Was Trump’s Real Estate Hype Fraud or Just Business as Usual?

The New York attorney general’s lawsuit against Donald Trump over his real estate business hinges on one question: Where does puffery end and fraud begin? To put it differently, how much can Mr. Trump overstate what he’s worth before he crosses the line into illegality?

There’s no doubt that Mr. Trump vastly exaggerated his net worth. He has at times made the argument that his statements were not meant to be taken seriously.

I’m not siding with Mr. Trump here, but let’s ask ourselves: Has the real estate business ever been one where claims about the value of an apartment or a building are always fair and square? This is Attorney General Letitia James’s challenge: How can Mr. Trump be held accountable for absurd statements about his real estate when much of the industry makes claims that are reliably unreliable?

It’s fascinating to read the language in his company’s official documents and then hear how Mr. Trump talks about those documents. The company’s statements of financial condition that contained his exaggerations said that the assets and liabilities were valued using “various valuation methods,” and that “considerable judgment is necessary to interpret market data” and come up with the numbers.

The key phrase — the one Mr. Trump is relying on to get him out of trouble — came in the next sentence of the statements. It said that “the estimates presented herein are not necessarily indicative of the amount that could be realized upon the disposition of the assets or payment of the related liabilities.” (I added the emphasis.)

To Mr. Trump, that disclaimer makes the statement useless to anyone who would want to do business based on it. He said it’s known in the business as the “worthless clause.”

“Again, you know, I hate to be boring and tell you this,” he said in his sworn deposition. “When you have the worthless clause on a piece of paper and the first — literally the first page you’re reading about how this is a worthless statement from the standpoint of your using it as a bank or whatever — whoever may be using it, you tend not to get overly excited about it. I think it had very little impact, if any impact on the banks.”

The prosecutor then asked him, “So am I understanding that you didn’t particularly care about what was in the statement of financial condition?”

Mr. Trump replied: “I didn’t get involved in it very much. I felt it was a meaningless document, other than it was almost a list of my properties, with good-faith effort of people trying to put some value down. It was a good-faith effort.”

Here Mr. Trump appeared to contradict himself. First he said it was meaningless, just a list of properties. Then he said it was a good-faith effort. The fact that he repeatedly called it worthless tells me that he didn’t actually consider it much of a good-faith effort.

Even if it was malarkey, would that matter? One argument is that nobody trusts anybody in real estate anyway. Alexander Goldfarb, a senior equity analyst who follows real estate investment trusts for the investment bank Piper Sandler, told me that he couldn’t speak specifically about the Trump case, but did have some thoughts about puffery in real estate in general.

“You’d be laughed at if you publicly admitted you used the seller’s statements, and trusted them,” Mr. Goldfarb said. “Everybody does their own homework.” He added: “I’m not going to say every owner fudges. But it’s like golf. Everyone says they’re a little better than they really are.”

“Basic exaggeration in the form of an opinion is not illegal,” Yuriy Moshes, a New York real estate lawyer, wrote in an article — not concerning Mr. Trump — on his law firm’s website in 2018 that was updated this year. “This is because a material misstatement must involve a material fact about the property.”

The counterargument is that Mr. Trump really did make material misstatements. The most blatant example is that, according to the complaint by Ms. James, he claimed his triplex apartment in Trump Tower in Manhattan was 30,000 square feet when it’s actually 11,000 square feet.

“A discrepancy of this order of magnitude, by a real estate developer sizing up his own living space of decades, can only be considered fraud,” Judge Arthur Engoron wrote in a decision Tuesday that stripped the former president of control of some of his major properties.

Another vulnerability for Mr. Trump is where he used methods that produced high valuations for properties when he wanted to borrow against them and methods that produced low valuations for properties when he wanted to reduce their tax assessments. You can argue that you were over-optimistic or that you were over-pessimistic, but you can’t argue that you were both at the same time.

The problem Mr. Trump faces is that he bluffed not just people who are used to being bluffed, but also parties that weren’t in on the joke, such as the Internal Revenue Service. Like the I.R.S., the courts do not take kindly to misstatements. Here’s Judge Engoron again: “Defendants’ reliance on these ‘worthless’ disclaimers is worthless. The clause does not use the words ‘worthless’ or ‘useless’ or ‘ignore’ or ‘disregard’ or any similar words.”

A separate question is whether anyone was materially harmed by Mr. Trump’s misstatements. The attorney general has not even tried to argue that lenders or buyers were gulled by the exaggerated valuations. “Defendants correctly assert that ‘the record is devoid of any evidence of default, breach, late payment, or any complaint of harm,’” Judge Engoron wrote.

Up for debate is whether the lack of demonstrated harm matters. Judge Engoron argued that it’s “completely irrelevant.” He cited a 2014 ruling that held that forcing someone to disgorge ill-gotten gains “aims to deter wrongdoing,” and that “accordingly, the remedy of disgorgement does not require a showing or allegation of direct losses to consumers or the public.”

It does seem a little odd, though, that harm would not factor into the case. What Judge Engoron said may be true as a legal matter (I’m not qualified to say) but it does bump up against the layperson’s standard of “no harm, no foul.”

A lawyer for Mr. Trump, Christopher Kise, called the decision “completely disconnected from the facts and governing law.” He didn’t immediately respond to my request for elaboration. A trial to determine the size of damages assessed against Mr. Trump may begin next week.

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