This term, the Supreme Court declined President Donald Trump’s attempts to shield personal financial records from congressional and judicial subpoena. The ruling’s impacts on executive powers and attorney-client privilege have been widely reported, and litigation over access to the documents will likely soon reach critical mass.
But Cy Vance Jr., the Manhattan District Attorney (DA), may have already obtained the pertinent New York state tax returns for the Trump Organization and its executives, including Trump and his family.
Should this be the case, then why the fuss over the Mazars USA subpoena that has already been appealed and opined upon by the Supreme Court and sent back to the federal District Court in Manhattan for further argument and appeal? What other surprises can the public expect?
Cutting Off a Classic Tax Fraud Defense
It is a routine internal procedure for agents of the New York state tax authority assigned to criminal tax investigations authorized by the New York Attorney General’s (AG) office (of which the Manhattan DA is a part) to obtain business and personal state tax returns that are material to their inquiry. It is likely that the experienced criminal tax investigator on the DA’s team has followed this routine protocol, and obtained the state tax returns early in their investigation.
But the tax returns alone would not be sufficient to establish criminal tax fraud. Criminal tax investigators for New York traditionally include retired Internal Revenue Service (IRS) criminal investigators working towards a second pension. These experienced forensic accountants would be most concerned with the classic tax fraud defense historically posed by the accused, wherein the taxpayer attempts to shift responsibility for the alleged fraud to the accountants who prepared the tax returns in question. Tax crooks have long raised their hands in innocence and then pointed their fingers at the hired hands claiming, “it was all their idea” with regard to any alleged tax fraud.
A viable tax fraud indictment cannot proceed until this defense is cut off. This may explain the intense legal struggle over the Mazars USA subpoena. The Mazars USA files will include much more than completed tax returns. Draft tax returns, financial statements, correspondence, emails, texts, and notes to the file containing direction from the taxpayer client to the preparer will likely be found in the Mazars USA files accompanied by the accountant’s work papers and notes to the file.
This type of evidence will not only cut off a potent defense of the taxpayer but it will also likely provide the investigators with a trove of evidence of intent or mens rea, demonstrating to a potential jury that the fraud committed was, in fact, intentional and not some type of accident, negligence, or innocent mistake. Paul Manafort’s accountant testimony at trial was so devastating that his attorney famously cried out in open court “only a fool would provide their accountant this type of information.” It is precisely this type of information that Vance is seeking from the Mazars USA subpoena.
From the SDNY to the DA’s Office
If the investigative team has pursued normal protocols, then we can make the rebuttable presumption that the Manhattan DA has already outlined a potential tax fraud indictment based on tax returns already in their possession and evidence previously obtained.
What other evidence does Vance likely possess?
The DA’s team likely has all the grand jury information (documents and testimony) generated by the Southern District of New York (SDNY) investigation of Michael Cohen. All that would be needed to obtain the above SDNY grand jury evidence would be for an individual from the office of the Manhattan DA or New York AG to be placed on what is known as the 6(e) list which is a record of individuals authorized for disclosure of grand jury information. The prosecutor maintains this listing and adds individuals who are needed as the inquiry progresses.
Indeed, information sharing between federal and state prosecutors has already been established in related cases. Early in his investigation, Robert Mueller traveled to New York to meet with state prosecutors and to establish cooperation between the offices (likely including adding state prosecutors to the 6(e) list) – thus ensuring that state inquiries could continue even if the New York-based targets of Mueller’s investigations were federally pardoned or if Mueller were fired. Cohen was part of the Mueller investigation and it is likely that the 6(e) list for his grand jury included authorized officials from the New York AG’s offices.
Additionally, and notably, Deutsche Bank has cooperated with Vance’s subpoena for critical bank documents which can be used by the Manhattan DA to further corroborate tax fraud allegations. The DA may also look to use the records to pursue bank fraud violations that were referenced in Cohen’s congressional testimony; Cohen stated that the Trump Organization had submitted falsified financial statements to banks when applying for loans. The material gathered from a successful Mazars USA subpoena may also be used to corroborate these potential bank fraud charges as Mazars USA reportedly refused to certify the financial statements provided by the Trump Organization that were then submitted to the bank. Instead, Mazars USA included an unusual disclaimer with the financials: “Users of this financial statement should recognize that they might reach different conclusions about the financial condition of Donald J. Trump.”
Clearly, the Vance team will want to drill down on just why Mazars USA would include such a disclaimer with any financial statement that the company prepared for the Trumps.
The Connection Between Cohen’s Case and Vance’s Investigation
Vance likely possesses substantial evidence and investigative leads gathered in the Mueller and SDNY inquiry into Cohen. This would no doubt include information as to who directed Cohen to submit false invoices to the Trump Organization; these false invoices led to Cohen receiving checks totaling $420,000 to reimburse him for his hush-money payments to Stormy Daniels et al, a total which was “’grossed up’ for tax purposes,” according to SDNY.
The inclusion of taxes in the reimbursement payments by the Trump Organization indicates that these payments were treated as a business expense on the Trump business records, which would then flow through to the tax returns unless flagged by some executive prior to submission to the relevant tax authorities. If the deduction were not corrected then, flagrantly false tax returns would have been prepared, subscribed to, and submitted, based on the prior falsification of the business deduction for legal expenses.
Thus, the alleged tax fraud was committed in association with the cooking of the books of the Trump Organization stemming from the posting of the false invoices. This fraud elevates the state misdemeanor of falsification of business books and records to felony status since it is in coordination with the commission of another felony – tax fraud. Mail fraud and/or wire fraud charges could also be contemplated since the false invoices were either mailed or wired as were the reimbursement payments.
Trump signed one reimbursement check while in the White House. He further misrepresented these payments as ‘personal’ on his 2018 financial disclosure form in an attempt to characterize these payments as both business expenses (in the tax returns) and as personal expenses (in his financial disclosure form). This misrepresentation adds to the evidence of deliberate intent to defraud in any prospective Vance prosecution.
Vance has also referenced ‘patterns’ of illegal conduct when justifying the Mazars USA subpoena which requested Trump-related tax returns going back eight years. Patterns of financial impropriety have long been held to be evidence of ‘intent’ on the part of the defendant. Pro Publica published an analysis pointing out tax and loan discrepancies on the part of the Trump Organization relative to the 40 Wall St. building going back to 2012 and 2013. Cohen’s congressional testimony suggested that the falsification of business expense invoices was not an isolated case but part of a pattern on the part of Trump and his business to alter his business records at will.
Statute of Limitations Issues
But the duration of this pattern of impropriety also raises statute of limitations concerns which the Trump legal strategy is attempting to exploit. Most New York state felony fraud charges, including mail fraud, mirror federal five-year statutes of limitations. This means that the perpetrator cannot be charged if the crime was committed more than five years ago. State and federal Racketeer-Influenced and Corrupt Organization (RICO) charges include 10-year statutes and are used when the ‘patterns’ of illegal conduct or racketeering are evidenced, particularly when the financial wrongdoing is ‘protracted’ and ‘extensive’ as Vance has already gone on record as stating. Whatever statute of limitations is at play here, it may be that Trump’s lawyers are pursuing a legal strategy based on delaying the investigation – and such a strategy may succeed if the legal team can prevent the release of key documents needed for an indictment (such as those establishing intent) until after the statute has expired. If so, then Vance’s investigation may be foiled.
Justice delayed is justice denied. Right?
However, the most recent judicial ruling in the Mazars USA subpoena saga makes the delay strategy less likely to succeed. On Aug. 20, the federal District Court Judge Marrero ruled against the Trump legal strategy “with prejudice.” The expedited appeal of Marrero’s decision to the Second Circuit will be heard on September 1 with the same result anticipated as the last time the Trump team appealed this subpoena to the same court. The Supreme Court opens its new session a week or two later. Should the Second Circuit reject the latest Trump appeal, as expected, then it is quite possible that the Supreme Court will decline to hear any further appeal on the matter which would then compel compliance on the subpoena service by Mazars USA.
The Vance investigative team is believed to already possess much of the documentation needed to support an indictment and with the addition of evidence gathered through the execution of the Mazars USA subpoena, viable defenses will likely have been cut off. Moreover, the Manhattan DA is not bound by the Office of Legal Counsel (OLC) opinion which prevents federal indictment of a sitting president. Nor is he constrained by Department of Justice (DOJ) norms prohibiting indictments of political candidates less than 60 days prior to an election.
Notably, Vance has recently hired veteran Washington D.C. attorney Walter Dellinger. Dellinger possesses vast litigation experience as ex-Solicitor General and he headed up the OLC for a time. Dellinger also memorably authored a New York Times Op-ed in 2018 that concluded it would be justifiable to indict a sitting President, particularly if pertinent criminal statutes of limitations were in danger of expiration: “The White House should not be a sanctuary from justice.”
It appears that Vance has made an impression on the appellate process by emphasizing the Trump “delay” legal strategy. The pace of appeals decisions has recently accelerated and the defense strategy of evading indictment until relevant statutes of limitations expire may well be in jeopardy. Given the likelihood that Vance has already obtained the needed tax returns and probable appellate rulings which will provide access to the Mazars USA material, it is possible that sufficient evidence has been obtained that would support fraud indictments of the Trump Organization and pertinent executives in the near future.
An October surprise – indeed!