Was it immoral for Trump to lie about his wealth?

Peter Swiecicki

19 February 2024

On Friday New York Judge Arthur Engoron ordered Donald Trump to pay $450 million ($354 million plus accrued interest) for falsifying his statements of financial condition over many years.? Judge Engoron said that he was not a judge of morality, just a judger of facts who applied the law.? But Judge Engoron applied a law that is certainly a code of moral conduct, and Judge Engoron concluded his decision with a moral judgment: "[Trump's and co-defendants'] complete lack of contrition and remorse borders on pathological [and they] are incapable of admitting the error of their ways."

Was it immoral for Trump to lie about his wealth?? New York law says yes; Trump says the decision is a "manifest injustice" and the New York legal system is "corrupt".

What is New York's applicable moral standard?

In 1956 the New York legislature adopted a law granting New York's Attorney General authority to enjoin anyone from continuing in a business activity if such person has been guilty of frequent fraudulent dealings.? The law currently applies "Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business." "Fraud" is very broadly defined to "include any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions." Executive Law 63 (12).

The law is extremely broad.? The Attorney General does not need to prove intent to deceive, nor reliance on the deception by a third party.? The goal is to secure an honest marketplace, rather than one where transactions can be pursued and completed through fraud.

What did Trump do to break the law?

The evidence in Trump's case was that the amounts shown in his statements of financial condition (SFCs) for the years 2011-2021 bore no relation to either appraisals or valuations.? Judge Engoron found discrepancies (shown in the table) between the amounts claimed by Trump and underlying appraisals or valuations for the same properties.

The total difference between the amounts shown on the SFCs and the appraisals or valuations for each property varied each year, but amounted to around $1.6 billion.

The financial statements included this statement:? "Donald J. Trump is responsible for the preparation and fair presentation of the financial statement in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statement."

And this: "Assets are stated at their estimated current values and liabilities at their estimated current amounts using various valuation methods."

Trump utilized the SFCs for these purposes:

·???????? To obtain three loans from Deutsche Bank to acquire properties secured by his personal guarantees.? The loan agreements required him to maintain a minimum net worth of at least $2.5 billion. On the basis of his net worth and personal guarantee, Deutsche Bank offered him a lower interest rate, 6% per annum lower according to the evidence.

·???????? One of these loans was used to finance the acquisition and redevelopment of the Old Post Office in Washington D.C. In 2022, Trump sold it for a profit of $126.8 million.

·???????? To obtain a loan through Ladder Capital to refinance 40 Wall Street, with the requirement of his personal guarantee to cover major expenses.

·???????? To win a public tender and obtain a license in 2012 to operate New York City's Ferry Point Golf Course, which required his personal guarantee and showing of substantial net worth, which was represented at over $3 billion.? In 2023 the Trump Organization assigned the license to another operator for $60 million.

·???????? To conspire to obtain surety insurance and directors' and officers' insurance at lower premiums based on the net worth shown in the SFCs.

Judge Engoron found that the SFCs were false and misleading and that Trump repeatedly or persistently used the SFCs to transact business.? Thus, the legal standard was met.

What remedies were applied?

Disgorgement is the main remedy applied.? Disgorgement is an equitable remedy (and therefore there was no jury trial). It is distinct from the remedy of restitution because it focuses on the gain to the wrongdoer as opposed to the loss to the victim. Thus, 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 direct losses to consumers or the public; the source of the ill-gotten gains is immaterial.

Disgorgement is not an impermissible penalty; Judge Engoron held that the “wrongdoer who is deprived of an illicit gain is ideally left in the position he would have occupied had there been no misconduct.” So the Judge ordered that Trump turn over to the State rather than retaining:

·??????? the cost of interest he saved on the loans due to the lower interest rate enabled by his fraud;

·??????? the amount of his profit on sale of the Old Post Office, which profit was made possible by a loan obtained using fraudulent means; and

·??????? the amount of his profit on assignment of the Ferry Point Golf Course license, which license had been obtained using the fraudulent documents,

totaling $354 million. The goal of the judgment is to make Trump no worse off than he would have been had he complied with the law.

The Judge also said that Trump showed no understanding that he had breached the law. To prevent continuing violations the Judge also retained an independent monitor over Trump's businesses, ordered that a person be appointed to institute internal controls in the businesses and ordered that Trump not serve as a director or officer of a New York corporation or legal person for three years.

Trump's defenses

Trump's main defenses were:

·???????? There is no such thing as objective value;

·???????? The SFCs had a "worthless" disclaimer, meaning that no reliance could be placed on them;

·???????? Each of the recipients of the SFCs conducted their own due diligence and, following that, still determined to proceed with the transaction. They were not misled;

·???????? All the loans were repaid on a timely basis.

The court rejected these defenses:

·???????? Accepting Trump's premise would require ignoring decades of controlling authority holding that financial statements and real property valuations are to be judged objectively, not subjectively. The court does not accept that valuations are in the eye of the beholder, that is, that they are always subjective and therefore that there is no such thing as an overvaluation;

·???????? A defendant may not rely on a disclaimer for misrepresentation of facts peculiarly within the defendant's knowledge;

·???????? The fact that the counterparties accepted false financial statements is irrelevant; reliance by the counterparty is not required to prove a breach of the law;

·???????? The fact that these specific lenders were repaid misses the purpose of the law, which is that fairness is an essential element of an honest marketplace that benefits all of society.? Saying "everyone does it" (submits false statements) and that representations cannot be relied on, is a recipe for chaos. The court stated: "The defendant borrowers did not default on any loans; but we only know that with hindsight . Markets are volatile, and borrowers come in all shapes and sizes. The next borrower, or the one after that, might default, and if its SFCs are false, the lender might unfairly be left holding the bag. This will distort the lending marketplace and deprive other potential borrowers of the opportunity to obtain loans and create wealth."

Is Trump being unfairly singled out and being persecuted?

No. Executive Law 63 (12) has been on the books for decades, and many cases have been filed by New York's Attorney General alleging its violation, including against other high-profile businesspersons.? Disgorgement of ill-gained profits is the usual remedy sought.

In 2005, the Attorney General sued Maurice Greenberg and Howard Smith, the principal officers of American Insurance Group (AIG).? The Attorney General alleged that Greenberg and Smith participated in causing AIG to enter into a sham reinsurance transaction that transferred no real risk from the reinsurer to AIG, and therefore should not have been treated as an insurance transaction on AIG's books; and that the transaction's sole purpose was to increase the insurance reserves shown on AIG's financial statements, thereby creating the impression of a healthy insurance business.? The Attorney General sought disgorgement of Greenberg's and Smith's gains. People v Greenberg, 21 N.Y.3d 439 (2013) and 27 N.Y. 3d 490 (2016).

After the bankruptcy of Lehman Brothers in 2008, the Attorney General alleged that Ernst & Young participated in a scheme involving Lehman Brothers getting paid cash in overseas transactions for securities that it would quickly buy back. The Attorney General alleged that those transactions were used as a reason to remove "tens of billions of dollars" in securities from the company's balance sheets and were solely intended to make it appear Lehman Brothers was in a far stronger position financially than it really was. Ernst & Young, while aware of the transactions, did not flag them and did not object as the information was used allegedly to mislead analysts.

The Attorney General did not allege direct injury to the public or consumers as a result of Ernst & Young's alleged collusion with Lehman Brothers in committing fraud.? Rather, he sought the equitable remedy of disgorgement of E&Y's gains.? People?v.?Ernst & Young LLP, 114 A.D.3d 569?(N.Y.?App.?Div.?2014).

Both of these cases involve an alleged continuing fraud with no showing of intent or reliance or loss and fit the pattern of the allegations against Trump.?

Also highly relevant, Trump previously was sued by the Attorney General for the illegal, unlicensed operation of Trump University, which engaged in fraudulent advertising and bait and switch tactics to get persons to pay ever higher fees. People v Trump Entrepreneur Initiative LLC, 137 A.D.3d 409 (1st Dept 2016). So Trump was no stranger to Executive Law 63 (12).

Other cases, among many, include FTC and New York v Martin Shrekli, 581 F.Supp.3d 579 (2022); People v Amazon.com , Inc., 550 F Supp 3d 122 (SD NY 2021); People v Coventry First LLC, 13 NY3d 108 (2009); In the Matter of State of New York v. Ford Motor Co., 74 N.Y.2d 495 (1989); People v Credit Suisse Sec. (USA) LLC, 31 NY3d 622 (2018), modified 31 NY3d 622 (2018).

Can New York impose this moral standard on Trump and thus interfere with his business?

Trump, and many others, believe that government should have no right to regulate his private transactions that were at the heart of this case. That is, he could go to the bank and present what documents he wanted want and it was up to the bank to determine whether those documents were acceptable and sufficient to grant him a loan.

For him, the basis of these transactions should be relationship-based, not rules-based.? If I convince you to lend me money, that is all that counts – the papers that you make me sign are meaningless.? The only thing that counts is the end -- whether I repay you.

New York's legislature decades ago rejected this logic, and enacted Executive Law 63 (12) as a much broader enforcement tool to fight fraud than the common law fraud claim (which requires proving intent and reliance).

On a narrower level, remember that banks accept deposits and therefore are regulated; they need to comply with certain standards to ensure that there is reasonable likelihood that loans will be repaid.? Thus, the public has an interest in ensuring that banks are provided with reliable information.

On a general level, a claim under Executive Law 63 (12) is the exercise of the State's regulation of businesses within its borders in the interest of securing an honest marketplace. For Trump, his SFCs were truthful because they expressed his opinion of the value of his properties, and that is all that mattered.? For the law, when the SFCs stated that they were presented according to GAAP, through a system of internal controls, and using various valuation methods, and where valuations and appraisals were available, the SFCs needed to bear some objective relationship to those valuations and appraisals.? Basing them solely on Trump's subjective opinions was fraud.

But can the legislature encroach on Trump's liberty when there is no identified victim with a loss – Deutsche Bank's bankers testified that they were repaid and happy to make the loans?

Yes, it can.

With homage to the philosopher Ronald Dworkin, the legislature cannot encroach on my liberty – on matters of ethical choice for which I am personally responsible and where my dignity requires independence from government. But when my actions encroach on the dignity of others – when my actions move into the sphere of morality, which defines what opportunities and resources other persons are entitled to have – then constraints on my freedom to act can be justified.

The legislature can encroach on my freedom to assault, slander or libel others, for instance.? But the legislature can also go farther and say that persistently preparing and using financial statements prepared with no objective basis amounts to fraud that harms all members of society by denigrating the reliability and usefulness of such documents, making transactions more difficult and expensive for others, and therefore legitimately can be constrained.

Trump would have a complaint if such a constraint on his freedom had been promulgated autocratically and enforced idiosyncratically.? But the law was enacted by a democratically enacted legislature and enforced following a weeks-long trial with 40 witnesses. He also complains that the amount of the disgorgement was unfair – why should one loan taken to finance acquisition of the Old Post Office cost him his $126 million in profit on the sale? But can he show that if he had never lied on his SFCs he would still have made that profit?

Dworkin wrote: "We must “make our country’s fundamental law what our sense of justice would approve, not because we must sometimes compromise law with morality, but because this is exactly what the law, properly understood, itself requires.” The morality expounded by Trump in his defense is best expressed by saying that if there's a sucker out there who will give me his money, I have a right to take it. The morality expounded by the law of New York and its courts differs.

Trump's defense and his reaction to the decision exemplifies his contempt for the rules-based order.? If Trump were to become President, we can expect he would apply the same contempt to the international rules-based order, to be replaced by his belief that everything is personal -- with the important exception he repeats that agreements matter where someone else has to pay him (thus, we will not defend your country if you do not achieve the 2% spending goal on your defense budget).

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