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    Thursday, June 20, 2024

    Guilt, despite absence of intent, malice, damages or fraud

    Let me say first that I am not a lawyer. Nor am I a supporter of Donald Trump for the GOP presidential nomination. Yet, I am troubled by the New York Executive Law § 63(12) (the “Law”) under which Donald Trump and his associates have been found to have committed fraud, his business licenses canceled and various of his business units ordered dissolved within 10 days – all before a trial in which New York State seeks a whopping $250 million from The Donald.

    This Law strikes me as dangerous, certainly to anyone doing business in New York State. As the order by New York Supreme Court Justice Arthur Engoron (“the Order”) acknowledges, no victim of Trump’s fraud “lodged a complaint” or “otherwise claimed damages.” Usually, a murder conviction requires that the victim’s body be found. In the Trump case, the body is alive and kicking.

    The Order identifies by type the undamaged non-complainants, along with the crime, but names very few: “defendants committed repeated and persistent fraud by preparing, certifying and submitting to lenders and insurers false and misleading financial statements.” Mostly, the Order says simply “Donald Trump submitted SFCs [statements of condition],” but not to whom. Yet, the Order does name one recipient, Deutsche Bank, Germany’s largest bank.

    If there were no self-identified victims and no harm was done, it seems over-harsh to revoke business licenses and dissolve businesses before trial and to seek a $250 million sanction. Yet, evidently, the Law provides for this remedy. The 35-page Order explains a few other aspects of the Law that may raise eyebrows. First, for a finding of fraud under this statute, it is not necessary for someone to perpetrate actual fraud; it is enough that one “creates an atmosphere conducive to fraud.”

    Second, there is no requirement of intent: “the Law does not require demonstrating an ‘intent to defraud’.” Really? Third, there is no standard of materiality: “materiality and scienter [intent] are not requirements under § 63(12).” Apparently, a person can be prosecuted for defrauding someone of a paper clip. Fourth, there is no alternative standard in the instance of sophisticated victims (or non-victims, as the case may be). In the Trump case, Deutsche Bank is as much a victim as a fifth grader.

    Finally, the remedies that the New York Attorney General can seek in court are extraordinary, including the aforementioned pre-trial revocation of business licenses and dissolution of business entities. Of course, if there is actual fraud and an actual victim, damages can be awarded to the victim. Fair enough. Yet, in the absence of a victim and damages, the AG can seek disgorgement of profits derived from the fraudulent activity. Huh?

    In Trump’s case, it doesn’t matter that the lenders and insurers sustained no damages and, in fact made money – loan interest and insurance premia. Trump et

    al must disgorge the profits Trump earned from the activity. To quote the Order, “Disgorgement… focuses upon the gain to the wrongdoer as opposed to the loss to the victim.”

    New York is seeking $250 million in disgorgement. Engoron did not grant this relief in his Order, but he may award it in the non-jury trial now underway. You might be wondering what might justify the exercise of such extraordinary powers by New York State authorities. You guessed it: protection of the public interest.

    The Order offers a string of case citations: “courts have held that a state has a quasi-sovereign interest in protecting the integrity of the marketplace”; “Executive Law § 63(12) constituted proper exercises of the State’s regulation of businesses within its borders in the interest of securing an honest marketplace.” Yet, the New York Attorney General is not the sole guardian of the marketplace.

    The Securities and Exchange Commission oversees securities markets and investments nationwide; note that it provides exemption from much regulation for transactions between sophisticated parties. There are both federal and state banking and insurance regulators that provide oversight, including as to real estate transactions of the type involved in the Trump case. Arguably, these regulators are more expert in these areas than the New York Attorney General.

    The Executive Law as manifest in the Order appears duplicative of other more qualified regulatory bodies and tilted almost to the point of presuming guilt rather than innocence. It is intrusive, interjecting the state as referee into the marketplace, devaluing the “free” in free enterprise and undermining the principle that the market is largely self-correcting, as in Adam Smith’s invisible hand.

    Whether you like or hate Trump, and despite the manifest flaws in Trump Organization financial statements, the excessive powers being wielded against him under this Law should worry you. Once government arrogates to itself this kind of overweening power, it seldom relinquishes it. New York v Trump will serve as a precedent to cite in, and to justify, future cases. That should worry all citizens.

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