Opinion ID: 2643963
Heading Depth: 2
Heading Rank: 3

Heading: Carpenter's Trading Strategy and Losses

Text: In reality, Carpenter used the exchangors' funds to trade in risky assets, including stock options. Carpenter primarily sold put options, which allow the optionholder to sell shares of stock to the option seller in the future at an agreed-upon price within an agreed-upon timeframe. Generally, the holder of a put option will make money when the price of the underlying stock decreases -6- during the option period, while the seller of the option will make money when the price of the underlying stock increases during the option period. Many of Carpenter's trades were naked or uncovered, meaning that Carpenter did not own the underlying shares or take an offsetting position. Naked or uncovered option trading increases a trader's risk of loss. Carpenter's trading strategy succeeded at first, from 1998 to 2000, and the additional gains beyond the promised 3% or 6% annualized return increased the company's, and his own, profit. During that time, Benistar's clients were paid the amounts promised to them. But Carpenter's investments began to turn in the spring of 2000. From late March to late May 2000, Carpenter lost approximately one million dollars from Benistar's Merrill Lynch trading account as various stocks fell significantly during the option periods. Carpenter's strategy ultimately failed completely when the NASDAQ stock market crashed in late 2000. By the end of September 2000, Carpenter had lost about four million dollars. The period covered by the indictment started to run after Carpenter had already suffered significant losses. Even as Carpenter's losses mounted, Benistar continued soliciting business using the same marketing materials with the same language about safety, escrow accounts, and promised rates of return, even though Carpenter continued to employ the same trading strategy. By the beginning of 2001, Carpenter had lost approximately nine million -7- dollars belonging to seven exchangors who had contracted with Benistar between August and December 2000. Those exchangors were never paid the promised 3% or 6% interest and lost the vast majority of their principal.