FAQs About the New York Judgment Against the Trump Organization and Family

There is a lot to unpack from Judge Engoron’s 39-page opinion and order yesterday finding fraud by the Trump Organization and its principals. Due to the multiplicity of issues, I’m going to use a “frequently asked questions” format. 

What is this case all about?

The New York State Attorney General filed a civil suit against the Trump Organizations, some of its related companies and individuals who were officers in those companies, including Donald Trump, Donald Trump, Jr. and Eric Trump. Ivanka Trump has been excluded as a defendant due to a prior appellate court decision. 

The suit claims that all of the defendants “committed repeated and persistent fraud by preparing, certifying and submitting to lenders and insurers false and misleading Statements of Financial Condition,” all for the benefit of Donald Trump. Although there is a great deal of accounting wiggle room in determining the value of property, the Attorney General claims that the defendants’ overvaluations were “egregious.” 

Did this opinion and order come after a trial?

No, we are still in the pretrial stage of this. There has previously been an injunction issued against the Trump Organization (upheld on appeal twice) to prevent it from transferring or otherwise disposing of property. 

The current matter concerns Motions for Summary Judgment, one filed by the Attorney General and the other by the Trump Organization. A Motion for Summary Judgment usually claims that the facts are clear enough that it is not necessary to go through an entire trial to establish them. Defendants in their motion claimed that “there is nothing here” and that the suit should be dismissed. The Attorney General asked for Summary Judgment on only one of the claims, the one alleging fraud. 

Why is this case going to a bench trial where the judge makes the decisions rather than by a jury?

Since Donald Trump is claiming in the media that this judge is biased against him, you would think he would be demanding a jury trial where 12 people would decide the case. There is a limited time after a case is filed in which to demand a jury trial. For reasons I am at a loss to explain, the defendants’ lawyers did not make a timely demand and the period to demand a jury trial has expired. Therefore, Judge Engeron is hearing the case because of a decision (or lack thereof) by the defendants. 

Who prevailed in the Motions for Summary Judgment?

The Attorney General did. Defendants’ Motion for Summary Judgment was denied. The Court found that the defendants committed fraud, the Trump Organization’s certificate to exist in New York is revoked, defense attorneys were fined, and the only matter remaining on the first count of the lawsuit is how much the State of New York is going to be owed. 

Why were the defendant’s attorneys each fined $7,500?

Judges hate it when lawyers do two things: continue to argue matters that have already been decided (here, TWICE on appeal) and make legal arguments that misquote cases. 

The first analogy that comes to mind is when someone contends that the Bible says: “There is no God.” Though that is an accurate quote, the phrase preceding it says: “The fool has said in his heart.” Defendants did the exact same thing in quoting one of their supporting cases. Really, really bad form. 

Isn’t pulling a corporation’s certificate to operate a truly severe action?

Yes, and it does not happen often. Judge Engoron noted that civil cases do not offer the same remedies as criminal ones, such as jail. When everything else has been tried and nothing else worked, only extreme measures are left. 

Some parts of the judge’s opinion have led to some talking points by the defendants. 

“How can there be fraud if we have never defaulted on a loan resulting from the financial statements?”

This is worth a Lawdromat article of its own. We usually think of money damages as restitution to the person harmed. If I am guilty of fraudulently obtaining $1,000 from you, I owe you that money back. This is restitution. 

The Attorney General here is asking for up to $250 million under a completely different, but well established, legal principle called disgorgement. Disgorgement focuses on the gain to the wrongdoer rather than the loss to the victim. As a previous New York case said: “Disgorgement aims to deter wrongdoing by preventing the wrongdoer from retaining ill-gotten gains from fraudulent conduct. Accordingly, the remedy of disgorgement does not require a showing or allegation of losses to consumers or the public; the source of the ill-gotten gains is ‘immaterial’.” 

It therefore makes no difference whether there was a default or not so long as there was fraudulent activity. 

“Even wrong valuations aren’t fraudulent because there was a disclaimer about the accuracy of the numbers.” 

From the opinion:

In his sworn deposition, Donald Trump said: “Well, they call it a ‘disclaimer.’ They call it a ‘worthless clause’ too because it makes the statement ‘worthless’.” Donald Trump goes on to say that “I have a clause in there that says, don’t believe the statement, go out and do your own work. This statement is ‘worthless;’ it means nothing.”

In finding that the “worthless” claim was indeed worthless (judge’s words, not mine), the judge cited a New York case finding that disclaimers are not effective when the facts are “peculiarly within the defendant’s knowledge.” The judge goes into much greater detail, but you get the point – disclaimers cannot be used to cover up misconduct that you create. 

“Mar-a-Lago is not overvalued. If anything, it is UNDERvalued.”

Mar-a-Lago was one example the judge used to show defendants’ fraudulent use of overvaluation. It is contained in pages 25-27 of the opinion. It makes little sense to go into the weeds about the judge’s analysis here. 

What is curious, however, is that the defendants’ current post-decision comments are not referencing (as far as I have seen) the court’s other detailed overvaluations: Seven Springs Estate in Westchester County, NY; Trump Park Avenue, 40 Wall Street, The Trump Tower Triplex, Aberdeen in Scotland; and U.S. golf clubs. These analyses cover twelve pages of the opinion. 

What is coming next?

The Summary Judgment only dealt with Count I of the complaint. The remaining counts will require additional evidence at a trial that is scheduled to begin next month. You can also expect the defendants to appeal yesterday’s order. It is never wise to predict what an appellate court will decide, but decisions such as this one, exhaustively annotated, are seldom overturned.

Why Stopping a Subpoena Can Be a Big Thing

The State of New York has sued the Trump Organization and Trump family members individually as part of investigation into several questionable financial dealings. Oversimplified, the suit suggests that the defendants carried at least two sets of financial books. One set of books purportedly inflated property values for purposes of obtaining financing. Another one deflated values for tax purposes. 

This is a civil suit that seeks financial damages, unlike a criminal suit that might result in jail time. 

New York issued subpoenas to Trump family members to testify under oath in a deposition. Today’s hearing was to hear Trumps’ objections to these subpoenas. The court denied Trumps’ objections and ordered the family members to appear for depositions within a few weeks’ time. The order will certainly be appealed. 

One may ask why this is such a big deal. After all, Eric Trump has had his deposition taken previously in this case and “pleaded the fifth” more than 500 times. 

As anyone who has taken a Government class will recall, you are never forced to testify against yourself. You are completely protected from incriminating yourself. The effect of refusing to testify (or answer questions), however, is markedly different in criminal and civil cases. 

In a criminal case, the refusal to testify may not be used against you. Thus, a jury must disregard your willingness or unwillingness to testify in determining your guilt or innocence. 

In a civil case, you retain the right to refuse to answer questions or testify. However, the jury make take that into account in deciding the case. In other words, a jury could infer bad intent if the Trumps were to refuse to answer questions. 

Donald Trump has repeatedly said publicly that people who “take the fifth” or refuse to testify are likely guilty of charges against them. The State of New York will undoubtedly introduce those statements into evidence at the eventual civil trial if testimony is refused. 

That is why it was so important for the Trumps to win on the subpoena motion. Having lost, they are now facing a true quandary. Do they testify and subject themselves to explaining financial discrepancies (and possible perjury) or do they remain silent and accept the consequences of that inference? 

The answer to that question has taken on even greater weight this week when their accounting firm stated in a letter that financial statements over the last ten years are unreliable. In the same letter, the Trump Organization was fired as a client due to a “conflict of interest.” 

In this context, “conflict of interest” means that the accounting firm believes that their interests and that of the Trump Organization are in conflict. The Trump Organization was, to use a common phrase, thrown under the bus.

Trump Loses His Valued Secrecy in Arbitration Case

Buried deep in the small print of many contracts is a provision stating that disputes will go into arbitration. That provision is typically inserted by the party having the higher degree of power: landlords, franchisors, etc. The two main reasons why arbitration (rather than lawsuits) are beneficial for the party with greater power are: (1) arbitration is a more streamlined and less costly option that proceeding through the court system and (2) arbitration proceedings are private, not subject to the same kind of public scrutiny as lawsuits.

The applicability of arbitration agreements came into sharp focus in a decision earlier this week by the Second Circuit Court of Appeals (one step below the U.S. Supreme Court).

Here is an oversimplification of the facts.  ACN Opportunity, LLC (ACN) is a "multi-level marketing" company that enlists individuals to work on its behalf as "Independent Business Owners" (IBOs) in exchange for a sign-up fee and annual renewal fees. A large class of people signed up. When most people hear the term “multi-level marketing,” something goes ding, ding, ding in their brains and they slowly walk away. These investors did not. Why?

The answer is Donald Trump and the Trump Organization. Through various forums, including at ACN events, recruiting publications and videos, and on two episodes of "The Celebrity Apprentice" television show, ACN was strongly promoted. This series of messages by the Trump group was critical, the plaintiffs asserted, in convincing consumers – including them – to invest in ACN as IBOs. The court noted that the investors’ chances of success were minimal at best: 

Contrary to the defendants' [Trump] representations that ACN's business opportunity was a low-risk entrepreneurial venture that offered investors a viable source of income, investigations by regulatory agencies allegedly have demonstrated that ACN's business was high-risk and that investors had a minimal likelihood of commercial success. Despite claims that ACN's business opportunity would be highly profitable for investors, it is nearly impossible for IBOs to profit or earn a satisfactory income from such multi-level marketing arrangements.

The problem wasn’t that Trump endorsed ACN. He endorses things all the time. The issue was that Trump claimed that the profitability of ACN was based on an “independent evaluation.” But was it?

[T]he plaintiffs allege that in exchange for millions of dollars in secret payments from ACN to the defendants[Trump] between 2005 and 2015, the defendants fraudulently promoted and endorsed ACN as offering legitimate business opportunities that were likely to afford IBOs success.

The plaintiffs had a choice. They could have pursued ACN for damages. However, under the terms of the IBO agreement, this would have gone to arbitration. So the plaintiffs sued Trump and the Trump Organization in the federal district court.

Trump cried foul, claiming that arbitration was required. Both the district court and court of appeals ruled against Trump, noting that since Trump was not one of the parties who signed the contract, arbitration did not apply.

Because of the court’s ruling (which specifically said it was not addressing the merits of the lawsuit), the case can proceed in the federal district court.

Why would Trump and his organization work so hard to keep this in arbitration? Public access to information.

Arbitration proceedings are conducted in private and the only thing that the public will typically ever hear is who won. Court cases, however, are widely reported, pleadings by the parties are public, and information that comes out during the lawsuit often reveals facts that some people would prefer remain hidden.

For an individual such as Trump who regularly uses arbitration agreements and nondisclosure agreements as a silencing measure, this defeat will be highly disconcerting.

It Helps if You Actually Read the Indictment

There is a lot to unpack from the indictments Thursday of Allen Weisselberg and the Trump Organization. As I always say, remember that an indictment is not proof of guilt. That is why there are pre-trial motions and ultimately a trial on the merits.

At this stage of the proceedings, you can expect a lot of posturing. Remember that none of what the lawyers and political pundits say is relevant to the proceedings. In particular, you should disregard “whataboutism.” If I’m a line of 20 speeding cars and I’m the one who gets pulled over, it is no defense to go in front of a judge and say “others were speeding too.” It is also no defense to say that I’m a Democrat and the arresting officer was a Republican. The correct, and only, defense is that I was not speeding.

Much of the initial defense and media focus is on the treatment of “fringe benefits.” The argument is that this a gray area in the tax code and a great many businesses reward their most valued employees in the same way. Therefore, the defendants here are being singled out for doing what a lot of others are also doing.

If these fringe benefits are, in fact a gray area, would you, as a large organization want to take the chance (over a period of more than 10 years) that you and your employees could be criminally liable?

Assuming that you wanted to avoid potential liability, there is a mechanism in place to protect yourself. It is to request a private letter ruling (PLR) from the IRS. These letters are issued all the time and offer specific protection to the individual or company requesting them. Most non-lawyers have not even heard of PLRs, mostly because they get little media attention and appear to be tediously dull and boring. Naturally, I enjoy reading them.

Weisselberg and the Trump Organization did not go the PLR route to protect themselves.

Back to the title of this article, it helps if you actually read the indictment. The most clearly illegal conduct, if proven, has nothing to do with fringe benefits. I’ll focus on just one of those allegations here.

Weisselberg was obviously a long-term employee of the Trump Organization. So, whether you include or exclude some of the fringe benefits, we know that he received a wage statement (W-2) that reflected his earnings during the year.  However, he also received checks as a NON-employee from Mar-a-Lago and other Trump organizations. In other words, he, as an employee of the Trump Organization, simultaneously claimed he was an independent contractor as far as Mar-a-Lago was concerned. As a non-employee, the money he received from Mar-a-Lago was reported on tax form 1099.

Why was it beneficial for Weisselberg to simultaneously be an employee and an independent contractor? The answer has to do with a special tax benefit available to independent contractors that is not available to employees. As an independent contractor, he was able to contribute to a KEOUGH plan, which is a tax-deferred pension plan.

Thus, in one pocket Weisselberg was collecting benefits associated with employment, and in another pocket he was collecting benefits for being an independent contractor. You can’t do both for the same organization.

As next steps, you can expect a number of preliminary motions from the defense. It would also not be surprising the see additional charges against Weisselberg (and perhaps other defendants) coming from the grand jury.

Regardless, this process will unfold over a series of months, not weeks.