Peeling away financial reporting issues one layer at a time

Was Donald Trump Complicit in a Securities Fraud?

What do the race for U.S. President and financial reporting have in common?

Non-GAAP performance measures!

It’s looks like a stretch, I know, but stay with me. If you will give me a moment to tell you about the SEC’s Accounting and Enforcement Release (AAER) No. 1499, In the Matter of Trump Hotels & Casino Resorts (THCR), Inc., you’ll know what I’m talking about.


In 1999, Donald Trump was the board chair of THCR, a public company listed on the NYSE. The most prominent property of THCR was the Taj Mahal hotel in Atlantic City, which was well known for extravagance in design and decoration, and the resulting high costs to build and operate. Adding to the high fixed cost burden on profitability, THCR was financed in significant part by high-interest junk debt.

THCR’s earnings were never anything to brag about (though it’s hard to imagine that The Donald wasn’t bragging about something at the time). But two very meh things happened during the third quarter of 1999.  First, THCR made the decision to shut down an older property, the Trump World’s Fair, taking a $81.4 million accounting charge in the process.

Second, a restaurant company that was leasing space at the Taj Mahal negotiated a termination whereby THCR took over its leasehold improvements.  GAAP required THCR to recognize a gain from continuing operations for the value of the leasehold improvements, which THCR estimated to be $17.2 million.

THCR’s earnings release for Q3 of 1999 was different from its previous earnings releases. Among other things, the earlier releases itemized revenues  by property and by source of revenue (e.g., hotel, casino, other). But in this quarter, THCR adopted a “streamlined,” format, which only displayed revenue as a single line item for each property. Moreover, even though the $17.2 million one-time gain would normally not be considered to be a component of revenue, it was added to the Taj Mahal total revenue — which was not disaggregated by source.

The SEC Findings

Pretty fishy already. Still, the SEC might have given THCR a pass on their press release but for the fact that it reported a “pro forma” measure of profitability instead of traditional net income: i.e., GAAP earnings EXCLUDING the $81 million charge occasioned by the shuttering of Trump World’s Fair.

The gist of the AAER, and the lesson to all issuers being sent by the SEC is that if you must report pro forma earnings, you can’t cherry pick. It was misleading for THCR to exclude the Trump World’s Fair loss while including the $17.2 million gain on the early termination of the lease. And, the discussion of revenue trends without separately mentioning the $17.2 million gain wasn’t kosher either:

“…THCR violated Section 10(b) of the Exchange Act and Rule 10b-5  thereunder by knowingly or recklessly issuing the Earnings Release.”

In other words, the SEC found, and THCR did not deny, that THCR committed securities fraud.

Was Donald Trump Complicit in THCR’s Securities Fraud?

It’s an understatement to say that there have been a lot of questions about Donald Trump lately:

  • His Trump University is on trial for defrauding students;
  • His former ghostwriter now admits that he alone wrote The Art of the Deal, that Mr. Trump did not read books, had the attention span of a gnat (my term), and that the book did not accurately portray his business acumen;
  • An NYT columnist weighed the evidence and concluded that Mr. Trump is a racist;
  • A former CIA acting director thinks that Mr. Trump is a security risk and is being manipulated by Vladimir Putin;
  • And some are even questioning whether he actually likes babies.

But, was Donald Trump complicit in a securities fraud?

If Mr. Trump had been performing his duties as fiduciary of THCR’s shareholders, then one would think that he would have been on top of the details behind the press release in question, and would have been aware of the manner in which it was doctored to be misleading.

But, if Mr. Trump had been kept in the dark by THCR management about the machinations in the earnings release, then just what was he doing as the THCR’s Board Chair? Did he hire the right people to run his company? Did he ask the right questions?

So, it would seem that Mr. Trump is damned if he was in on the scheme to mislead investors, and damned if he wasn’t.

* * * * *

People can go to jail for being associated with a securities fraud.  But to be clear, I’m not chanting “Lock him up!”  I’m just asking a question.

Because it seems to me that few others have.


  1. Reply Michael Pakaluk August 8, 2016

    Why do you suppose (as described in the SEC release), within two days of its earnings release, THCR’s CFO began calling analysts to inform them of the omission of the one-time gain? What would be the motive for that way of proceeding? Paragraph P: ” Immediately after the issuance of the Earnings Release and the conference call, analysts began asking questions about the details of the Company’s increase in revenues. Within hours of the conference call, THCR’s CFO spoke to several analysts who called with questions about specific aspects of Company’s third-quarter results, and he provided them with information about the All Star Café gain. Over the next few days, additional analysts raised questions about the quarterly results, and the lack of detail in the Earnings Release. As a result, the Company’s CFO and Treasurer attempted to speak to every analyst who had been on the conference call to explain the All Star Café transaction. In addition, the Company decided to accelerate the filing of its 10-Q for the quarter, which would contain a description of the one-time gain.”

  2. Reply Dave F. August 9, 2016

    It is significant that THCR settled this enforcement action (resulting in a cease and desist order) rather than defend its actions in court. Trump has boasted that he doesn’t settle lawsuits.

  3. Reply Steve Thomas August 14, 2016

    Surprise – the political and crony capitalist elite are above the law. It’s a great battle – politicians “all the things are illegal – unless you pay us”. Cc’s we will do what we can to get away with stuff – if we lose we pay a fine.

  4. Reply Kacy Fletcher August 17, 2016

    It’s all bluster and hot air with Trump and I just hold my breath how far he will take it.
    Great insights, I always appreciate your angles.

  5. Reply Chitan August 20, 2016

    Trump in my opinion does not really want to become US president. He is simply looking for some sorts of publicity which he would use to launch his next line of duggy deals. This post reminds me of an aticle that I read from Accountantnextdoor that the word Trump should be added to finance dictionary to mean Risky.

  6. Reply louis Kirby August 21, 2016

    Great post. I’m pretty sure he has little curiosity and I’m not entirely convinced he’s actually literate. Maybe that’s why he avoids teleprompters…

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