document, the defendant wrote that “[w]e,” meaning those who were participating in the administration of COT, “do not get paid until if and when the deal is- completed satisfactorily 25-30 months from now.” Id at 4. The time period the defendant mentions is significant because it corresponds to the two-year contestability period. It must be concluded that the defendant was referring to the sale of policies on the life settlement market.

On July 30, 2007, Mr. Westcott sent an email to the defendant concerning a potential COT client. According to Mr. Westcott, the client was “thinking after 2 yrs to turn over the profit to charity.” Gov’t Ex. 2065 at 1. The defendant responded by telling Mr. Westcott to “go for it.” Id. This exchange makes sense only if the client expected to earn a profit from the sale of his policy to an investor..

On May 21, 2008, the defendant received an email from Mr. Trudeau regarding a policy on the life of Judith Amsterdam, who would ultimately become a COT participant. In the email, Mr. Trudeau acknowledged that Ms. Amsterdam’s life expectancy was longer than investors would like. Even so, he advocated for funding her policy because “the secondary market is starting to look at these types of policies more favorably and I believe that they will gain in value over the next few years.” Gov’t Ex. 2124 at 1. This email makes no sense if the purpose of COT was to sell the policies to the insureds. •

On December 16, 2008, the defendant received an email from Mr. Waesehe that discussed the possibility of improving the marketability of Lincoln policies. Mr. Waesehe wrote that “with this idea we could stay in this market and have the best [internal rate of return] in the market place and when it comes to buy time I can’t imagine that [the policies] wouldn’t sell at a significant premium.” Gov't Ex. 2174 at 1. The defendant’s response: “This is a brilliant idea” that “could be a game changer for us. ... Do not share this idea with anyone else.” Id This exchange also makes no sense if the purpose of COT was to sell policies to insureds.

Another clear indicator of Mr. Carpenter’s intent to sell policies on the secondary market is provided by an email sent by his assistant, Kevin Slattery, to Mr. West-cott on November 16, 2008, regarding COT. See Gov’t Ex. 2156. The defendant was copied on the email, and it was signed “Dan & Kevin.” Id. at 1-3. At the trial, the defendant attempted to distance himself from this email, but the evidence'easily supports a finding that he wrote it. The email- states: “we need ... to get policies [the] Market wants to buy. The Market knows what it wants, and we should feed it the same. Give the Market what it wants.” Id.

The defendant testified that COT was not permitted to sell a policy to anyone but the insured and that the insureds were expected to, buy the policies after two years. Indeed, according to the defendant, it would have been a “financial disaster for Grist Mill Capital” if the insureds did not purchase their policies because this was the only mechanism by which GMC could repay its indebtedness to Ridgewood. The defendant’s assertion that he planned to sell the policies to the insureds must be rejected. No provision in the trust documents has been cited or found that purported to prevent COT from selling policies to third parties, and the defendant has conceded that the “employers” involved in COT had no obligation to repay anything at the end of the two year period. In addition, he testified that neither COT nor GMC investigated the accuracy of the financial information in the paperwork submitted by insureds. A person in the defendant’s position who thought he could avoid financial disaster only by selling policies to the insureds themselves could be expected to. take, steps to ensure that the financial information he received concerning their ability to buy the policies was accurate. The defendant contends that he relied on Mr. Waesehe and others to provide accurate information and they betrayed him. At the same time, however, he denies that Mr. Waesehe ever worked for him or on his behalf.

The defendant’s testimony that COT was not permitted to sell a policy to anyone but the insured is contradicted by the evidence of what he said and did during the conspiracy. In addition to the evidence discussed above, the record shows that when a COT insured named Sash Spencer died, the trust refused to pay the beneficiary on the ground that a beneficial interest in the policy had been sold to Grist Mill Capital. There is no doubt the defendant made the decision to deny the claim on this basis. Moreover, the defendant ultimately tried to sell COT policies himself through Chad Gerdes, an active participant in the life settlement market.

Mr. Carpenter points to certain provisions in the trust documents to support his claim that COT policies were not purchased for resale to investors. It is apparent, however, that these provisions served no purpose except to disguise the true nature of COT. For example, paragraph 4 of' the Disclosure, Acknowledgment and Certification Agreement, which was signed by every insured who participated in the trust, provides: “The Policy is not being purchased with the intent of selling it in a settlement or viatical sale, and there have been no offers to sell or buy the Policy. Neither Agent, nor- Funder, nor the Trust have recommended such a sale.” Gov’t .Ex. 2066 at 26. However, the credible evidence proves that the straw insureds hoped to profit from the sale of the policies to investors. Similarly, section 5.01 of the Declaration of Trust obligates a participating employer to “contribute to the -Trust an amount sufficient to meet the costs ■ for benefits selected in the Adoption Agreement executed by the Employer.” Gov’t Ex. 2020 at 8. This provision purports to hold the employer responsible for contributing premium payments to the trust. But no such payments were actually expected or made.

b..Operation of Charter Oak Trust

i. Funding Policy Premiums

Financing for COT policies was provided by an entity called Ridgewood Finance, Inc. Ridgewood was a portfolio company owned by Plainfield Asset Management, LLC, the hedge fund mentioned earlier. Edward Stone, who worked for Plainfield, testified that Ridgewood was set up as a speciality finance lender. In this capacity, Ridgewood made loans to other finance companies,. often at high rates of interest. In late 2006, Ridgewood entered into an agreement with GMC to provide a $35 million credit facility for the purpose of funding COT policy premiums.

Plainfield stood, to benefit from this transaction in two ways. The first was direct — Plainfield would be able to recover interest and fees on the amounts- Ridge-wood loaned to GMC. There was also the possibility of an indirect benefit. At the pertinent time, one of the areas in which Plainfield was active, through another portfolio company called Caldwell Funding Corporation, was the life settlement market. Plainfield understood that COT policies would be obtained for the purpose of resale on the secondary market and envisioned that Caldwell would be able to bid on the policies. Caldwell could then generate additional profit for Plainfield by reselling policies or holding them to maturity,

The agreement between Ridgewood and Grist Mill Capital was memorialized in a series of documents, which provided for the following' arrangement: At its discretion, Ridgewood would advance funds from the $35 million credit facility to Grist Mill Capital for the purpose of paying premiums on life insurance policies owned by COT. At the end of the loan period, GMC would repay the loan amount plus interest. The loan was secured by “a first priority perfected and continuing security interest in and to all of [GMC]’s right, title and interest in and to ... all assets and personal property.” Gov’t Ex. 1902 at 17. GMC would use the money advanced by Ridgewood to fund life insurance polices that would be placed in COT. Under GMC’s agreement with COT, GMC was entitled to recover’ the value of its loan to COT, plus origination and placement fees. As collateral, COT assigned to GMC a power of attorney over the policies COT owned ■ so long as GMC owed money to Ridgewood. By operation of these various agreements, Ridgewood’s loan was secured primarily by the COT policies themselves, and if GMC defaulted, Ridgewood could step in and exercise control over the policies.

The parties agreed that Christiana Corporate Services, Inc., a Delaware corporation, would act as the custodian of documents and insurance trustee. Christiana was responsible for disbursing funds to pay premiums. This process involved several steps. GMC was first required to compile and submit to Ridgewood a number of documents, including life insurance premium illustrations, a Health Insurance Portability and Accountability Act form, a complete medical underwriting file or life expectancy report, and a copy of the original insurance application. Ridgewood would use these documents to complete an internal underwriting process to determine whether to fund the premiums. If Ridge-wood decided to fund the policy, it would issue a commitment letter to Wayne Bur-sey,'who acted as the trustee of COT, and Kathy Kehoe, a Benistar employee. If GMC found the terms of the commitment letter acceptable, it would submit to Ridge-wood a funding memorandum and disbursement request. Simultaneously, GMC would submit to Christiana a “closing package” that included all the documents ordinally submitted to Ridgewood along with the funding memorandum and disbursement request. Christiana, in turn, would transmit the “dosing package” to Ridgewood, which would have five business days to authorize funding. In the event funding was authorized, Ridgewood would wire funds to an account in GMC’s name at Christiana. Ridgewood would then direct Christiana to transfer the funds to an account in COT’s name at PNC Bank and to authorize the release of the , funds from that account to the insurance carrier.

Ridgewood had a right to decline funding if its internal underwriting process revealed that a particular policy was not a sound investment. And it did so on a number of occasions. When this occurred, the defendant had a choice: fund the policy or walk away. The record shows that in some instances, he chose to have GMC fund the policies.

ii. Recruiting Prospective Insureds

COT was not widely marketed in order to reduce the risk that the true nature of the trust would be revealed. As the defendant stated in an email to several Benistar employees and external life insurance agents, “[W]e fly under the radar ... don’t talk to anyone ... don’t give presentations to anyone.” Gov’t Ex. 2039 at 2. Consistent with the defendant’s directive, COT was marketed to “friends and family.” COT’s ideal insured was a person over 65 with substantial wealth. Policies on the lives of people over 65 were easier to value and sell in the secondary market. And carriers were more apt to approve applications seeking coverage of $2 million and up if the applicants appeared to be wealthy.

People were recruited to participate in COT as straw insureds by third parties with whom COT had a preexisting -business relationship, including the following: Ken Landgaard, who operated a company called Tranen Capital Alternative Investment Fund, Ltd.; Bruce Mactas, a life insurance agent who operated a financial planning company in New York City; Fred Prelle, who ran an insurance general agency in Texas; and Derek Siewert, a life insurance agent. These recruiters or their employees often completed insurance applications and related forms, which would then be processed by employees of the Benistar Entities at the 100 Grist Mill Road offices in Simsbury. In return, they were paid part of the first-year commission by TPG, even if they were not licensed agents.

In addition, a number of straw insureds were recruited directly by Ed Waesche. Some of these individuals were referred to Mr. Waesche by Marvin Carrin in return for a small percentage of Mr. Waesche’s commission. After Mr. Carrin presented the initial pitch to the prospective applicant, ■ Mr. Waesche would work ■ directly with the applicant to complete the necessary paperwork.

To induce people to participate in COT as straw insureds, the agents used a sales pitch learned from discussions at the 100 Grist Mill Road offices. The prospective insureds were promised free life insurance for two years. They were told that if they died during the two-year period, the policy proceeds would be disbursed to their beneficiaries. After two years, the policy would be sold and the insured could potentially profit from the sale. No effort was made to attract people with an interest in buying long-term life insurance coverage then or later.

For some COT insureds, the recruiting pitch included offering to create a limited liability company so the individual could participate in COT. For example, Mr. Waesche helped Henry Cooper create an entity called HLC Real Estate, LLC. Mr. Cooper testified that this company was created solely to allow him to participate in COT, and that he never intended to transact any business under the HLC Real Estate name.

iii. Completing Applications

In some instances, prospective COT insureds completed the application for the policy and related documents with help from the agent who recruited them. In others, they signed blank documents to be completed by the agent. Regardless of the manner in which the documents were' completed, they invariably contained misrepresentations designed to prevent the carriers from discovering that the policies were intended for resale on the secondary market. In this way, the defendant and his associates sought to induce providers to issue STOLI policies they otherwise would have refused to issue,

All the applications in the record contain inaccurate answers to questions used by the carriers to . detect STOLI policies. Rather than discuss each question and answer on every application, I will group the relevant questions into categories and provide examples of the answers that were given.

All the applications asked about the source of funds for premiums. For exam-pie, applications submitted to Phoenix on behalf of Luella Paulsrud and Beat Zahner included the following questions:

Will any of the first year or subsequent premiums for the policy be borrowed by the proposed owner or proposed insured or by any other individual, trust, partnership, corporation or similar or related entity?

Will the owner, now or in the future pay premiums funded by an individual and/or entity other than the proposed insured?

See Gov’t Ex, 501 at 5; Gov’t Ex. 1201 at 5. Similar questions in other carriers’ applications also encompassed any sort of borrowing by either the insured or the policy owner,1 Regardless of their wording, these questions were invariably answered “no.” As discussed above, however, GOT was borrowing from GMC and/or Ridgewood to pay the premiums.

The defendant testified that these questions were answered correctly. He stated that the agreement between COT and GMC was not "premium financing,” which would be characteristic of STOLI and thus “bad,” but a “modified split-dollar arrangement,” which was acceptable to the carriers and thus “good.” A “split-dollar arrangement” is an agreement between an owner and non-owner of a life insurance policy, most often an employer and employee, to split premium payments in exchange for a split of the death benefit. The carriers were willing to accept such arrangements between an employer and employee. But premium funding arrangements that involved third parties raised STOLI concerns, as the defendant knew at the time. The series of agreements between Ridgewood, GMC, COT, and the insureds created the very type of premium funding arrangement carriers sought to discover by asking questions about the source of premium payments.

Given the defendant’s awareness of the carriers’ opposition to STOLI, his testimony that the questions on the applications were answered correctly must be rejected. The arrangement between COT and GMC was a form of premium financing. Moreover, most of the applications asked not whether the insured would rely on “premium financing,” but more generally whether funds would be borrowed, either by the insured or the policy owner. The accurate answer to these questions was “yes.”.

The applications also asked whether offers of financial inducements had been made to the prospective insured. For example, the Phoenix SOCI Form asked:

Have the proposed insured or proposed owner, or any individual, trust, partnership, corporation or similar or related entity received cash or other financial ■ inducements in connection with this application or the purchase of this insurance?

Gov’t Ex. 2009 at 2. Questions on this topic also were answered “no.” However, the pitch used to recruit COT insureds included a promise of free life insurance for two years. As the life insurance carrier witnesses testified, such a promise -constitutes the type of financial inducement the applications were designed to uncover. In addition, COT insureds were told that they could receive a payout after their policy was sold. Accordingly, the truthful answer to all these questions was “yes.”

A third category of questions for which false answers were given asked whether any discussions had occurred regarding a sale of the policy. For example, Penn Mutual required applicants to answer the following question:

Have you been involved in any discussion about the possible sale or assignment of this policy to a Life Settlement, Viatical or other secondary market provider?

Gov’t Ex. 101 at 4. These questions were invariably answered “no.” However, the evidence establishes that recruiters induced prospective applicants to participate by telling’ them that when the policy was sold on the life settlement market after two years, they could share in the profits from the sale. And the communications excerpted above show that the defendant and other Benistar employees frequently discussed the sale of policies. Accordingly, the correct answer to these questions was “yes.”

The applications also contained misrepresentations on questions related to whether a third party would have an interest in the policy. Several of the insureds completed a Phoenix application that asked:

Does the proposed insured or proposed owner have any understanding or agreement providing for a party, other than the owner, to obtain any legal or equitable right, title or interest in the policy or entity owning the policy?

Gov’t Ex. 501 at 5. Questions in this category were always answered “no.” As shown by the discussion of the funding arrangement, however, COT assigned a security interest in the policies to GMC which, in turn, assigned its right to control the policies to Ridgewood. Thus, the correct answer to these questions was “yes.”

Other questions that were answered falsely related to life expectancy reports. For example, a Phoenix application asked:

Has any entity, including, for example, any life expectancy valuation company or