What Passes for Justice in America

On December 6, 2022, after only two days of deliberation, the jury in the criminal trial of the Trump Organization returned guilty verdicts on all seventeen charges levied against the firm which involved consistent manipulation of accounting ledgers to hide income for key executives, dodging income taxes for those individuals and payroll taxes for the firm. The conviction draws obvious attention as a criminal conviction of a firm operated as a tightly controlled private business owned by a man running for then serving as President of the United States during some of the years covered by the charges. However, the conviction should also draw attention for what it says about how the justice system operates in America.

A Recap of the Charges

The charges were filed on July 1, 2021 in New York State Court as a result of coordinated investigations conducted by the Manhattan District Attorney (then Cyrus Vance) and New York State Attorney General Letitia James. You can read the full indictment HERE but bullets are excerpted below:

• the key crime cited in the indictment is SCHEME TO DEFRAUD
• charges cover the period between March 31, 2005 and June 30, 2021
• the indicted parties are The Trump Corporation (the administrative entity that employs senior executives), Trump Payroll Corporation, an entity owned by The Trump Corporation to process its payroll), and one individual, Allen Weisselberg, who specifically performed some of the manipulations of bogus accounting entries
• both indicted entities are controlled by The Trump Organization whose beneficial owners (only owners?) include Donald J Trump and the Donald J Trump Revocable Trust.
• the scheme disguised certain types of compensation to employees as NON-payroll expenses to the business, lowering the personal income tax obligations of the employees and lowering payroll tax obligations of the companies
• Allen Weisselberg alone received approximately $1.76 million in disguised compensation via this scheme (an average of $110,000 per year over the span of the charges)
• from 2005 to 2013, The Trump Corporation was listed as the leaseholder and paid rent for an apartment within NYC that was used exclusively by Weisselberg as his principal residence while he claimed his residence was outside of NYC, evading city income taxes for that period
• between 2012 and 2017, private school tuition payments for children of Weisselberg were paid via personal checks from Donald J. Trump or the DJT Revocable Trust, tracked internally as compensation but NOT reported as income for federal / state / local tax purposes, avoiding incoming taxes on those amounts totaling $359,058 (nice schools, that averages to $71,916 per year)
• between 2005 and 2017, lease costs totaling $196,245 for Mercedes autos used solely by Weisselberg and his wife were paid by The Trump Corporation, tracked internally as compensation but NOT reported as income for federal / state / local tax purposes, avoiding incoming taxes on those amounts
• between 2011 and 2017, Weisselberg initiated the drafting of checks payable to other employees (presumably for misc expenses) which were cashed by the receipient and the cash given to Weisberg as spending money -- again they were tracked internally as compensation but NOT reported as income for federal / state / local tax purposes, avoiding incoming taxes on those amounts totaling $29,400
• substantial portions of year-end bonuses paid to a subset of Trump Organization executives were not paid out of Trump Corporation and reported on state / federal income but instead paid via checks issued from at least SEVEN other Trump owned entities to obfuscate the nature of the payments and facilitate avoiding income and payroll taxes

Implications of the Verdict for Trump

Any discussion of impacts from this verdict must begin with a reminder that this was a CRIMINAL case (not civil) whose DEFENDANTS were The Trump Organization, The Trump Payroll Corporation, and Allen Weisselberg. Two corporate entities and one non-Trump individual. Weisselberg already pleaded guilty in a plea deal in exchange for testimony about some of the mechanics, even though he managed to negotiate an arrangement where he did not have to say directly that Donald Trump (human) explicitly approved these actions. However, in the trial, the fact that evidence was provided that some payments were issued from the personal account of Trump or his Revocable Trust rather than the entity created for payroll functions would seem to make that point irrefutable. In fact, that evidence submitted in this trial and accepted by the jury seems to have given new Manhattan District Attorney Alvin Bragg new courage to consider criminal charges, despite backing down from this path upon taking office in January 2022.

The Trump Organization as an entity faces up to $1.61 million in fines. It isn't clear if New York State or a federal entity will pursue charges against all of the executives who benefited from the off-books compensation and trigger fines or pay-back of unpaid taxes. On the surface, a $1.61 million fine is literally a slap on the wrist to a firm with $278 million in revenue as of 2020. Perhaps the only penalty that matters to both The Trump Organization and Trump the human is the conviction itself on financial fraud charges.

Trump's empire is HEAVILY leveraged and in constant need of re-financing existing debt to maintain solvency. At this point, virtually any reputable bank would have internal policies if not outright restrictions on lending money to a corporation -- especially a tightly controlled private corporation controlled by a single family -- that has been criminally convicted for financial fraud. So that rules out all the reputable banks across the world. Unfortunately, that still leaves dozens of overseas entities willing and able to fill the breach -- Saudis, Russians, random oligarchs on the run, etc.

Will The Trump Organization continue to be able to turn over loans with an even smaller pool of possible lenders? It seems unlikely. The State of New York has already imposed an external audit process upon The Trump Organization as of November 3, 2022 in light of other wider fraud allegations still being pursued separately by NYS Attorney General Letitia James. Those audits require a review of Trump Organization books against GAAP accounting standards. If that audit function is allowed to report findings back to the state, any efforts to infuse cash from suspect international players is likely to be referred immediately to state or federal prosecutors.

If The Trump Organization becomes unable to turn around its borrowing and collapses, Donald Trump the individual will clearly be exposed as an empty vault -- literally and figuratively. The only source of funds left available to him sit in his political action committee. Technically, PAC funds don't revert to the candidate afer they exit political life -- they must still be spent on "politics" and "issue education." In reality, campaign finance laws are so flawed that it is very easy to spend PAC money in ways that prop up a luxury lifestyle -- private jet flights between "rallies" and "education events", stays at deluxe resorts hosting said events, etc.

It seems clear that even individual criminal indictments of Trump might not stop him from running for President. It is also sadly clear that pending individual criminal indictments wouldn't stop some Republian voters from supporting him in primaries. He might even win the Republican nomination again. All of which can provide plausible justification for spending that PAC money down while continuing to live the high life, eating Chicken McNuggets at the Rizt Carlton, etc.

That's not a terribly satisfying result for a $9.6 million dollar crime. Especially a crime committed by an ex-President who not only extorted an ally in need of arms who wound up beign invaded by Russia but organized and promoted an organized coup to remain in power after losing a fair election.

Implications of the Verdict for Justice

One synopsis of the entire fraud mentioned that the majority of the fraudulent bookkeeping stopped sometime in mid-2017. The assumption was that after Donald Trump became busy doing whatever he was doing as President, his children were forced to become more involved with running The Trump Organization, a few different people became involved in looking at the books, the shell games were discovered and someone decided the manipulations had to stop. IMMEDIATELY. At that time, there were apparently at least four employees whose on-the-books compensation immediately jumped $200,000 to make them whole.

If this anecdote is correct, it provides an easy way to put a lower-bound estimate on the size of the entire fraud. Four people with $200,000 in income from 2005 to 2017 is at least $9.6 million dollars in hidden taxable income. That would be worth

• $3,552,000 in personal federal income taxes at the 37% marginal rate
• $657,600 in personal New York State income taxes at 6.85% marginal rate
• $371,232 in personal New York City income taxes at 3.867% marginal rate
• $734,400 in employee federal payroll taxes at 7.65% rate
• $734,400 in employer federal payroll taxes at 7.65% rate

That's a total of $6,049,632 in dodged taxes yet the maximum fine is only $1.6 million dollars? One the surface, it would seem to indicate that white collar crime pays well. In fact, had Trump kept his ego in check and NOT run for President and won, it seems highly likely this fraud -- though likely easily detected by any newly minted CPA -- would have continued uninterrupted forever.

While the interval from indictment to conviction seems rapid compared to many other high profile, high-dollar prosecutions, the time required seems inordinately long in light of the simplicity of the crimes committed and the paper trails created. These were not crimes stemming from an fraudulent but subtle / technical accounting treatment decision. When accountants at WorldCom decided to reclassify monthly expenses for trunk circuit connections between WorldCom and other carriers as CAPITAL expenditures, there might have been three people in the company who understood the nuance of that decision and knew it to be wrong, allowing the firm to shift BILLIONS off their profit and loss statement, inflating earnings. The dozens of other people in operations and accounting just adjusted an attribute as directed somewhere in an accounting system and reported the results.

The crimes committed by "The Trump Organization" were not subtle at all. Cars, an apartment for daily living and tuition expenses for children are NOT legitimate business expenses, under ANY interpretation of accounting principles. And routinely paying executive bonuses from accounts of unrelated affiliate firms and booking those charges as generic expenses in those firms is blatantly an illegal tax dodge. The only surprise in this case is that the jury took two days to reach the unanimous verdict on all seventeen charges. Would it take the government (state or federal) that long to indict and convict Joe Q Public for the same conduct? If Joe Q Public did this same thing using his Joe Q Public, LLC, does anyone think the government would settle with convicting Joe Q Public, LLC and leaving Joe Q Public out of jail? Hardly.

It also seems clear that The Trump Organization is an admittedly big example of a larger problem with financial fraud in general that is practically encouraged by not only the laughable penalties applied to the corporation but also the ongoing reluctance by courts to "pierce the corporate veil" through sane interpretations of the difference between diffuse actions taken by dozens / hundreds of employees of an even larger corporation versus specific actions taken by a HANDFUL of employees with concrete paper trails taken to defraud external parties for the benefit of individuals, not the company.

Again, in the WorldCom example, an inflated stock price created by artificial reductions in operations expenses benefited Bernard Ebbers and a few WorldCom execs but thousands of shareholders as well. The crimes in this case were perpetrated by possibly three to four people and likely only benefited fewer than ten. Since the company is tightly controlled by Trump and family, "The Trump Organization" is not an abstract entity reflecting hundreds or thousands of owners in absentia, it is a paper shell proxy for a HANDFUL of family members. The "benefits" to The Trump Organization for engaging in these crimes didn't stay with "the company,' they flowed directly to Donald J. Trump the person and the Donald J Trump Revocable Trust.

The concept of a corporation as a legal entity is intended to simplify raising capital across larger pools of owners and facilitate continuity of operations and enforcement of contracts beyond the life of individual owners. These capabilities allow businesses to grow larger and more efficient in ways that can benefit society. Providing a shield against individual liability for actions taken by a corporation was viewed as an acceptable trade-off in exchange for these efficiencies of scale over partnerships and sole proprietorships. However, when a "corporation" commits crimes and is still financially organized to funnel all benefits to a very narrow set of owners, the benefit / risk balance should not always tip towards honoring corporate protections. The Trump Organization is a poster child example of the results of honoring such a one sided deal.

WTH