In the Courts

The SEC sought an officer and director bar, disgorgement of ill-gotten gains and a financial penalty. But U.S. District Judge Manuel Real of the Central District of California didn't buy it. After a nine-day bench trial, Real rejected every claim in the SEC's 57-page complaint.

“No documentary evidence or witness testimony presented at the trial tended to show that any of the transactions were shams,” Real wrote in his Dec. 10 decision. “In fact, everybody involved in the various transactions testified that they were actual, legitimate deals.”

Real concluded that “revenue was properly recognized on all six transactions,” and that there were “valid economic justifications” for all of them. The only evidence that supported the SEC's position, the judge wrote, was testimony from an expert witness, Professor Carla Hayn. However, the judge did not find her testimony persuasive, and “gave very little weight” to it.

Nor did Real find the defendants were negligent, writing that Tekulve “worked diligently on ensuring he got the accounting right.” Real also found the insider trading allegations to be without merit.

In early December, the SEC also came up short when a federal jury in Kansas rejected all 12 of the agency's securities fraud claims against Stephen Kovzan, chief financial officer of NIC Inc. And in October, a jury in Dallas found against the SEC in an insider trading case against billionaire Mark Cuban. ' Jenna Green, The National Law Journal

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First Circuit Overturns New Trial Order in Fraud Case

A federal appeals court in November, rejecting a judge's ruling about alleged prosecution errors, has blocked a new trial for a businessman on mail and wire fraud charges. United States v. Carpenter, 2013 U.S. App. LEXIS 23678 (1st Cir. 11/25/13).

The U.S. Court of Appeals for the First Circuit on Nov. 25 reversed U.S. District Judge George O'Toole Jr.'s decision in September 2011 to grant Daniel Carpenter a new trial in Massachusetts federal district court. The appellate panel also reinstated the jury's 2008 conviction of Carpenter on 14 counts of wire fraud and five counts of mail fraud. The First Circuit remanded the case for “prompt” sentencing.

The prosecution was rooted in tax-deferred real estate exchange deals Carpenter performed through his company, Benistar Property Exchange Trust Co. Inc., between August and December 2000. Prosecutors said Carpenter misused the exchangors' investment money to trade in high-risk options.

Carpenter did not speak directly with the investors but he did execute many of Benistar's contracts with them. Also, he did not create the marketing materials, but he approved them.

At issue in the appeal was the propriety of the government's closing argument in the case against Carpenter.

First Circuit Chief Judge Sandra Lynch said in the court's ruling that none of the three features of the government's closing argument ' that O'Toole raised on his own'were improper. Judge Jeffrey Howard and Senior Judge Norman Stahl joined Lynch.

O'Toole's new-trial order recited three alleged improprieties: overstatements of Carpenter's promises of “safety and security”; arguments that Benistar described its business as “parking” money in “escrows”; and repeated references to Carpenter's profit motive.

“Because the district court committed an error of law in determining that the closing argument was improper, it necessarily abused its discretion in granting the new trial, and we reverse,” Lynch wrote.

On the issue of Carpenter's intent, Lynch wrote that “had there been full disclosure, especially after Carpenter knew his risky investment strategy had failed, the exchangors would never have made the investments to begin with or maintained them with Benistar.”

Carpenter claimed that the government engaged in excess emphasis on the riskiness of his investment strategy and his losses, mischaracterized some evidence and relied on a prosecutor's personal opinion that Carpenter had committed fraud. In response, Lynch wrote, “Although they may sound like the prosecutor's opinions in isolation, the comments that Carpenter cites as improper opinions actually came in the context of properly encouraging the jury to evaluate the evidence.”

The Boston U.S. Attorney's Office is “pleased with the appeals court's ruling in this matter,” spokeswoman Christina DiIorio-Sterling said. Assistant U.S. Attorney Kelly Begg Lawrence argued for the government.

The First Circuit's ruling marked the latest review by the appeals court.

Carpenter was tried twice on mail and wire fraud charges. He successfully challenged his conviction after the first trial in 2005. The appeals court, divided, upheld a determination that the government's closing argument was improper in that case.

In 2008, Carpenter was retried ' and convicted again. The First Circuit in its ruling this week overturned O'Toole's decision to grant a new trial.

Carpenter has a pending petition for certiorari at the U.S. Supreme Court that “raises the issue of whether citizens are entitled to have their acquittal issue ruled on along with a new trial order,” said his appellate lawyer, Martin Weinberg, a Boston criminal defense lawyer.

Weinberg said Carpenter is also planning a petition for First Circuit rehearing on its decision about the new trial.

“We believe after almost 10 years of litigation that the Sixth Amendment prevents any sentencing at all or any retrial,” Weinberg said. ' Sheri Qualters, The National Law Journal

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SEC Losing Streak Continues in Los Angeles Fraud Case

The U.S. Securities and Exchange Commission (SEC) struck out across the board in an accounting fraud case against two former executives from a Southern California water treatment company. Securities and Exchange Commission v. Jensen, 2013 U.S. Dist LEXIS 173532 (C.D. Ca. 12/10/13).

In June 2011, the SEC charged former Basin Water Inc. chief executive officer Peter Jensen and former chief financial officer Thomas Tekulve Jr. with fraudulently inflating the company's revenue by improperly including revenue from six sales transactions in reports filed with the commission. The commission alleged Basin overstated its 2006 revenues by 13% and its 2007 revenues by 74%. Jensen was also charged with insider trading.

The SEC sought an officer and director bar, disgorgement of ill-gotten gains and a financial penalty. But U.S. District Judge Manuel Real of the Central District of California didn't buy it. After a nine-day bench trial, Real rejected every claim in the SEC's 57-page complaint.

“No documentary evidence or witness testimony presented at the trial tended to show that any of the transactions were shams,” Real wrote in his Dec. 10 decision. “In fact, everybody involved in the various transactions testified that they were actual, legitimate deals.”

Real concluded that “revenue was properly recognized on all six transactions,” and that there were “valid economic justifications” for all of them. The only evidence that supported the SEC's position, the judge wrote, was testimony from an expert witness, Professor Carla Hayn. However, the judge did not find her testimony persuasive, and “gave very little weight” to it.

Nor did Real find the defendants were negligent, writing that Tekulve “worked diligently on ensuring he got the accounting right.” Real also found the insider trading allegations to be without merit.

In early December, the SEC also came up short when a federal jury in Kansas rejected all 12 of the agency's securities fraud claims against Stephen Kovzan, chief financial officer of NIC Inc. And in October, a jury in Dallas found against the SEC in an insider trading case against billionaire Mark Cuban. ' Jenna Green, The National Law Journal

'

First Circuit Overturns New Trial Order in Fraud Case

A federal appeals court in November, rejecting a judge's ruling about alleged prosecution errors, has blocked a new trial for a businessman on mail and wire fraud charges. United States v. Carpenter, 2013 U.S. App. LEXIS 23678 (1st Cir. 11/25/13).

The U.S. Court of Appeals for the First Circuit on Nov. 25 reversed U.S. District Judge George O'Toole Jr.'s decision in September 2011 to grant Daniel Carpenter a new trial in Massachusetts federal district court. The appellate panel also reinstated the jury's 2008 conviction of Carpenter on 14 counts of wire fraud and five counts of mail fraud. The First Circuit remanded the case for “prompt” sentencing.

The prosecution was rooted in tax-deferred real estate exchange deals Carpenter performed through his company, Benistar Property Exchange Trust Co. Inc., between August and December 2000. Prosecutors said Carpenter misused the exchangors' investment money to trade in high-risk options.

Carpenter did not speak directly with the investors but he did execute many of Benistar's contracts with them. Also, he did not create the marketing materials, but he approved them.

At issue in the appeal was the propriety of the government's closing argument in the case against Carpenter.

First Circuit Chief Judge Sandra Lynch said in the court's ruling that none of the three features of the government's closing argument ' that O'Toole raised on his own'were improper. Judge Jeffrey Howard and Senior Judge Norman Stahl joined Lynch.

O'Toole's new-trial order recited three alleged improprieties: overstatements of Carpenter's promises of “safety and security”; arguments that Benistar described its business as “parking” money in “escrows”; and repeated references to Carpenter's profit motive.

“Because the district court committed an error of law in determining that the closing argument was improper, it necessarily abused its discretion in granting the new trial, and we reverse,” Lynch wrote.

On the issue of Carpenter's intent, Lynch wrote that “had there been full disclosure, especially after Carpenter knew his risky investment strategy had failed, the exchangors would never have made the investments to begin with or maintained them with Benistar.”

Carpenter claimed that the government engaged in excess emphasis on the riskiness of his investment strategy and his losses, mischaracterized some evidence and relied on a prosecutor's personal opinion that Carpenter had committed fraud. In response, Lynch wrote, “Although they may sound like the prosecutor's opinions in isolation, the comments that Carpenter cites as improper opinions actually came in the context of properly encouraging the jury to evaluate the evidence.”

The Boston U.S. Attorney's Office is “pleased with the appeals court's ruling in this matter,” spokeswoman Christina DiIorio-Sterling said. Assistant U.S. Attorney Kelly Begg Lawrence argued for the government.

The First Circuit's ruling marked the latest review by the appeals court.

Carpenter was tried twice on mail and wire fraud charges. He successfully challenged his conviction after the first trial in 2005. The appeals court, divided, upheld a determination that the government's closing argument was improper in that case.

In 2008, Carpenter was retried ' and convicted again. The First Circuit in its ruling this week overturned O'Toole's decision to grant a new trial.

Carpenter has a pending petition for certiorari at the U.S. Supreme Court that “raises the issue of whether citizens are entitled to have their acquittal issue ruled on along with a new trial order,” said his appellate lawyer, Martin Weinberg, a Boston criminal defense lawyer.

Weinberg said Carpenter is also planning a petition for First Circuit rehearing on its decision about the new trial.

“We believe after almost 10 years of litigation that the Sixth Amendment prevents any sentencing at all or any retrial,” Weinberg said. ' Sheri Qualters, The National Law Journal

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