That Trump lied about, inflated, grossly exaggserated the value of his holding and hence his claimed net worth surprised no one with any knowledge of who he was.* That New York Attorney General Tish James took three plus years to figure this out is sad. But then, James needed more than to know the obvious. She needed to gather evidence of it, to prove it, and then she could use her offices as chief civil legal officer of New York to flex her limited corporate oversight muscles. And now she has, even coming up with her own cute catch phrase.
This isn’t the Art of the Deal. It’s the Art of the Steal.**
The more than 200 pages of the complaint set forth a litany of absurd lies and distortions about the size and value of Trump’s holdings. Some are so ridiculously high, such as his 10,000 square foot gold-plated triplex in Trump Tower, the gaudiest address in Manhattan, which he claimed was 30,000 square feet and valued at almost $30,000 per square a foot, thrice the price of the most expense square foot ever in the city. But that’s the sort of valuation Trump needed to comfort him for never being invited to dinner by wealthy people.
The upshot, according to James, was that Trump’s grossly inflated valuations enabled him to benefit from preferential interest rates on bank loans and premiums on insurance policies.
His company, the Trump Organization, provided the fraudulent financial statements to lenders and insurers, her suit said, “to obtain beneficial financial terms,” including lower interest rates and premiums. All told, Ms. James said, the Trumps were able to obtain a quarter of a billion dollars that she now wants the company to forfeit.
There’s little doubt, and even less pushback, that Trump lied about the value of his assets. Somehow, “lied” doesn’t begin to capture the magnitude of his cartoon claims. At the same time, that’s part of where his defense begins, that his valuations were so facially absurd, so laughably false, that no one with a business IQ above a rock would have believed them. To a large extent, this has been Trump’s saving grace throughout his career, that he’s so utterly lacking in credibility that no reasonable person would rely on anything he says.
And this is Trump’s “defense,” framed a little differently.
Trump’s legal team has suggested that any rosy analyses of Trump’s financial condition in statements submitted to banks is consistent with the practice in the world of real estate and bank financing.
The value of commercial real estate, among most other things, is whatever someone will pay for it. When it benefits the owner for the valuation to be higher, it’s entirely normal to make it so. Banks know this. Insurers know this. Buyers know this. Everybody knows this. But there is a huge difference between fudging the estimated valuation by 10% and doing so by 1000%. The former is normal. The latter is Trump.
Indeed, his attorneys have argued that bankers were not actually deceived by the alleged asset inflation because they produced more conservative internal assessments before approving the loans to Trump.
This is almost certainly true, that no bank was fooled by Trump’s cartoon valuations designed to make him appear to be RICH!!! to anyone without a clue how it worked. On the one hand, banks do their own due diligence, appraising the properties before cutting the check no matter how grandiose the claims of the loan applicant. On the other hand, it’s not as if a claim that a property bought for $5 million yesterday is valued at $500 million today isn’t a big red flag that the applicant is full of shit.
Trump himself leveled a version of the “no harm, no foul” defense on his Truth Social media site Wednesday, saying that the banks and insurance companies involved “were fully paid, made a lot of money, and never had a complaint about me.”
The valuation of the property only matters as collateral for the loan. If there is a default, then the bank has recourse against the property, so the sufficiency of the value of the property to cover the unpaid balance of the loan matters of the bank could take a hit. Banks hate that. Folks who lend hundreds of millions of dollars tend not to rely on the valuations of the applicants, particularly when applicant managed to bankrupt a casino and has gainful employment as a game show host.
But if there was no default, then the value of the property isn’t relevant for purposes of collateral. Moreover, if the loan to value ratio is good, the risk taken by the bank is reduced such that the lower risk is reflected in a lower interest rate. The fact that banks made money, therefore, doesn’t address the issue, which is that the banks would have made more money, about $150 million per year according to James, had Trump not gotten preferential interest rates.
But as flagrant and ridiculous as Trump’s very deliberate lies may have been, did they constitute a scheme or artifice to defraud? Civil fraud has five elements.
- the making of a statement
- the falsity of the statement
- an intent to deceive, called “scienter”
- reasonable reliance on the statement by the injured party
- injury sustained as the result of the reliance
Clearly, James has the goods on the first two elements. The third only gets sticky when applied to major business entities like banks, as opposed to magazines and Page Six, who were not really the intended target of Trump’s lies because he knew well enough that they weren’t biting on his ridiculously high valuations.
But what about the fourth and fifth elements?
However, James’ office appears to be taking the stand that whether the banks were or were not actually tricked isn’t relevant to the legal case — that the alleged intent to deceive on the part of Trump, his children and top aides in order to get a financial benefit is sufficient to constitute a violation of the law.
James has also said that whether the other parties in Trump’s deals sustained a loss also isn’t relevant, so she can pursue these violations even if the banks profited from the deals.
Whether James can sustain this position is a question that remains to be answered. While there are a number of low-level offenses associated with issuing a false financing statement, those are outside James’ authority. While there’s little doubt that Trump engaged in wild lies to puff his wealth, whether that conduct alone will sustain James’ suit remains unclear.
*My old pal Don’t Worry Murray used to joke that he was six feet tall, a four foot guy standing atop his pile of money. As everybody knew, that was how Trump claimed he was RICH!!!, to bolster his fragile ego.
**Much as the nice folks at Slate think this was the ginchiest wordplay ever, I do not share that view and think it’s obvious enough that Trump might have come up with it.
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I don’t suppose he was actually paying taxes on his asserted values,. Banks are so cynical, they are likely to inform themselves about tax values and limit their internal appraisals accordingly. I thought when listening to the news this morning this could be an overreach. Even after the “referral” of everything she concluded she couldn’t pursue.
But then, the real objective may be simply to tie up resources of the Trump organization and generate bad press.
It might even be determined that he sought to excessively minimize value for real estate tax purposes. It could happen.
So which is it, maximizing value for loan purposes, or minimizing value for income tax purposes? It can’t be both.
It can, and allegedly was, both.
According to the complaint (which is not evidence, just an allegation), the TO kept different sets of books to show different audiences. The tax authorities got the “I’m broke” books; banks, insurers, and others, got the balloon-animal-inflated books.
Every company I worked for had two sets of books. The tax books and the GAAP books. Nothing nefarious. GAAP allows/required different depreciation of assets than the tax code did.
I don’t know if that’s involved in Trump’s accounting or not. Different business. But it’s certainly possible, even likely that his assets legally had different basis (value) on different accounts. Not 10x different though.
And of course overvaluing assets was a total no-no. Regularly we were required to write down the assets due to ceiling tests and so on.
Property is not minimized for income tax purposes. Depreciation is based on historical cost and depreciated according to the tax code. Property tax is based on an appraisal by the taxing district which is based on market value.
Yes, it can and is both. Property is maximized for loan purposes and minimized for property tax purposes. I’ve done it many times for clients and never was it a crime.
For property tax purposes, the taxing district sets the taxable value, not the property owner, although he can appeal a value he thinks is too high.
This is from the NYC Department of Finance website: “The Department of Finance assigns market values to all properties in New York City. Market Value is the worth of your property determined by the Department of Finance based on your property’s tax class and the New York State Law requirements for determining market value.” The Trump organization does not assign tax value to it’s property, the city does.
It is easy to understand: the taxing district sets a value using its rules, the bank or lender or insurance company sets its values for its purposes and the owner sets a value for his own purpose (ego, reputation?). That the value would be different for each should be easy to understand.
I agree with you. We’re saying the same thing basically. In energy the difference between tax value and GAAP value is how much d,d and a has run off.
And value for property tax value is a completely different process. We come up with our value and the taxing authority come up with theirs and then we duke it out. Almost always could get to a happy middle. The valuation can change a lot from year to year depending on how the property has performed and on commodity prices. In real estate the equivalent metrics I think would be current cashflow run rate and occupancy/rental rates.
I agree that it’s absolutely not clear that trump gained from his goofiness. Banks have their own appraisers for their protection, who are entitled to see all the records. Hard to see how he could have pulled the wool over their eyes to the tune of 10x, but I don’t actually know. We could never of done that with our banks, and for the first 5 years of my career I was handling this stuff (as an engineer) for a guy who was a lot richer and more well thought of than Trump. He ran for president in 1992 and threatened to win for a while……
Dear Mr Greenfield
Perhaps AG James had been following the TV series “Billions” and believed in it too much. This lawsuit appears to be like those actions brought by Chuck Rhoades in the series.
Regards
Mark Brooks
St Elizabeth
Jamaica
[Ed. Note: Random off topic nonsense deleted.]
As to the credulity and naivete of Deutsche Bank and other large international banks that Mr. Greenfield brought up, I am reminded of something that Harlan Ellison incredulously once said in an interview, “I should do a freebie for Warner Bros.? What, is Warner Bros. out with an eyepatch with a tin cup on the street? F—, no!”
Tish James is doing a freebie for Deutsche Bank.
The claims are not brought pursuant to common law fraud, from my reading–the complaint only appears to have claims brought pursuant to New York Executive Law § 63(12). (Doing so also explains why the NY AG has standing, which was what I was curious about).
The elements of 63(12) are much simpler than common law fraud, in fact, there is just one element:
“The test is whether the act complained of “has the capacity or tendency to deceive, or creates an atmosphere conducive to fraud. Executive Law § 63 (12) was meant to protect not only the average consumer, but also `the ignorant, the unthinking and the credulous.” People v. Applied Card (full cite omitted, citation omitted).
“Proof of an intent to defraud is not essential”. People v. Concert Connection (ditto).
So the only element NY needs to prove are repeated false or misleading statements, even if you think they are true. Nothing more is required. And the test for what is false and misleading is very generous.
If I were defending, I would argue that the acts complained of were not numerous enough to be repeated, because the law is normally applied to events that are much more numerous.
Disclaimer: I have never practiced in New York, so there may be something obvious I’m missing.
I’ve read through a few decisions on EL § 63 (12) and it’s unclear to me what the elements are and whether it applies here. The best way to figure it out is by the pattern jury instructions, but I found none for this statute. I’ve seen no Court of Appeals case defining the elements, or case where the putative defrauded parties weren’t consumers and didn’t involve “distinct fraudulent or illegal acts” of consumer fraud. From Matter of Allstate Ins. Co. v Foschio, 93 AD2d 328 (1983):
Thanks.
Is there any reason to think that this couldn’t be a scheme to defraud committed by a narcissistic jackass with a fragile ego? Occam’s razor and all that…