On February 16, New York State Attorney General Letitia James boasted of her “landmark victory” over former president Donald Trump, who had been in her crosshairs since she first attained office in 2019. James struck paydirt when New York state Supreme Court judge (i.e., trial judge) Arthur Engoron ordered Trump “to pay $364 million in damages for fraud he committed by inflating his net worth to obtain favorable treatment from banks and insurers,” as described in US News & World Report. On top of the damages (and interest at 9 percent per annum), Engoron also banned Trump and his sons from doing business as officers or directors of any New York corporation for three years, and from borrowing from any bank in New York. The combined financial impact of these restraints could well exceed the amount of the fine. Engoron’s “blistering” opinion contained these startling observations: first, that Trump (and his sons) display a “complete lack of contrition and remorse borders on pathological,” and, second, these “defendants are incapable of admitting the error of their ways.”
Engoron is blind to the massive errors in his vindictive opinion, which offers grim testimony to how judges and state prosecutors can willfully and repeatedly abuse their legal powers. At no point did Engoron prove that Trump had obtained any loans upon especially favorable terms, or even that he sought do so. The whole case stalls at step one. In his final opinion of February 16, however, Engoron took a step further by lashing out at Trump’s effort to use “the common excuse that ‘everybody does it,’ ” and further insisted that the pervasive nature of the Trumpian abuse “gives all the more reason to strive for honesty and transparency,” because even if “it is undisputed that the defendants have made all required payments, the next group of lenders to receive bogus statements might not be so lucky.”
The Trump organization has been doing business within the state of New York for years, and nothing untoward happened as it made gobs of money. If the Trump family was so determined to rip off its lenders, why did members of the organization foolishly wait to strike until their personalities were in the limelight? And why did these hardened banking professionals come back for more business if they had been either victimized or even threatened by bogus information? Engoron offers not a particle of evidence to condemn practices that have been, by his own admission, profitable. Why would the Trump organization risk civil suit from victims and criminal punishment from the state when it could make buckets of money working within the law?
To overcome the evidentiary gap, Engoron resorts to useless generalities. In his initial September 2023 opinion, Engoron insists that tough enforcement buttresses “the State’s regulation of businesses within its borders in the interest of securing an honest marketplace.” He then denounces the common defense that “everybody does it” without addressing the oversimplifications in his broad proposition. In Trump’s case, the key point is that these repeated loan transactions take place in a highly sophisticated setting where the parties are all repeat players who work within a well-articulated framework. Engoron’s claim is tantamount to saying that if all players within a closed investment community follow the same practices, they are all rubes or criminals for doing so, such that this risk of contagion requires steep, near punitive, fines. Yet these common practices are not imposed upon innocent dupes by crafty borrowers—they are institutional positives, not institutional negatives. If Engoron were correct, then all other borrowers who used similar practices should be subject to similar criminal sanctions for imitating the Trumps and their bankers.
Judge Engoron thinks he is strengthening market institutions by protecting financial actors from fraud. But by getting the analysis backwards, Engoron’s legal position will wreck the state’s premier lending industry by making standard business practices criminal offenses.
There is no doubt that Attorney General James did identify in her initial September 2021 complaint many Trump properties whose stated values may well have exceeded their worth. But if such a common practice is as corrupt as Engoron insists, why does it persist? The simplest explanation is that no one was harmed in a booming lending business, for, as two key Deutsche Bank lenders insisted, their bank made substantial profits in these transactions that were not tainted by fraud. Why? Because standard industry practice expects the lender to do its own re-evaluation of the submissions made by Trump and other borrowers before issuing a loan. That practice has huge efficiency advantages because these lenders have every incentive to make sound valuations as part of their own due diligence. Typically, therefore, all the transactional ambiguities are ironed out before the deal is closed, reducing the need for future litigation to unpack any fraud or concealment if the loan goes bad—which is, of course, now far less likely. Observing these practices makes it easier for the original lender to sell all or part of its loan portfolio to third parties, which in turn increases overall market efficiency.
Judge Engoron only makes matters worse because of his ignorance of the proper relationship between public and private enforcement of anti-fraud laws. The case for private enforcement is strongest when knowledgeable parties make a deal. They collect and organize private information about specific deals that public parties cannot possibly do, so that if these parties testify that no one has been hurt, any sensible and modest judge takes them at their word and refuses to engage in clumsy public interference. The shoe, however, is on the other foot whenever unscrupulous operators bilk either small businesses or ordinary customers of substantial amounts of money by making promises that they don’t plan to keep, only to pocket the proceeds and move on. The parties fully know that unorganized business and individuals are unable to track down and sue these miscreants, so that unless government fills that enforcement gap the thieves and con artists escape scot-free.
New York Executive Law § 63(12) is one tool to fill the gap in those cases where parties engage in “persistent fraud or illegality” (which covers any “device, scheme, or artifice”). Accordingly, the attorney general may seek to enjoin such illegal acts and obtain restitution and damages.” Here is how it works. In New York v. Interstate Tractor (1971), then–attorney general Louis Lefkowitz sued Interstate for its false representations to prospective students, stating that they would pass an examination on graduation that could get them jobs immediately in an expanding construction industry, paying $6.60 per hour. Lefkowitz then attached the affidavits of some 53 graduates who recounted their failures, and he introduce further evidence that only 14 graduates of a class of 179 got jobs, and only for lower wages. Here were real losses that justified issuing a permanent injunction, and disgorgement. Yet in his September 2023 opinion in the Trump matter, Engoron ignores all relevant differences between Interstate Tractor and the Trump case, making the irrelevant observation that Section 63(12) does not require an “intent to deceive.” He then goes on to insist that it is perfectly proper for him to order the disgorgement of profits that Trump obtained by the scheme, without showing what amounts are at stake.
Every case Engoron cites has real losses to small individuals and firms—a point he never mentions. It is easy to see how the standard legal remedies work in Interstate Tractor and similar cases. But it’s impossible to demonstrate how the Trump organization had obtained any illegal profits in its private dealings with sophisticated lenders. Read carefully, Section 63(12) does not even apply. Why enjoin a standard practice that harms no one? And why award damages when there are no bank losses? Engoron insists the want of any customer losses is “completely irrelevant” because restitution refers to illicit gains to the Trumps, not to the loss to the banks. But if there are no illicit gains from the loans, what is there to disgorge?
Engoron’s ruling is a house of cards, unworthy of the uncritical and effusive praise found in, say, the New Yorker. And now, on any appeal, Engoron insists that Trump post a bond—a potential $500 billion liability—even though Trump’s local real estate properties, which James announced that she wanted to seize, are not decamping to Florida. Trump has announced his appeal but has yet to post the bond, and has not offered a clear path as to how he will proceed. This travesty of due process desperately needs a fresh set of eyes willing to waive this exaction, but that is not easily found in New York’s progressive wonderland, where James and Engoron’s preposterous arguments are too likely to be accepted at face value.
