Last week, Judge Arthur Engoron issued his ruling in the New York civil fraud case against the Trump organization and its executives. This is his succinct summary of the case:
Donald Trump and entities he controls own many valuable properties, including office buildings, hotels, and golf courses. Acquiring and developing such properties required huge amounts of cash. Accordingly, the entities borrowed from banks and other lenders. The lenders required personal guarantees from Donald Trump, which were based on statements of financial condition compiled by accountants that Donald Trump engaged. The accountants created these “compilations” based on data submitted by the Trump entities. In order to borrow more and at lower rates, defendants submitted blatantly false financial data to the accountants, resulting in fraudulent financial statements.
The complaint by the New York Attorney General accused the defendants of making false statements in a business, intentionally falsifying business records, conspiring to falsify business records, intentionally issuing a false financial statement, conspiring to issue a false financial statement, intentionally engaging in insurance fraud, and conspiring to engage in insurance fraud.
By exaggerating asset values and net worth, the defendants made the organization look like a better risk than it was, helping it to obtain loans and insurance contracts on more favorable terms. Although the loans were repaid, the fraud consisted of not compensating the lenders for the risks they were really taking.
The defendants
The defendants included both the collection of companies branded “the Trump Organization” and the Donald J. Trump Revocable Trust, which holds the assets of the Trump Organization in trust for Donald Trump, the sole beneficiary. They also included the individuals Donald Trump, Donald Trump, Jr., Eric Trump, Allen Weisselberg and Jeffrey McConney.
Donald Trump was both Chairman and President of the Trump Organization until he became President of the United States in 2017. His son, Donald Trump, Jr., served as Executive Vice President from 2011 until 2017, when he and his brother Eric became co-CEOs.
Allen Weisselberg was Chief Financial Officer of the Trump Organization from 2002 to 2022. He was placed on leave “after pleading guilty to 15 criminal counts of tax fraud and falsification of business records at the Trump Organization.”
Jeffrey McConney was Controller of the Trump Organization from the early 2000s until 2023. He maintained the spreadsheets with the itemized property valuations. These were then compiled by the Mazars accounting firm and presented in the annual Statements of Financial Condition (SFCs). The SFCs were then approved by Allen Weisselberg and whoever was in charge at the time, either Donald Trump or co-CEOs Donald, Jr. and Eric.
Michael Cohen was not a defendant because he was now testifying for the state, but he had been an executive V.P. and special counsel to Donald Trump. He testified that Trump asked him to help prepare the SFCs and their supporting valuations beginning in 2012.
Specifically, Cohen affirmed: “I was tasked by Mr. Trump to increase the total assets based upon a number that he arbitrarily selected[,] and my responsibility[,] along with Allen Weisselberg predominantly[,] was to reverse engineer the various different asset classes, increase those assets in order to achieve the number that Mr. Trump had tasked us.”
Cohen said that each reverse engineering process would take several days, and that Weisselberg relied on McConney to assist him in adding value to the numbers on the supporting data for the SFCs… Cohen further made clear that Donald Trump had to approve the final numbers before they went to Mazars to be used in the compilations.
According to Cohen, Trump was motivated not only by a desire to qualify for loans at the most favorable rates, but to boost his net worth to place as high as possible in the Forbes ranking of the richest Americans.
The overvalued properties
Controller McConney understood that the financial statements were required to conform to Generally Accepted Accounting Principles (GAAP). These defined the “estimated current value” of a property as “the amount at which the item could be exchanged between a buyer and a seller, each of whom is well informed and willing, and neither of whom is compelled to buy or sell.” Nevertheless, he and his superiors approved many valuations that violated those standards. For example:
When valuing unsold units in Trump Park Avenue for Donald Trump’s SFCs, McConney used offering plan prices from an internal Trump International Realty spreadsheet, while wholly disregarding “current market values” listed on the exact same spreadsheet. Moreover, McConney “intentionally removed” the current market values column from the spreadsheet before forwarding it to Donald Bender at Mazars, despite McConney’s knowledge and representation that he understood that the SFCs had to reflect the estimated current value.
The defendants used a variety of other methods to inflate the value of the Trump Organization’s assets. The most blatant was simply to overstate the size of the property, which they did for Trump’s Triplex apartment. The valued it as if it were 30,000 square feet instead of its actual 10,996 square feet, which added anywhere from $114 million to $207 million depending on market conditions in a given year. They continued to use the inflated numbers for a time even after journalists from Forbes called attention to the discrepancy.
For some properties, the defendants overstated the number of residential units they had a right to build on the property. For Briarcliff, they claimed 71 instead of the actual 31, more than doubling the appraised value.
Instead of using current market value, some valuations used projections of future value based on dubious assumptions.
From 2011-2014, when valuing a plot of land upon which seven mansions could be built in Bedford [Trump Seven Springs], McConney relied on valuations provided by Eric Trump, who advised McConney to value the seven-mansion development at $161 million on the 2012 SFC. This valuation assumed a host of future events that had not—and as hindsight has shown, would not—occur, including that the Trump Organization had received legal permission to develop the lots, that the mansions were already built and available for sale, and that there would be no construction or development costs associated with building the mansions.
For a piece of land adjacent to the Aberdeen golf course in Scotland, the defendants both exaggerated the number of residences they were permitted to build by a factor of five, and also assumed that the residences had already been built, and at zero cost.
For an income-generating property like 40 Wall Street, where the value was calculated by dividing the net operating income by the capitalization rate, they could inflate the value either by exaggerating the net operating income or understating the capitalization rate. Apparently, they did both.
The value of the Mar-a-Lago club was limited because Trump had signed a “Deed of Conservation and Preservation” in 1995. There he gave up the right to develop the property as a single-family residence and received a tax break in return. That effectively took it off the residential market. No problem—the defendants simply ignored that restriction and based their valuation on the premise that it could be sold as a private residence.
The defense
The overvaluations resulted in large discrepancies between the company’s financial statements and the property appraisals by accounting firms. When confronted with such discrepancies at trial, defendants were generally vague about who had arrived at the higher valuation and with what justification.
When McConney was asked why Mar-a-Lago was valued as a private residence instead the social club it was, he said he couldn’t remember. In other cases, he claimed that he had gotten his numbers from Eric Trump, but Eric testified that he paid little attention to valuations, since “I am a construction guy.”
Although Weissenberg was Chief Financial Officer, he was not a CPA. He had so little knowledge of GAAP that he couldn’t say what the term “estimated current value” meant. Yet, “each year, Weissenberg represented to Mazars that the SFCs were presented in conformity with GAAP and that assets in the SFCs were stated at their estimated current value.” He testified, “I certainly am not one to value a property. I have no idea what properties are worth.”
Donald Trump, Jr. approved financial statements in his roles of co-CEO and trustee of the Donald J. Trump Revocable Trust “despite having no knowledge of the requirements of GAAP, never having been employed in a position that required him to apply GAAP, and never having received any training on applying GAAP.”
What Judge Engoron calls “the crux of the defense” was that:
…defendants relied on their accountants, mainly Mazars, but sometimes Whitley Penn, to make sure that the SFCs were accurate, and that responsibility for any misrepresentations lies with the accountants, not defendants. Donald Trump, Jr. and Eric Trump testified several times that they would have relied on their accountants to find any errors in the SFCs’ supporting data.
Engoron found this claim unreasonable, since these accountants were hired only to be “compilers,” not appraisers, taking the numbers provided by the defendants and organizing them into a single document. The Trump organization was not supposed to rely on them for the valuations; it was the other way around. Trump executives were obligated to represent the financial statements as complete and accurate, and they did so. When the defendants did obtain appraisals on specific properties, such as the $5.5 million appraisal of the Seven Springs property by Cushman & Wakefield, they often ignored or drastically revised them, in that particular case raising the value to $161 million! To say that they “relied on their accountants” is a bit disingenuous.
For his part, Donald Trump mostly claimed that the properties were so great that they were worth even more than the valuations submitted on the SFCs. Overall, the court’s decision gives us an image of defendants playing fast and loose with the numbers because their greed exceeded their competence and their honesty.
The ruling
The organizations and their executives were found liable for using false statements in business, conspiring to falsify business records, and conspiring to engage in insurance fraud. The named individuals Donald Trump, Donald Trump, Jr., Eric Trump, Allen Weisselberg, and Jeffrey McConney were also found liable for intentionally falsifying business records, intentionally issuing a false financial statement, and conspiring to issue a false financial statement. Only Weisselberg and McConney were found liable for intentionally engaging in insurance fraud.
The court ordered the defendants who had personally profited from fraud to disgorge the “ill-gotten gains” they received. Almost all the profits accrued to Donald Trump himself. The state contracted with a highly qualified expert witness, Michiel McCarty, to compare what the organization actually paid in interest with an estimate what it would have had to pay without the inflated assets. In addition, the court ruled that the organization profited from certain real estate deals that could not have been made without the use of false SFCs, so those gains were ill-gotten as well. The court found Donald Trump liable for $354.9 million and his two sons liable for $4 million each. The interest that accrued since the frauds were committed added another $98.6 million.
The court banned the defendants from serving as directors or officers of a New York company for varying lengths of time: Trump, Weisselberg and McConney for three years, and Trump’s sons for two years. In addition, Weisselberg and McConney were banned for life from performing a financial control function in a New York company.
Comment
The ruling in this civil fraud case adds to Donald Trump’s record of fraud, which includes defrauding students of Trump University and defrauding donors to the Trump Foundations by spending some of the donated money for his own benefit. Next month he is scheduled to go on trial for election fraud because of his hush-money payment to conceal an extramarital affair from the voters (which also involved alleged falsification of business records). Trump’s response to all this is almost never to address the specific allegations. He simply claims that every lawsuit and indictment is part of a conspiracy by President Biden and the “radical-left Democrats” to interfere with the 2024 election. That excuse is getting a little stale.
From time to time in US history, we have elected presidents who turned out to be crooked; Warren Harding and Richard Nixon come to mind. This year, the Republican Party has an opportunity to achieve something really special, the nomination of a presidential candidate who is already a certified fraud. How low can we go?
Beneath the Surface 