Understanding Banking Fraud: Donald Trump and the New York Attorney General

I wonder if at some point in the future, someone will write a book about white-collar crime using Donald Trump’s career as a basis. I actually began this week intending to write a blog post examining the Espionage Statutes in light of the ongoing litigation in Florida over the seizure of classified information from Trump’s residence at Mar-a-Lago but shifted to the civil suit filed by the New York Attorney General (NYAG). In the end, a discussion of banking fraud seems more relevant to more people than a discussion of the espionage statutes (although that discussion would be fascinating).

It should be noted at the outset that neither the Trump Organization nor any of the Trumps have been charged with banking fraud. The NYAG filed a civil suit against Donald Trump and three of the Trump children alleging fraud, specifically the over-inflation of the value of real estate to gain more favorable terms from certain financial institutions. A civil suit, however, is not a criminal prosecution. The Trump Organization is currently the defendant in a criminal state income tax fraud case, but the allegations in that case differ from the allegations in the current case.

In State of New York v. The Trump Organization currently pending in the state court in Manhattan, the Organization is charged with grand theft and tax fraud. The CFO of the Organization, Allen Weisselberg, has already pled guilty. The allegations in that case revolve around luxury items, private school tuitions, rents, and other valuable consideration that was provided to people (including Weisselberg). These payments are alleged to be compensation subject state income tax for which no income tax was paid.

The new civil case filed by the NYAG alleges fraud as well, but the fraud in that case concerns the intentional inflation of property values in order to gain more favorable finance terms from financial institutions. The NYAG had referred these matters to the U.S. Attorney for the Southern District of New York and the District Attorney for Manhattan for criminal investigation and prosecution. In this article, I will attempt to explain what all of this means focusing especially on the federal Bank Fraud statute since that is where the greatest jeopardy lies for the former President and his children.

Civil versus Criminal Cases

While it may be generally understood that fraud is a crime, allegations of fraud arise most frequently in civil cases. A civil case is a lawsuit between two private parties wherein the person bringing the suit, known as the “plaintiff”, seeks to recover “damages” from one or more defendant(s). Damages in the civil context are limited to money, or sometimes a court order prohibiting a defendant from certain activities in the future (working in the securities industry, for example). A person found liable in a civil suit for fraud does not become a convicted criminal and cannot be sentenced to prison.

By contrast, in a state or federal criminal case, the government seeks to convict the defendant of a crime and impose a punishment. The punishments imposed, particularly by federal courts, can be harsh. The recovery of damages by the victim—referred to as restitution in criminal cases—is a secondary concern. If a defendant is sentenced to twenty years in prison, it is unlikely that any restitution will ever be paid.

There are other differences as well. A civil case begins with the filing of a Complaint. A criminal case begins with the finding of probable cause by a grand jury which returns an Indictment (although some states permit an Information filed by a prosecutor followed by a finding of probable cause by a judge or magistrate). No such “approval” is needed for the filing of a civil Complaint. Civil cases have a less stringent burden of proof, “clear and convincing” evidence in a civil case versus “proof beyond a reasonable doubt” in a criminal case.

The different due process considerations are particularly important in the NYAG case against Trump. In a criminal case, a defendant cannot be compelled to testify against himself or herself. In a civil case, a defendant cannot be compelled to testify, but the invocation of the Fifth Amendment can be used to establish liability. In a criminal case, it cannot even be mentioned. In the NYAG case, it has been reported that the former President invoked the Fifth Amendment over 450 times. His failure to answer these questions creates an adverse inference that a finder of fact could use to infer the answers would have not been favorable to the President. Whether the President asserted the Fifth Amendment, however, is something that cannot even be mentioned in the criminal case.

We represent both plaintiffs and defendants in civil frauds and in arbitrations, and while a substantial financial judgment is unpleasant, it is no where as unpleasant as a criminal conviction can be. Therefore, when the realistic prospect of a criminal conviction exists, it is often better to invoke the Fifth Amendment in the civil case understanding that the impact in the civil case will be adverse.

Bank Fraud

A finding of liability in a civil fraud case does not necessarily foreshadow a criminal conviction for Bank Fraud in a criminal case. In fact, most civil fraud cases are never prosecuted criminally. There are a number of practical considerations the government will have to consider. First, it faces a higher burden of proof—proof beyond a reasonable doubt as opposed to proof by clear and convincing evidence. Second, the government would not be able to use the Trumps’ invocation of their Fifth Amendment rights against them in a criminal trial. The fact that they asserted their Fifth Amendment rights against self-incrimination cannot even be mentioned.

In addition, because the constitutional right to a trial by jury is stronger in a criminal case than in a civil case, the government would have to be concerned with how a jury is going to view the evidence. In a civil case, the NYAG may even be entitled to “summary judgment” meaning that the judge could find members of the Trump family liable without a trial.

Turning then to the statute itself, there are actually two types of Bank Fraud in 18 U.S.C. 1344. The first type of Bank Fraud involves defrauding a bank. The second type involves obtaining “…moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises”.

From what I can determine, no financial institution is alleged to have suffered any financial loss, it does not appear that any financial institution has been defrauded. In fraud cases generally, it is often not difficult to find a “false statement”; however, that false statement must be related to some financial loss. In other words, there must be “convergence” for a crime to have actually been committed. The Trumps may therefore be safe if they were prosecuted under 18 U.S.C. 1344(1).

18 U.S.C. 1344(2) poses greater risks for the former President and his family. In order to secure a conviction under this statute, the government would need to prove: 1) that the Trumps inflated the value of assets; 2) that he did so in connection with a loan application; and 3) that he did so in order to obtain favorable financing for the loan. The government would have to prove each of these elements beyond a reasonable doubt. Since no evidence has yet been presented, it would be inappropriate to speculate on the strength or weakness of any case that could hypothetically be brought.

However, if the allegations made by the NYAG turn out to be true, a criminal prosecution would be possible, perhaps even likely.

Potential Defenses to Consider

There may be some defenses that the Trump team could use which should be noted here.

The Unique Nature of Trump’s Ownership. First, is goes without saying that Donald Trump is like no other person on the face of the earth. He is undoubtedly famous or infamous, and his fame or notoriety likely make anything he owns more valuable than they would be if they were owned by someone else. He has spent a lifetime enhancing the value of the “Trump Brand”, focusing on ostentatious wealth and privilege.

If Trump is to be believed, he is a billionaire many times over with the best of everything, the best residences, the best jets, and the best wives. Whether this wealth and success are real or illusionary, I would suggest is immaterial. He has been a celebrity with his show The Apprentice, and he served as the President of the United States. There are many people who would pay extra to live in a New York condominium Donald Trump once lived in. And it doesn’t matter if Trump turns out to be President again or finishes the remainder of his life in prison. The Trump touch adds value. A chair once owned by J. K. Rowling sold for $394,000 even though it was probably worth less than $100. The same is true for items owned by famous criminals. A revolver owned by Jack Ruby and used to shoot Lee Harvey Oswald sold for over $2 million even though the fair market value of the pistol would only be about $670.

The NYAG claims that the value of some of Trump’s property was inflated by two to three times its fair market value. An attorney representing Trump in a Bank Fraud investigation/prosecution might want to retain experts to focus upon the impact Trump’s ownership of an item has on its fair market value. Also, since the value of any given item is the price a willing buyer would pay for an item on any given day, it might be beneficial to find people who were willing and able to but Trump’s properties for the price he valued them at.

Of course, I have not seen any of the discovery in the case, but the Complaint alleges, for example, that Trump lied about the size of his penthouse (I know that is difficult to believe) and lied about the existence of restrictions and easements on his property at Mar-a-Lago. Lies about these more objective criteria would be easier to prove and may pose a greater danger to Trump and his family, but then again, it could be argued that even these statements were not “material” since thy do not affect the value of the properties in question.
Ultimately, it would be for a federal jury in Manhattan to decide guilt or innocence, but it could be argued that the property was more valuable than it might appear because it was owned by Donald Trump.

The “Release” Donald Trump Mentioned. One thing that makes any white-collar criminal defense lawyer cringe is the sight of his or her client on TV giving an interview. I am not talking about the interview where he said he could declassify information just by “thinking about it”, although I am sure that made some of his defense counsel cringe. No, I’m talking about his statement the following day to the affect that he had a “Release” that the financial institutions signed, a beautiful, perfect release, I am sure. Trump even said it was a page and a half long and that he had read it (which he said like it might be an unusual occurrence).

I have prosecuted and defended numerous fraud cases, and it is not unusual for a defendant to produce a release from a purported victim. Unfortunately, these releases have no impact on a criminal prosecution and may show a defendant’s intent to defraud. In the civil context, a release would have to be supported by “full disclosure”. Since the initial representation was false, there would be no disclosure and the release would be ineffective.
In a criminal case, a victim can never release a criminal defendant from liability for a criminal violation where the real victim is the United States. In other words, a victim cannot excuse criminal conduct. Therefore, the release that Trump references would not be useful to him in a criminal prosecution. To the contrary, the fact that he attempted to have a financial institution release him from liability for false statements he made would tend to show knowledge that the information he was providing was indeed false and that he knew it was false.

Advice of Counsel or Other Professional? There are times when the advice of an attorney may negate specific intent to commit a crime. We have had cases where attorneys have advised client to take actions that were illegal, and, in certain circumstances, following the advice of that attorney can lead to a defense.

Specifically, when it comes to Banking Fraud, it is not unusual for loan officers or other senior banking officials to be complicit in overinflating property values, particularly when the official involved is paid on commission or receives some other form or direct or indirect bonus or other incentive. We would need to know much more about the negotiations leading to this loan and the preparation of the application itself, but these are matters that a competent defense counsel would explore. At a minimum, if a customer is doing as he or she is told by “the Bank”, that fact could negate specific intent. If the official is senior enough, it could constitute actions by the Bank itself. Since the Bank cannot defraud itself or be a party to defrauding itself, there is no crime.

Conclusion

Charges of criminal bank fraud are both serious and complex and involve both an understanding of banking law as well as white-collar criminal statutes. Each case is different, and the difference between a conviction and an acquittal can rest on a few small facts.

It appears this suit will likely not be the last of the former-President’s legal woes.