Sylvia Gonzalez, a former Castle Hills, Texas, city council member, plausibly alleges that she was arrested on a trumped-up charge in retaliation for conduct protected by the First Amendment. So does Priscilla Villarreal, an independent journalist in Laredo, Texas. But in backing up that claim, Gonzalez, whose case will soon be decided by the Supreme Court, faces a problem that Villarreal does not: It is hard to say how often people engage in the conduct that police cited to justify her arrest, which involved putting a petition in her personal folder during a city council meeting. Villarreal, by contrast, was arrested for asking questions, something that journalists across the country do every day.

Last January, the U.S. Court of Appeals for the 5th Circuit nevertheless ruled, in an opinion by Judge Edith Jones that provoked four sharp dissents authored or joined by seven of her colleagues, that Villarreal's arrest was not "obviously unconstitutional." Thirteen briefs supporting Villarreal's petition for Supreme Court review—submitted by an ideologically diverse mix of groups and individuals, including organizations ranging from the Manhattan Institute to the Constitutional Accountability Center—underline the chilling implications of that astonishing conclusion.

"No right is more fundamental to the practice of journalism than the one the Fifth Circuit declined to recognize: the right to ask public officials for information," a brief submitted by the Reporters Committee for Freedom of the Press and 21 news organizations notes. They urge the Supreme Court to resolve the "chilling uncertainty" created by the appeals court's decision and "reaffirm the fundamental proposition that '[a] free press cannot be made to rely solely upon the sufferance of government to supply it with information.'"

Villarreal, who is represented by the Foundation for Individual Rights and Expression, is asking the Supreme Court to uphold that principle, which her arrest blatantly violated. Her alleged crime, the Institute for Justice notes, consisted of "peacefully asking a police officer to corroborate information for two developing stories—a routine due-diligence and newsgathering practice used by journalists across the country." The two stories, which Villarreal posted on her locally popular Facebook page, involved a public suicide and a fatal car crash. Villarreal asked a Laredo police officer to confirm information about those incidents that Villarreal had received from other sources. By doing that, police and prosecutors claimed, Villarreal committed two felonies.

To justify those charges, police cited Section 39.06(c) of the Texas Penal Code, an obscure, rarely invoked law that applies to someone who "solicits or receives from a public servant" information that "has not been made public" with the "intent to obtain a benefit." The claim that Villarreal had violated that law was absurd for several reasons.

First, Section 39.06(c), which deals with "misuse of official information," is part of a chapter addressing "abuse of office." Its roots go back to a 1973 law that applied to "a public servant" who "acquires or aids another to acquire a pecuniary interest in any property, transaction, or enterprise that may be affected by" information that "has not been made public" but to which "he has access in his official capacity." The statute also covered "a public servant" who "speculates or aids another to speculate on the basis of the information." Over the years, legislators broadened the definition of the offense, reclassified it as a felony, and expanded the law beyond government officials. But in light of its history and statutory context, Section 39.06(c) is clearly aimed at curtailing official corruption, not journalism.

Second, the Texas Penal Code defines "benefit" as "anything reasonably regarded as economic gain or advantage." What "economic gain or advantage" did Villarreal allegedly seek to obtain by asking a cop about a suicide and an accident? According to the arrest affidavits, it was an increase in her Facebook traffic. Jones' opinion, which drips with contempt for Villarreal's "journalistic style," notes that she "boasts over one hundred thousand Facebook followers and a well-cultivated reputation, which has engendered publicity in the New York Times, free meals 'from appreciative readers,' 'fees for promoting a local business,' and 'donations for new equipment necessary to her citizen journalism efforts.'" This sweeping definition of "benefit" would apply to any journalist who attracts readers and/or earns money by publishing information that previously "has not been made public."

Third, Section 39.06 defines "information that has not been made public" as "any information to which the public does not generally have access" that is also "prohibited from disclosure" under the Texas Public Information Act (TPIA). The arrest affidavits did not address the latter requirement at all. The 5th Circuit suggested the information that Villarreal obtained was covered by Section 552.108(a)(1) of the TPIA, which says government officials do not have to disclose information when doing so might compromise an ongoing investigation. While law enforcement agencies frequently invoke that vague provision, the information it covers is not "prohibited from disclosure." The TPIA explicitly gives agencies the discretion to release information even when they are not required to do so.

The MuckRock Foundation, which "has helped thousands of journalists, professionals, and ordinary citizens request, share, and understand public records," notes that Laredo's reading of Section 39.06(c) would lead to "the absurd result of imposing liability not only on those who seek 'confidential' information, but on those who request information that the government may, but need not, make public." Under that interpretation, anyone who asks for information that is deemed to be covered by a TPIA exception is committing a felony. As a brief from half a dozen journalists (including me) explains, Texas agencies that don't want to disclose information frequently seek support from the state attorney general's office, which in 2015 "issued over 7,000 rulings based on § 552.108(a)(1) alone." Yet the thousands of people whose TPIA requests are rejected each year have never been "arrested or prosecuted for their requests."

Laredo cops investigated Villarreal for months, so they had plenty of time to consider whether their interpretation of Section 39.06(c) was reasonable. So did the prosecutors who signed off on the case. Yet they did not even bother to present a plausible argument that Villarreal's conduct met the elements of this offense, and they were unfazed by the obvious First Amendment problems with criminalizing basic journalism. The charges were ultimately dismissed by a judge who deemed Section 39.06(c) unconstitutionally vague.

These cops and prosecutors—who, like Jones, were irked by Villarreal's "journalistic style"—were determined to pin charges on her without regard to statutory requirements or constitutional constraints. Yet according to the 5th Circuit, they cannot be held accountable for their vindictive lawlessness because it was not "clearly established" that arresting a journalist for practicing journalism was unconstitutional. Since they supposedly had no way of knowing that, they received qualified immunity.

The Supreme Court grafted qualified immunity onto 42 USC 1983, a federal law that authorizes people to sue government officials who violate their constitutional rights. The doctrine is supposedly designed to protect officials from unanticipated liability for "split-second" decisions in situations where they have little opportunity for careful reflection. That rationale, the Americans for Prosperity Foundation notes, does not apply to the sort of "intentional and slow-moving infringement of First Amendment rights" that Villarreal's case exemplifies. The protections offered by Section 1983, the brief says, "come to nothing where state actors may purposefully infringe First Amendment rights and then rely on prolix state law to trigger qualified immunity, claiming they did not know any better."

In this case, that claim is risible. "Villarreal's arrest obviously violated the Constitution," the Institute for Justice notes. "No reasonable government official would think the First Amendment permits criminalizing plain speech or routine journalism."

Contrary to what the 5th Circuit held, the Young America's Foundation and the Manhattan Institute say, it has been "clearly established for over 50 years" that "journalists and citizens" have a First Amendment right to "ask questions of their government officials." The Supreme Court has upheld that right in a line of decisions beginning with Branzburg v. Hayes in 1972. In that case, the Court rejected the idea that "news gathering does not qualify for First Amendment protection," without which "freedom of the press could be eviscerated."

Seven years later in Smith v. Daily Mail, the Court ruled that West Virginia violated the First Amendment when it prohibited newspapers from publishing the names of juvenile offenders without judicial permission. The justices held that the First Amendment protects "routine newspaper reporting techniques" and that the government may not "punish the truthful publication" of "lawfully obtained" information. As dissenting 5th Circuit Judge James E. Graves Jr. noted, the Supreme Court "has made clear that the First Amendment protects the publication of information obtained via 'routine newspaper reporting techniques'—which include asking for the name of a crime victim from government workers not clearly authorized to share such information."

These longstanding precedents are not the only reason the cops who arrested Villarreal should have known better. As the brief I joined points out, police officers across the country are accustomed to fielding questions from reporters, and department policies frequently encourage them to "work in cooperation with the media," as a general order to Washington, D.C., officers puts it. "Based on the TPIA, police department regulations, officer training on responding to press inquiries, and personal experience dealing with reporters," the brief says, "a reasonable officer would know that journalists are permitted to ask police officers the names of accident and suicide victims. A reasonable officer would know that reporters ask for such information every day."

You might think that Villarreal's arrest, which relied on a quirky reading of a little-used law, poses little realistic threat to journalists in Texas or elsewhere. But the briefs supporting Villarreal emphasize that police can always find an excuse to arrest journalists who annoy them. The brief I joined describes a couple of examples: the 2023 arrest of NewsNation reporter Evan Lambert for "trespassing" by covering a governor's press conference in Ohio and the 2020 arrest of radio reporter Josie Huang for "obstructing a peace officer" by using her phone to record an encounter between protesters and Los Angeles County sheriff's deputies.

"Retaliatory arrests have become an increasingly common occurrence," the Law Enforcement Action Partnership (LEAP) notes. "This trend is a byproduct of the ever-growing size of modern criminal codes." Thanks to those proliferating prohibitions, Justice Neil Gorsuch has observed, "almost anyone can be arrested for something." A cop "who may be inclined to punish a disfavored speaker—such as a journalist, as here—can therefore readily find a minor offense they committed and use that to justify an arrest," LEAP says. If police are emboldened to harass journalists this way, it warns, retaliatory arrests will become even more common.

That threat is especially acute for reporters who do not have the backing of a professional news outlet. Independent journalists Avi Adelman and Steven Monacelli, who "have been arrested or detained by police officers while reporting on law enforcement's public performance of their duties," note that increasingly strict police control of information may force a reporter to rely on the sort of "backchannel source" that Jones condemned Villarreal for using. "If using alternative sources exposes journalists to the risk of official retribution," Adelman and Monacelli warn, "journalists will become little more than conduits for government public relations copy."

Jones dismissed the idea that Villarreal is "a martyr for the sake of journalism." She seems to think independent reporters like Villarreal don't qualify as "real" journalists because they don't follow the rules that "mainstream, legitimate media outlets" do. In addition to criticizing Villarreal's use of a "backchannel source," a standard journalistic practice, Jones faulted her for "capitaliz[ing] on others' tragedies to propel her reputation and career," which is an apt, if cynical, description of what professional reporters routinely do. These criticisms make you wonder if Jones has ever watched the local news or noticed that "mainstream, legitimate media outlets" often carry stories that cite anonymous government sources.

Contrary to Jones' take, the critics who are urging the Supreme Court to overrule the decision she wrote include "mainstream, legitimate media outlets" such as ABC, NBC, The Atlantic, The Boston Globe, The New York Times, and The Washington Post. It is possible they know a little bit more about how journalism works than Jones does.

The post These Strange Bedfellows Want SCOTUS To Remind the 5th Circuit That Journalism Is Not a Crime appeared first on Reason.com.

Every now and then a corporation is at least a bit funny when going about their late-stage capitalism. For instance, Samsung has released an absolutely perfect diss-ad response to Apple’s recent crushing PR disaster.

Read more...

During a sleepover in August 2017, three 14-year-old boys, two of whom were about to start attending St. Francis High School in Mountain View, California, took a picture of themselves wearing dark green acne masks. One of the boys, who was hosting the other two, had severe acne, and his friends applied the masks in an act of playful solidarity. They took the picture because they thought they looked "silly."

Three years later, after another teenager obtained the picture and posted it online, the two St. Francis students were falsely accused of posing in blackface and forced to leave the school under the threat of expulsion. This week a California jury awarded the boys, identified as A.H. and H.H. in their lawsuit against the school, $1 million in damages, plus a tuition reimbursement of about $70,000.

"A photograph of this innocent event was plucked from obscurity and grossly mischaracterized during the height of nationwide social unrest," the boys' familes said when they filed their lawsuit in 2021. The photo came to light in June 2020, a month after Minneapolis police officer Derek Chauvin killed George Floyd. "St. Francis became involved in a number of racial scandals," NBC News reports, "including one where recent graduates of the school posted a meme about Floyd's death on Instagram." Because of that context, A.H. and H.H. argued, St. Francis officials rushed to judgment, tarring the students as racist and disrupting their lives without giving them a chance to explain the photo.

"The boys did not use the facemasks or take the photograph with any ill-intent, bias or prejudice, let alone in connection with any racist sentiments or epithets," the lawsuit said. "Defendants took it upon themselves to use the innocent and wholly unrelated photograph of the boys to make the malicious and utterly false accusation that the boys had been engaging in 'blackface,' and to recklessly assert that the photograph was 'another example' of racism" at St. Francis. That false accusation, according to the complaint, interrupted the boys' educations, destroyed their local reputations, and forced their families to move.

The jury agreed that St. Francis had treated the boys unfairly, thereby violating an oral contract. More controversially, the jury accepted a claim under the California Supreme Court's "common law doctrine of fair procedure," which extends due process requirements to private actors such as unions, hospitals, insurers, and professional organizations. Last year, the court ruled that the doctrine also applies to private universities. But according to the attorneys who represented A.H. and H.H., this is the first time the doctrine has been applied to a private secondary school.

"This case is significant not only for our clients but for its groundbreaking effect on all private high schools in California, which are now legally required to provide fair procedure to students before punishing or expelling them," said Dhillon Law Group partner Krista Baughman. "The jury rightly confirmed that St. Francis High School's procedures were unfair to our clients and that the school is not above the law."

Karin Sweigart, another lawyer at the firm, emphasized that it took four years to definitively refute the school's erroneous claim about the supposedly racist nature of the photo. "The jury's verdict finally cleared our clients' names after four long years of repeated personal attacks from St. Francis High School," she said. "Schools are supposed to protect and nurture children, not sacrifice them when it is convenient for public relations purposes."

The school's representatives said they "respectfully disagree with the jury's conclusion" about "the fairness of our disciplinary review process." They added that the school is "exploring legal options," including a possible appeal.

The plaintiffs' attorneys note that "St. Francis expelled the boys within 24 hours, without considering their evidence or offering any hearing." They add that "the school's actions led to significant personal, educational, and emotional consequences for the students."

The boys' parents amplified that point. "We would never wish the pain, humiliation, and suffering St. Francis has inflicted on our families on anyone," they said, "but we are thankful that the jury has spoken," "vindicated our boys," and "forced St. Francis to finally take responsibility for their repeated personal attacks."

Even with "time to reflect and contemplate after the heat of the moment had subsided," the parents said, St. Francis officials "don't regret their actions" and "would do the same thing today." Although the case has consumed "twenty percent of our boys' lives," they said, "the sacrifice is worth it to clear our boys' names" and "to try and make sure that St. Francis can never again assume a child is guilty" without giving him "the opportunity to show [his] innocence."

The post California Students Get $1 Million After They Were Expelled for Wearing Supposedly Racist Acne Masks appeared first on Reason.com.

As Donald Trump tells it, all of the civil and criminal cases against him are part of a Democratic conspiracy to keep him from returning to the White House. Although some of the many charges against him involve credible allegations of serious crimes, they have been overshadowed recently by two New York cases that are much weaker.

In 2016, Manhattan District Attorney Alvin Bragg says, Trump "corrupt[ed] a presidential election" by concealing embarrassing information from voters. And according to New York Attorney General Letitia James, whose lawsuit resulted in a staggering "disgorgement" order against Trump last week, he defrauded lenders and insurers by habitually inflating the value of his assets.

Bragg and James, both Democrats, argue that Trump was dishonest, which will not come as news to anyone who has been paying attention to the persistent gap between reality and his public statements on matters large and small. But neither Bragg nor James has been able to explain exactly who was victimized by the misrepresentations they cite.

Bragg's criminal case, which is now scheduled for trial on March 25, charges Trump with 34 counts of falsifying business records. Each of those is based on an invoice, check, or ledger entry that allegedly was designed to disguise Trump's reimbursement of a $130,000 payment that Michael Cohen, his former lawyer, gave porn star Stormy Daniels shortly before the 2016 election to keep her from talking about her alleged affair with Trump.

Falsifying business records—in this case, mischaracterizing the payments to Cohen as compensation for legal services—is ordinarily a misdemeanor. But Bragg is charging Trump with 34 felonies, each punishable by up to four years in prison, because he allegedly was trying to cover up "another crime."

Bragg says the "criminal activity" that Trump sought to "conceal" included "attempts to violate state and federal election laws." That claim is based on legal interpretations so iffy that Bragg's predecessor, Cyrus R. Vance Jr., rejected them after lengthy consideration.

Explaining why he nevertheless is trying to convert one hush payment into 34 felonies, Bragg complains that Trump "hid damaging information from the voting public during the 2016 presidential election." Although Bragg says that offense is "the heart of the case," it is not a crime: If Daniels had simply agreed not to talk about the alleged affair after Trump asked her nicely, the result would have been the same.

James' case likewise lacks any measurable injury to a specific victim, which is not required by the New York law she used to sue Trump. Although she presented plenty of evidence that Trump overvalued his properties and exaggerated his wealth, she did not show that lenders or insurers suffered any losses as a result.

Most notoriously, Trump claimed his apartment in Manhattan's Trump Tower was 30,000 square feet, nearly three times its actual size. He valued Mar-a-Lago, his golf resort in Palm Beach, based on the assumption that it could be sold for residential purposes, which the deed precluded.

New York County Supreme Court Justice Arthur Engoron also found that the Trump Organization had treated rent-stabilized apartments as if they were not subject to that restriction, assumed regulatory permission for construction that had not in fact been approved, failed to discount expected streams of revenue, dramatically departed from estimates by professional appraisers, and counted Trump's limited partnership interest in a real estate company as cash even though he could not access the money without the company's consent. But the sum that Engoron ordered Trump to pay, which totals nearly half a billion dollars with interest, was styled as "disgorgement" of "ill-gotten gains," not as compensation for damages.

That's because James was not able to identify any damages to lenders or insurers, which she was not legally obliged to do. As in Bragg's case, the striking absence of any injury commensurate with the punishment lends credibility to Trump's reflexive complaint that he is the victim of a partisan vendetta.

© Copyright 2024 by Creators Syndicate Inc.

The post Two New York Cases Lend Credibility to Trump's Complaint of Partisan Persecution appeared first on Reason.com.

In this week's The Reason Roundtable, Katherine Mangu-Ward is in the driver's seat, alongside Nick Gillespie and special guests Zach Weissmueller and Eric Boehm. The editors react to the latest plot twists in Donald Trump's various legal proceedings and the death of Russian opposition leader Alexei Navalny.

00:41—The trials of Donald Trump in Georgia and New York

25:04—Weekly Listener Question

33:23—Sora, a new AI video tool

43:55—The death of Alexei Navalny

49:58—This week's cultural recommendations

Mentioned in this podcast:

"How a New York Judge Arrived at a Staggering 'Disgorgement' Order Against Trump," by Jacob Sullum

"Prosecutor Fani Willis Touts the Value of Cash, but What About the Rest of Us?" by J.D. Tuccille

"Trump Ordered To Pay $364 Million for Inflating His Assets in Civil Fraud Trial," by Joe Lancaster

"Alvin Bragg Is Trying To Punish Trump for Something That Is Not a Crime," by Jacob Sullum

"Alexei Navalny's Death Is a Timely Reminder of How Much Russia Sucks," by Eric Boehm

"Why Is Nike Stomping on Independent Creators?" by Kevin P. Alexander

"Bury My Sneakers at Wounded Knee," by Nick Gillespie

"Creation Myth: Does innovation require intellectual property rights?" by Douglas Clement

"A Private Libertarian City in Honduras," by Zach Weissmueller

"The Real Reasons Africa Is Poor—and Why It Matters," by Nick Gillespie

Bono's Ukraine Speech

"Justice or persecution? The Trump dilemma"

Send your questions to roundtable@reason.com. Be sure to include your social media handle and the correct pronunciation of your name.

Today's sponsor:

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Audio production by Ian Keyser; assistant production by Hunt Beaty.

Music: "Angeline," by The Brothers Steve

• Producer: Hunt Beaty

The post Goodbye, Navalny appeared first on Reason.com.

On Friday, New York County Supreme Court Justice Arthur Engoron ordered Donald Trump to pay a staggering $355 million for repeatedly inflating asset values in statements of financial condition submitted to lenders and insurers. When the interest that Engoron also approved is considered, the total penalty rises to $450 million. All told, Trump and his co-defendants, including three of his children and former Trump Organization CFO Allen Weisselberg, are on the hook for $364 million, or about $464 million with interest.

On its face, a penalty of nearly half a billion dollars is hard to fathom given that no lender or insurer claimed it suffered a financial loss as a result of the transactions at the center of the case, which was brought by New York Attorney General Letitia James. But the law under which James sued Trump and his co-defendants does not require any such loss. The money demanded by Engoron's 92-page decision, which goes to the state rather than individual claimants, is styled not as damages but as "disgorgement" of "ill-gotten gains." It is aimed not at compensating people who were allegedly harmed by Trump's misrepresentations but at deterring dishonesty that threatens "the financial marketplace."

Proving "common law fraud," Engoron notes, requires establishing that the defendant made a "material" statement he knew to be false, that the plaintiff justifiably relied on that statement, and that he suffered damages as a result. Section 63(12) of New York's Executive Law, by contrast, authorizes the attorney general to sue "any person" who "engage[s] in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business." The attorney general can seek "an order enjoining the continuance of such business activity or of any fraudulent or illegal acts, directing restitution and damages and, in an appropriate case, cancelling" the defendant's business certificate.

"The statute casts a wide net," Engoron observes. It defines "fraud" to include "any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions." Although Engoron found substantial evidence that lenders and insurers relied on the Trump Organization's misrepresentations, the state did not have to prove that they did or that they suffered damages as a result.

"Timely and total repayment of loans does not extinguish the harm that false statements inflict on the marketplace," Engoron writes. "Indeed, the common excuse that 'everybody does it' is all the more reason to strive for honesty and transparency and to be vigilant in enforcing the rules. Here, despite the false financial statements, it is undisputed that defendants have made all required payments on time; the next group of lenders to receive bogus statements might not be so lucky. New York means business in combating business fraud."

Engoron ruled that the appropriate standard of proof was a preponderance of the evidence, which typically applies in civil cases and requires showing that an allegation is more likely than not to be true. "Defendants have provided no legal authority for their contention that the higher 'clear and convincing' standard does, or should, apply," he writes. "A clear and convincing standard applies only when a case involves the denial of, addresses, or adjudicates fundamental 'personal or liberty rights' not at issue in this action."

Engoron had previously ruled that disgorgement of profits is one of the remedies allowed by Section 63(12) in this case. "In flagrant disregard of prior orders of this Court and the First Department [court of appeals], defendants repeat the untenable notion that 'disgorgement is unavailable as a matter of law' in Executive Law §63(12) actions," he wrote in that September 2023 decision, which held that Trump had committed fraud within the meaning of the statute. "This is patently false, as defendants are, or certainly should be, aware that the Appellate Division, First Department made it clear in this very case that '[w]e have already held that the failure to allege losses does not require dismissal of a claim for disgorgement under Executive Law § 63(12).'"

In Friday's decision, Engoron reviews the examples of fraud that he described in the earlier ruling. Most notoriously, they include the claim that Trump's triplex apartment in Manhattan's Trump Tower was 30,000 square feet, nearly three times its actual size. That misrepresentation was included in Trump's statements of financial condition (SFCs) from 2012 through 2016 and was not corrected until after Forbes made the glaring discrepancy public in 2017.

In 2012, former Trump International Realty employee Kevin Sneddon testified, Weisselberg asked him to assess the apartment's value. "In response to the request," Engoron writes, "Sneddon asked Weisselberg if he could see the Triplex, to which Weisselberg responded that that was 'not possible.' Sneddon then asked if Weisselberg could send him a floorplan or specs of the Triplex to evaluate, to which Weisselberg also said 'no.' Sneddon then asked Weisselberg what size the Triplex was, to which Weisselberg responded 'around 30,000 square feet.' Sneddon then used the 30,000 square foot number in ascertaining a value for the Triplex."

The value of Mar-a-Lago, Trump's golf resort in Palm Beach, also figured prominently in the case. The deed to Mar-a-Lago precluded it from ever being used as private residential property, a clause that made it eligible for a lower tax rate. Yet SFCs repeatedly valued Mar-a-Lago as if it could be sold for residential purposes. Engoron notes that Trump "insisted that he believed Mar-a-Lago is worth 'between a billion and a billion five' today, which would require not only valuing it as a private residence, which the deed prohibits, but as more than the most expensive private residence listed in the country by approximately 400%"

Other examples of misrepresentations included treating rent-stabilized apartments as if they were not subject to that restriction, assuming regulatory permission for construction that had not in fact been approved, failing to discount expected streams of revenue, dramatically departing from estimates by professional appraisers, and counting Trump's limited partnership interest in a real estate company as cash even though he could not access the money without the company's consent. More generally, expert testimony indicated, Trump tended to value properties based on rosy "as if" assumptions rather than the "as is" valuations preferred by lenders.

The defendants argued that the accountants charged with compiling the SFCs were responsibile for verifying their accuracy. But as Engoron notes, the accounting firms' role was limited to assembling information provided by the Trump Organization, which they assumed to be accurate. "There is overwhelming evidence from both interested and non-interested witnesses, corroborated by documentary evidence, that the buck for being truthful in the supporting data valuations stopped with the Trump Organization, not the accountants," he says. "Moreover, the Trump Organization intentionally engaged their accountants to perform compilations, as opposed to reviews or audits, which provided the lowest level of scrutiny and rely on the representations and information provided by the client; compilation engagements make clear that the accountants will not inquire, assess fraud risk, or test the accounting records."

Trump also argued that the SFCs were unimportant because lenders and insurers would perform their own due diligence. Engoron was unimpressed by that defense, especially with regard to the insurers. "Because the Trump Organization is a private company, not a publicly traded company," he says, "there is very little that underwriters can do to learn about the financial condition of the company other than to rely on the financial statements that the client provides to them."

Were the Trump Organizations overvaluations "material"? Engoron had already concluded that "the SFCs from 2014-2021 were false by material amounts as a matter of law." Under Section 63(12), he says, materiality "is judged not by reference to reliance by or materiality to a particular victim, but rather on whether the financial statement 'properly reflected the financial condition' of the person to which the statement pertains."

If fraud "is insignificant," Engorion concedes, "then, like most things in life, it just does not matter." But that "is not what we have here," he adds. "Whether viewed in relative (percentage) or absolute (numerical) terms, objectively (the governing standard) or subjectively (how the lenders viewed them), defendants' misstatements were material….The frauds found here leap off the page and shock the conscience."

While there is no precise numerical standard for materiality, Engoron says, "this Court confidently declares that any number that is at least 10% off could be deemed material, and any number that is at least 50% off would likely be deemed material. These numbers are probably conservative given that here, such deviations from truth represent hundreds of millions of dollars, and in the case of Mar-a-Lago, possibly a billion dollars or more."

Did those deviations ultimately matter in the decisions that lenders and insurers made? Engoron's summary provides reason to doubt that they did. Deutsche Bank, he notes, routinely "applied a 50% 'haircut' to the valuations presented by" clients, which a witness "affirmed was the standardized number for commercial real assets." A defense witness opined that lenders generally just want to see "the engagement of a warm body of a billionaire to stand behind the loan in his equity infusion and capital."

James nevertheless argued that Trump, by systematically exaggerating his wealth and the amount of cash he could access, misled lenders about what would happen in the event that the Trump Organization could not meet its obligations. And those misrepresentations, she said, allowed the business to borrow more money on terms more favorable than it otherwise could have obtained.

The difference between the interest rates that lenders charged based on Trump's personal financial guarantee and the rates they would have charged without it was crucial to Engoron's calculation of how much the defendants should disgorge. Over their vigorous objections, he accepted the numbers offered by a state witness, investment bank CEO Michiel McCarty, who compared the rate that Deutsche Bank charged the Trump Organization based on Trump's personal guarantee with the rate it proposed for a loan without that guarantee. By McCarty's calculation, the Trump Organization saved a total of about $168 million in interest on loans for four projects.

By itself, that estimate accounts for nearly half of the disgorgement that Engoron ordered. He also included nearly $127 million in "net profits" from the 2022 sale of the Old Post Office in Washington, D.C., which Trump had converted into a hotel. That deal, James argued, was facilitated "through the use of false SFCs," without which it would not have happened. She also argued that "without the ill-gotten savings on interest rates, defendants would not even have been able to invest in the Old Post Office and/or other projects."

Taking into account the partnership interest "fraudulently labeled as cash," James said, "Trump would have been in a negative cash situation" by 2017 but for the $74 million or so "saved through reduced interest payments." She noted that "the Old Post office loan itself was a construction loan, and its proceeds were necessary to the construction and renovation of the hotel, which enabled the 2022 sale and resulting profits."

Engoron found these arguments, especially the first, persuasive. The profits from the sale of the Old Post Office, he concludes, "were ill gotten gains, subject to disgorgement, which is meant to deny defendants 'the ability to profit from ill-gotten gain.'"

Engoron also counted $60 million in profits from the 2023 sale of a license to operate a golf course at Ferry Point Park in the Bronx, which Trump had obtained from the New York City Department of Parks & Recreation in 2012. "By maintaining the license agreement for Ferry Point, based on fraudulent financials," Engoron says, "Donald Trump was able to secure a windfall profit by selling the license to Bally's Corporation."

Although reliance is not required to prove fraud under Section 63(12), it does implicitly figure in these disgorgement calculations. But for the "fraudulent financials," Engoron assumes, Trump would have had to pay higher interest rates on the four loans, and neither the Ferry Point deal nor the Old Post Office renovation and sale would have happened. The defendants, of course, dispute those counterfactuals.

Explaining the need for continued independent supervision of the Trump Organization, Engoron emphasizes Trump et al.'s "refusal to admit error." After "some four years of investigation and litigation," he says, "the only error (inadvertent, of course) that they acknowledge is the tripling of the size of the Trump Tower Penthouse, which cannot be gainsaid. Their complete lack of contrition and remorse borders on pathological. They are accused only of inflating asset values to make more money. The documents prove this over and over again. This is a venial sin, not a mortal sin. Defendants did not commit murder or arson. They did not rob a bank at gunpoint. Donald Trump is not Bernard Madoff. Yet, defendants are incapable of admitting the error of their ways. Instead, they adopt a 'See no evil, hear no evil, speak no evil' posture that the evidence belies."

Engoron "intends to protect the integrity of the financial marketplace and, thus, the public as a whole," he writes. "Defendants' refusal to admit error—indeed, to continue it, according to the Independent Monitor—constrains this Court to conclude that they will engage in it going forward unless judicially restrained. Indeed, Donald Trump testified that, even today, he does not believe the Trump Organization needed to make any changes based on the facts that came out during this trial."

Although Engoron says his court "is not constituted to judge morality," his outrage at Trump's financial dishonesty is palpable. That dishonesty, which is consistent with the ego-boosting lies that Trump routinely tells about matters small (e.g., the size of the crowd at his inauguration) and large (e.g., a presidential election he still insists was "rigged" by systematic fraud), is indeed striking. In this case, however, it did not result in any injuries that Trump's lenders or insurers could identify. Under New York law, Engoron says, that does not matter. But maybe it should.

The post How a New York Judge Arrived at a Staggering 'Disgorgement' Order Against Trump appeared first on Reason.com.