In the last month, the array of investigations involving Donald J. Trump and many of Trump’s associates and family members has reached an intense pitch. Today another bombshell detonated—one that may prove to be the most devastating.
New York Attorney General Letitia James has announced the filing of a monumental civil enforcement action against Trump, Donald Trump Jr., Eric Trump, Ivanka Trump, the Trump Organization and many other Trump affiliates.
The sanctions sought by the New York Office of the Attorney General (the “OAG”) are sweeping and potentially devastating: disgorgement of $250 million in profits; the cancellation of business certificates for Trump’s corporate entities; appointment of an independent monitor at the Trump Organization; a 5-year ban on Trump and the Trump Organization entering into any New York commercial real estate transactions or from applying for any loans from any New York entity; permanently banning Trump and his adult children from serving as an officer or director of a New York corporation. In addition to the potential civil penalties associated with today’s complaint, AG James also announced criminal referrals to the Southern District of New York and to the IRS. Penalties resulting from those referrals could result in substantial fines, and potentially even imprisonment.
With today’s filing of this enforcement action, it is important to consider the factual and legal bases for the claims, and how it could serve as a tipping point in cases against Trump, especially in light of the many other existing federal and state investigations.
The History of the OAG Investigation
According to court filings, the OAG began investigating Trump in March 2019 when Michael Cohen—Trump’s former lawyer and a former executive at the Trump Organization—testified that the Trump Organization inflated the values of Trump’s assets to obtain favorable terms for loans and insurance coverage, while also deflating the value of other assets to reduce real estate taxes.
Ever since, the OAG has aggressively investigated whether Trump and the Trump Organization engaged in illegal activity. The OAG has asserted in court papers that it has unearthed sweeping fraudulent and unlawful conduct. That is despite the years-long fight by Trump, the Trump Organization, and numerous other witnesses to avoid compliance with the OAG’s lawfully issued subpoenas. Trump, and others involved in the investigation, sought to frustrate the OAG’s efforts at the New York trial state level, on appeal in New York, and in federal court. Although Trump continues his quixotic campaign to stymie the work of the OAG, he has been unsuccessful at every turn. Trump was held in contempt of the New York state court in April—ultimately paying a fine of $110,000 for his intransigence and the risk of further costs—and only then agreed to comply.
The OAG reviewed hundreds of thousands of documents and deposed numerous witnesses, including Allen Weisselberg and Eric Trump—both of whom invoked the Fifth (more than 500 times each)—and Donald Trump Jr. and Ivanka Trump—neither of whom did. It is hard to know why the latter two decided to testify rather than invoke the Fifth. Their decision may have been based on a calculation that criminal charges against them were unlikely, due to the civil nature of the OAG inquiry and the new Manhattan District Attorney’s reluctance to pursue further criminal charges. (Weisselberg and Eric Trump testified in late 2020, whereas Donald Jr. and Ivanka testified only recently).
Those who invoked their Fifth Amendment rights may have helped themselves in any criminal investigation, but did themselves no favor in the OAG’s civil enforcement action: in New York, the invocation of the privilege in a civil case allows the trier of fact to draw the “strongest” inference against them. That means the judge or jury can infer from a witness’ invocation that the answer they would have given would have been damaging to their case. In the civil context, those who invoked may therefore have caused themselves, and their company, grave harm. Don Jr. and Ivanka Trump perhaps testified in an attempt to avoid that kind of scenario.
The Factual Allegations
Although we are only beginning to digest the allegations contained in today’s filed complaint, much of the alleged factual basis for the action were articulated by the OAG in court filings in recent months. Ordinarily, the fruits of an investigation would not be made public until after an enforcement action is filed. However, because Trump, the Trump Organization, and other businesses implicated by the investigation fought compliance with lawfully issued subpoenas, some of the OAG’s evidence has come to light. Court documents submitted by the OAG in its efforts to secure enforcement of those subpoenas pointed to widespread malfeasance by Trump and the Trump Organization.
Today’s complaint, taken together with the vast additional information in OAG’s prior court filings, assert that, over a period of more than a decade, Trump and his organization prepared misleading financial statements that seriously misstated Trump’s finances. Although some of the allegedly fraudulent methodologies involved sophisticated accounting tricks, many of the misleading statements seem to involve blatant falsehoods—including apparently about the size of Trump’s penthouse in the Trump Tower. The court filings indicate that these allegedly misleading financial statements were used to achieve a variety of benefits—including those to which Michael Cohen testified before Congress—such as lower taxes and more favorable loans and insurance coverage.
Inflated value in Trump’s financial statements
Since at least 2004, Trump and the Trump Organization prepared an annual “Statement of Financial Condition of Donald J. Trump,” each of which ostensibly contained a report of Trump’s net worth (or of Trump’s revocable trust while he was in office). The complaint centers on those statements for “at least the years 2011 through 2021.” Those statements were based in part on the value of real estate assets from Los Angeles to Aberdeen, Scotland. The OAG’s investigation alleges that staggering misrepresentations were made in the valuation of Trump’s assets.
One notable example is Trump’s midtown Manhattan penthouse apartment. In 2015, Trump’s financial statement reported the value of the apartment at $327 million. That figure was calculated by taking the square footage of the apartment—listed at 30,000 square feet in the statement—and multiplying it by a fixed price per square foot. But there was a problem with that method. According to Trump Organization documents received by the OAG, which were personally signed by Trump, the actual size of the apartment was just over 10,000 square feet. As Allen Weisselberg later testified, that resulted in an overstatement of “give or take” $200 million.
Another example, according to the OAG, concerns Trump’s golf course in Scotland. The Trump Organization purchased the property in 2006 for $12.6 million. Trump’s 2014 financial statement valued the property at more than $435 million—a return of nearly 3500% in eight years. Given that no cache of oil was discovered on the property in the interim, it is unsurprising that the OAG alleges that some underhanded accounting was at work.
According to Trump’s financial statements, the Trump Organization had received planning permission in 2008 for “a residential village consisting of 950 holiday homes and 500 single family residences and 36 golf villas.” Only the 500 single-family residences would be available for individual purchase—the rest were to be short-term rental properties. According to a 2017 appraisal commissioned by the Trump Organization, 557 private homes would result in a net present value profit of £16–19 million ($18–21.5 million). Yet the undeveloped land was valued at more than ten times that amount in Trump’s financial statements.
The OAG’s investigation discovered a number of other instances of alleged improper inflation of Trump’s properties, including a more than $100 million overstatement of Trump’s Seven Springs property in Westchester County, New York; a similar over-valuation of Trump’s Westchester golf course; and a greater than $200 million over-valuation of residential units in Trump’s Park Avenue property.
Of additional note is the OAG’s allegation that the statements improperly reported the extent of Trump’s liquidity. In one year, nearly a third of the amount of assets Trump reported as “cash” were in fact held in partnership entities that he did not control.
The extent of the alleged fraud is on a level that is staggering. According to today’s complaint, the “acts of fraud and misrepresentation grossly inflated Mr. Trump’s personal net worth as reported in the Statements by billions of dollars.”
Misrepresentations to Banks and Insurers
According to the OAG, Trump used these exaggerated financial statements to secure more favorable terms from banks and insurers. When considering whether to offer a loan, and what terms will be included in any loan agreement, banks evaluate the risk of default (and concomitant loss) against the potential for profit should the debtor repay the loan with interest. The better the financial position of the applicant, the more likely they will be granted a loan, and the more favorable the terms are likely to be. Based on the allegations made by the OAG, Trump abused this process on multiple occasions with banks, specifically in his dealings with Deutsche Bank.
For example, Deutsche Bank issued a $125 million loan to the Trump Organization in 2012 relating to a property in Miami, Florida. According to the OAG, Deutsche Bank had reviewed the inflated financial statements in advance of issuing the loan, and ultimately decided to extend the loan in part based on its understanding of the “Financial Strength of the Guarantor” (referring to Trump) as well as Trump’s personal guarantee.
Deutsche Bank issued two subsequent loans to the Trump Organization—one for $107 million and another for up to $170 million. In both cases, according to the OAG, Trump’s financial profile—based on the fraudulent information contained in the financial statements—was a substantial factor in Deutsche Bank’s assessment of the loan deals it agreed to. The latter agreement was made with Trump Old Post Office LLC—a Trump organization subsidiary, whose officers and owners were Trump, Eric Trump, and Ivanka Trump.
The OAG also has alleged that the Trump Organization further used its inflated financial statements in its dealings with insurers. One such example concerned a surety bond agreement between the Trump Organization and Zurich North America, in which Zurich ultimately agreed to an aggregate bond limit of $20 million. Surety bonds provide a mechanism for parties involved in a contractual relationship to manage risk: for instance,some provide protection in the event of non-performance, which results in the underwriter paying the aggrieved party. The financial condition of the purchaser of a surety bond agreement therefore is a key factor in determining whether an insurance company will underwrite such bonds, as well as the price the insurer will charge. That is because the risk of non-performance is higher when an individual or business is less financially stable. According to the OAG, on at least two occasions, the Trump Organization intentionally misrepresented the reliability of the financial statements to persuade Zurich to continue the surety bond program.
Misleading Statements to the IRS
In addition to using the financial statements to obtain improper benefits from banks and insurers, the OAG alleges the Trump Organization used similar financial tricks to deceive the IRS. One example concerned the Trump National Golf Course in Los Angeles. The Trump Organization acquired the property in 2002 after the prior owner had declared bankruptcy. While the prior owners were constructing a golf course, a large chunk of the property dropped into the Pacific Ocean during a landslide, rendering the property unstable. Likely due to the engineering difficulties associated with building on the property, the Trump Organization decided to donate a conservation easement for tax benefits. An appraisement in 2012 determined the net value of the potential development of the property to be roughly $18 million. As set forth by the OAG in its papers, a series of subsequent appraisals calculated higher and higher values by failing to account for the most accurate engineering appraisals, and failing to discount future profits associated with lengthy development timelines. According to the OAG, Trump reported an inflated value of $25 million associated with his donation of a conservation easement on the property.
The OAG also alleges another scheme undertaken by the Trump Organization to receive an improper tax benefit associated with Trump’s Seven Springs property in Westchester County, New York. That scheme places Eric Trump as a central figure in providing inaccurate or incomplete information to project engineers and appraisers in order to inflate the value of a planned conservation easement on the property. According to the OAG, following the easement’s donation, the associated tax deduction resulted in a multi-million-dollar benefit to Trump.
The New York District Attorney Investigation
In order to understand the likely outcome in the OAG enforcement action, it is important to review the current status of the District Attorney of New York (the “DANY”) investigation. Last summer, the DANY indicted the Trump Organization and its longtime CFO Allen Weisselberg on an array of charges related to tax fraud. Although Trump was not named in the indictment, the DANY continued to investigate Trump, convening a grand jury last fall in furtherance of its investigation.
That investigation of Trump hit a roadblock, however, with the swearing in of District Attorney Alvin Bragg at the start of the year. Reports indicate Bragg stalled the DANY investigation of Trump, which led to the abrupt resignation of two prosecutors leading the office’s efforts.
Nevertheless, the office continued its prosecution of Weisselberg and the Trump Organization. On Aug. 18, Weisselberg entered into a plea agreement and admitted his guilt to all 15 felony counts. In addition to agreeing to serve a five-month sentence at Rikers Island and a subsequent five-year probation term, as well as to a payment of nearly $2 million, Weisselberg agreed to provide testimony in the office’s criminal trial against the Trump Organization scheduled for October.
Notably absent from the plea deal is any agreement to cooperate in any investigation against Trump or his family members—something Weisselberg has reportedly refused to do ever since he was indicted. Of course, for a number of reasons, criminal defendants frequently choose not to cooperate with authorities. In our experience, however, it is extremely unusual for a prosecutor to allow only partial cooperation. That is especially so when the possible severity of sentence facing the defendant is high—more than a decade, in this case—and the probability of conviction appears near certain.
This set of circumstances suggests that Weisselberg is a critical witness for the prosecution in the impending criminal trial against the Trump Organization, and that his testimony is likely to be particularly damning. Under New York law, with limited exceptions not applicable here, the actions of a corporate officer are imputed to the corporation for which they work. Even if Weisselberg ends up testifying only to his own illegal conduct on behalf of the Trump Organization—which is unlikely, given that he pleaded guilty to conspiracy—that evidence could be what is needed to convict the Trump Organization.
One open question from this investigation is what use, if any, the OAG can make of the testimony and material received by the grand juries convened by DANY. The answer is probably that OAG can use what will otherwise be made public in the DANY matter. That is despite the fact that OAG assigned two of its lawyers to assist with the DANY investigations. New York law provides for the secrecy of all “grand jury testimony, evidence, or any decision, result, or other matter attending a grand jury proceeding.” To avoid even an appearance of impropriety, the OAG will likely need to wall off its lawyers who were cross-designated to assist with the DANY investigation. Nevertheless, all materials that become public from these proceedings will be fair game—including all testimony and evidence that is introduced in the criminal trial against the Trump Organization this October. As the civil enforcement action proceeds, the material can be utilized in discovery and in any civil trial.
Finally, there is a possibility of further criminal prosecutions related to the DANY prosecution of Weisselberg and the Trump Organization. Paragraph 5 of the complaint very bluntly alleges violations of a long list of criminal statutes that some of the authors of this essay have also analyzed in a lengthy report. The DANY may alter course and decide to bring these related charges—potentially against Trump and others in his orbit, including Weisselberg himself. Regardless of what the DANY does, the criminal prosecutions may not yet be over for Weisselberg, the Trump Organization, and others. Under the “dual-sovereignty doctrine,” a defendant can be prosecuted in state and federal court for the same conduct. Indeed, it is curious, to say the least, that there has been no sign of a federal criminal investigation given the wealth of evidence, particularly Weisselberg’s plea to evading both federal and state tax laws.
The OAG Enforcement Action
In the complaint filed today, the OAG alleges seven causes of action against Trump and his co-defendants, all under New York Executive Law § 63(12).
This is the statute that the OAG has used to perform its investigation thus far, as it provides for the issuance of subpoenas to compel witness testimony even before filing a complaint. A violation of this statute requires proof of a pattern of fraudulent or illegal business actions, which can be shown through repeated tax fraud. Penalties include damages (covering any demonstrated losses of parties injured by the fraud) disgorgement (covering any net profits attributable to the fraudulent conduct), canceling of corporate certificates, and other equitable relief (including the various sanctions today’s action seeks, including prohibitions on certain business activities in New York State).
The OAG elected not to seek damages in this case, which is unsurprising given that proving damages would have been a difficult challenge to overcome. Courts generally do not award damages they deem to be speculative. It may be true that Deutsche Bank would have charged higher interest on its loans to the Trump Organization, and that Zurich North America would have demanded higher prices on its surety bonds—but the OAG likely decided that proof of exactly how much would have been too speculative for a court to award.
In contrast, seeking disgorgement of profits was a wise course of action for the OAG to take. New York courts have held in enforcement actions under § 63(12) that the remedy of disgorgement does not require a showing of a direct loss to any particular party. Moreover, the OAG has successfully secured disgorgement of profits under § 63(12) in a number of cases, including against Ernst & Young LLP for its actions assisting Lehman Brothers in the lead-up to the 2008 financial crisis, against J. Ezra Merkin in connection with the Madoff Ponzi scheme, and against Vyera Pharmaceuticals (the renamed firm of former CEO “pharma bro” Martin Shkreli). These actions alone resulted in disgorgement penalties of tens of millions of dollars.
Perhaps even more devastating, § 63(12) allows for a host of additional remedies that are tantamount to a “corporate death penalty” for the Trump enterprises named in the complaint and for the role of Trump and the other defendants in doing business at all. That includes canceling corporate certificates without which the businesses cannot operate, appointing an independent monitor, barring Trump and the Trump Organization from doing loan, real estate and other transactions relating to New York for five years, permanently barring Trump, his adult children and other defendants from serving as officers or directors of New York businesses, and much more. This potentially yields many of the same effects as judicial dissolution that we discuss below and may have led the OAG to determine that pursuing judicial dissolution simply was not worth the risk.
One potential caveat, however, is how far back any such case may go. Generally, these actions are subject to a six-year statute of limitations. Here relief is sought for conduct spanning 2011 through 2021. A statute of limitations may however be tolled due to fraudulent concealment—meaning when an alleged wrongdoer takes steps to hide their fraudulent activity, the statute of limitations does not begin to run until the misdeed is discovered. The United States District Court for the Southern District of New York has previously tolled an action under § 63(12) for just such a reason. It is possible the court could find fraudulent concealment here, allowing more years of activity to be covered by the suit and for greater penalties to be imposed.
Given the foregoing allegations, the OAG could also have brought claims under New York’s False Claims Act. It had also long been speculated that the OAG may file for the so called “corporate death penalty”—an option that the OAG appears to have decided against. We address these options below, and explain the likely reasons why the OAG elected to file only under § 63(12).
New York False Claims Act
The individual defendants named in today’s enforcement action, including Trump and his children, may have dodged a bullet by avoiding a potential action under the New York False Claims Act (the FCA). The FCA prohibits avoidance of payment owed to a state or local government. Those found liable for violating the FCA are subject to potentially devastating penalties—both for the entity that made a fraudulent filing, and for any individuals who conspired to make the filing. Penalties include three times the amount of all damages proven, as well as payment of the costs of litigation, including attorneys’ fees. Additionally, the statute of limitations is ten years, potentially allowing for enforcement related to a long period of fraudulent activity.
Although the FCA was only passed in 2007—and only amended to apply to tax fraud in 2010—the OAG has already won some sizable awards under the statute. In 2018, following years of litigation, the OAG settled a case of tax fraud under the FCA with wireless carrier Sprint for $330 million. Another application of the statute in 2013 resulted in a $138 million award in connection with illegal marketing of drugs in New York by Johnson & Johnson and Janssen Pharmaceuticals.
The FCA in New York is young, but it has teeth. As with so many other aspects of the case, it is difficult to project the size of a likely penalty under the statute. Weisselberg’s recent plea agreement admitted to evading payment of taxes due on $1.76 million. Should such tax evasion prove to be widespread throughout the Trump Organization—and with treble damages in the mix—a likely award could have been very substantial indeed.
It is possible the OAG elected not to pursue causes of action under this statute to narrow the focus of any potential trial to issues related to fraudulent business activity. And with the New York AG’s criminal referral to the IRS, it is possible that substantially more than mere financial penalties are on the horizon for Trump, his adult children, and other named individual defendants.
Often called the “corporate death penalty,” the OAG could in theory file have filed for judicial dissolution of the Trump Organization by alleging it has “transacted its business in a persistently fraudulent or illegal manner.” The more than decade-long pattern of misconduct uncovered by the OAG’s investigation might provide legal justification for dissolution. Such action, if successful, would have required the winding down of the Trump Organization and the sale of its assets. In this case, Trump would have stood to lose control not only of his businesses, but of many of his properties—including his most prized skyscrapers, hotels, and golf courses. However, Trump may have been able to retain those assets by purchasing the associated rights to the properties with corporate entities chartered outside New York.
Recent case law, however, may have dissuaded the OAG from filing for judicial dissolution, as it is far from clear whether such an effort would have been successful. The OAG’s action against the National Rifle Association provides a cautionary tale. As the New York trial court described earlier this year, the OAG had alleged:
a pattern of exorbitant spending and expense reimbursement for the personal benefit of senior management, along with conflicts of interest, related party transactions, cover-ups, negligence, and retaliation against dissidents and whistleblowers who dared to investigate or complain, which siphoned millions of dollars away from the NRA’s legitimate operations.
Nonetheless, the court dismissed the OAG’s request for judicial dissolution. Relying on a case written in 1890 from New York’s highest court, the trial judge found that in addition to persistent fraudulent activity, there must be serious injury to the public. Quoting a more recent case, the judge noted that “before the Attorney-General can obtain judicial dissolution of a corporation, there must be a grave, substantial and continuing abuse, involving a public rather than a private right, by the corporation.” Because the abuse alleged by the OAG involving the NRA primarily damaged the organization and its members—rather than the public at large—the trial judge found dissolution was not merited.
The types of cases where judicial dissolution in New York has been approved involved persistent harm to individuals or small businesses. Given this background, it is unclear that judicial dissolution would have been granted if the OAG were able to prove only that the Trump Organization defrauded a small handful of other large corporations and occasionally cheated on its taxes. On the other hand, given Allen Weisselberg’s plea and the substantial evidence that is likely to come out during the October DANY trial of the Trump Organization—in addition to whatever other evidence the OAG has yet to make public—it remains possible that sufficient evidence of widespread public harm could have been presented for judicial dissolution to be granted.
Even if the OAG has sufficient evidence such that a case for judicial dissolution might be winnable, it makes sense they chose not to pursue it. That is understandable in light of the OAG’s outcome this year in the case against the NRA. Nevertheless, the arguments in favor of actual public harm caused by the alleged fraudulent and illegal actions of the Trump Organization seem much stronger than the strictly internal harms described in the case against the NRA.
At any rate, as we note above, the remedies that were sought such as canceling corporate certificates to do business, appointing a monitor, and barring business activity potentially yields many of the same effects as judicial dissolution. That may have led the OAG to determine that pursuing judicial dissolution simply was not worth the risk.
Conclusion: The Tipping Point
Although Trump, his company, and most of those in his orbit have so far avoided the full force of the law, that run of good fortune may soon be over. The Trump Organization faces financial penalties in the DANY criminal trial scheduled for October. The Department of Justice investigation of Trump concerning his improper storage of sensitive government materials continues, with the appointed special master seeming ready to hurry the case along (and dubious about Trump’s arguments). Separate federal grand juries reportedly are investigating Trump’s alleged obstruction of Congress in and around January 6, his involvement in an alleged scheme to obtain fraudulent electoral slates, and looking at Super PAC, Save America, for fraud. Some 40 subpoenas recently were issued in the investigation reportedly focused on false slates. The House January 6 Committee is continuing its work, with hearings set to resume shortly. And a local grand jury in Fulton County, Georgia is accelerating its investigation into Trump’s efforts to overturn Georgia’s 2020 election results, with charges potentially coming as soon as the end of the year.
Nor does it stop there. Along with today’s announcement of the filing of the civil action, the New York Attorney General also stated that she had referred her office’s findings for criminal prosecution by federal authorities: to the Southern District of New York for possible charges of bank fraud and insurance fraud, and to the IRS for possible charges of tax fraud. Based on the allegations contained in today’s complaint, Trump and his children face a very real risk of indictment, criminal conviction, and imprisonment.
With sustained prosecutorial focus on a single individual from so many fronts, any additional straw may break the camel’s back. Because of the significant pressures on Trump already, we think this OAG civil case against his business and him could be that straw. He requires a substantial financial foundation to help sustain his many legal battles. Moreover, any sanctions in the civil case that result in the loss of prominent properties, where so much of Trump’s identity is tied up, would be a significant blow. The appointment of a monitor to replace him would be a devastating blow to his ego. Additionally, it has been our experience that, when family members are included in proceedings, it can take a devastating emotional toll. Here, as we have noted, the OAG has sued three of Donald Trump’s children who were involved in alleged wrongdoing at the Trump Organization.
At some point, the aggregate effect of all these investigations will reach a tipping point. We’ve often seen this in our collective over half-century of experience in white-collar criminal cases. The cumulative weight bearing down upon a possible defendant—whether corporate, individual, or both—at some point becomes unsustainable. To take another example of why that is the case, civil and criminal events can sometimes trigger default provisions in loan documents or other commercial contracts. While we’re not privy to all of the documentation here, that is a risk that we will look for (and, indeed, avoiding that outcome may be one of the reasons that the New York AG has expressed reservations about seeking the corporate death penalty). A criminal conviction in the October trial could also impact whether lenders or others choose to act based on any such provisions. Indeed, it has been reported that previous lenders have already cut ties with Trump, and that few firms remain are willing to do business with him. Trump faces a risk that the number of such willing business partners may dry up entirely.
Of course, this all is an assessment of future events based solely on currently available data. So far, Donald Trump has withstood years of legal pressures that would have felled a less shameless person. He has a genius for impunity the likes of which we have never seen. Still, we have never seen him, or any individual, come under this many fronts of sustained legal pressure. Today’s announcement may well serve as a tipping point signaling the beginning of the end.
Disclosure: Danya Perry is a co-founder and attorney at Perry Guha LLP in New York, as well as a former federal prosecutor in the Southern District of New York and New York State Deputy Attorney General. Danya represented Mr. Cohen in his successful habeas corpus complaint against William Barr and others after Mr. Cohen was unlawfully remanded to federal custody in violation of his First Amendment rights.