Thursday, October 18, 2018

The second shoe - the real business model of the Trump Organization

Shoe #1: My October 3rd 2018 post was about the NY Times reports on how Trump made his money - suspect tax schemes and gifts from Dad. I quoted one of that report’s amazing conclusions: “President Trump participated in dubious tax schemes during the 1990s, including instances of outright fraud, that greatly increased the fortune he received from his parents, an investigation by The New York Times has found.”

Shoe #2: Now Adam Davidson at The New Yorker asks Is Fraud Part of the Trump Organization’s Business Model? A new investigation shows a pattern in different projects around the country and the world.

Here are excerpts.

This month, two incredible investigative stories have given us an opportunity to lift the hood of the Trump Organization, look inside, and begin to understand what the business of this unusual company actually is. It is not a happy picture. The Times published a remarkable report, on October 2nd, that showed that much of the profit the Trump Organization made came not from successful real-estate investment but from defrauding state and federal governments through tax fraud. This week, ProPublica and WNYC co-published a stunning story and a “Trump, Inc.” podcast that can be seen as the international companion to the Times piece. They show that many of the Trump Organization’s international deals also bore the hallmarks of financial fraud, including money laundering, deceptive borrowing, outright lying to investors, and other potential crimes.

The reporters—Heather Vogell and Peter Elkind of ProPublica, and Andrea Bernstein and Meg Cramer of WNYC—identified a similar pattern that occurred in deals around the world. The basic scheme worked like this: some local developer in Panama, the Dominican Republic, Florida, Canada, or some other location pays Trump, up front, for the use of his name and agrees to pay him a cut of every sale—not only of units but of things like hotel-room minibar items or, even, bathrobes. These projects typically require sixty per cent or more of units to be sold before construction gets under way. The same set of problems occurred in multiple projects. Many of the early units would be sold to shadow buyers—hidden behind shell companies. Donald Trump or, often, Ivanka Trump would deceive future investors by telling them that a much higher percentage of units had been sold than was factual. More investors pour money in, getting enough money into the project, often, to begin construction. Eventually, the project fails and goes bankrupt. Many of those investors lose all of their money. But the Trumps do not. They got paid up front and are paid continuously throughout until the day the project collapses. They are paid for their name and for overseeing the project, and, if the building is opened, the Trumps manage the property day to day, in exchange for hefty fees.

[For example:] In the Panama City project, Trump licensed his name for an initial fee of a million dollars, ProPublica and WNYC reported. Trump was also paid a portion of apartment-unit sales and minibar fees. Whether the project succeeded or failed, he was paid as well. A final accounting is startling: the project went bankrupt, had a fifty-per-cent default rate, and the Trump Organization was expelled from managing the hotel, yet Donald Trump walked away with between thirty million and fifty-five million dollars.

The same pattern emerged in other projects. In Fort Lauderdale, Trump announced that a hotel-condominium project was “pretty much sold out” in April, 2006, according to a broker who attended the presentation. In reality, sixty-two per cent of units were sold as of July, 2006, according to bank records that emerged in a court case. The project entered foreclosure, and Trump’s name was removed before construction was completed. In Toronto, Ivanka referred to the property as “virtually sold out” in a 2009 interview. In fact, 24.8 per cent of units had sold, according to a 2016 bankruptcy filing by the developers. The project was built but went bankrupt, and Trump’s name was removed from it. In New York, Ivanka told reporters in 2008 that sixty per cent of units had sold in the Trump SoHo. A Trump partner’s affidavit revealed that only fifteen per cent had been sold at the time. The building was constructed, but the project went bankrupt, and Trump’s name was removed from it.

Real estate has long been associated with some types of fraud. Large projects are perfect for a wide variety of schemes. There is an opportunity for fraud in exaggerating the rate of sales. The price one pays for a unit in a new building is affected by how many units were sold earlier, because a well-sold building is worth more than a less well-sold one. How much the developer has put in of its own money is an opportunity to mislead buyers as well. If a developer doesn’t invest in a project that it’s in charge of, it can suggest that it’s not as great as the developer is saying. The Trumps repeatedly lied about these two factors, ProPublica and WNYC found, telling potential investors that far more units had been sold than really were and saying that they had invested much of their own money in the projects. This increases the amount people paid and disguises the very real risks people were taking with their investments.

What is the Trump Organization? What is it good at? Where do its profits come from? It is becoming increasingly clear that much of the company’s business may have come from fraud. Daniel Braun, a former Assistant U.S. Attorney who specialized in fraud cases, told the reporters on the story, “You’re describing the basic elements of a long-running and significant scheme to defraud investors. So is that the sort of thing that the F.B.I. and the Justice Department pay attention to? It is. It has a number of kinds of ingredients that you would typically see in an investigation or even prosecution of fraud.”

Regardless of whether it leads to impeachment, the House of Representatives has the power to acquire Trump’s tax returns. The Business Insider tells us how: Democrats will be able to make Trump’s tax returns public if they take back Congress. Here’s how.

  • Certain committees in Congress have the authority to request President Trump’s tax returns for review and can then vote to make them public.
  • Republicans have so far blocked efforts by Democrats to utilize the procedural tool.
  • If Democrats retake the House majority, they can move forward with getting Trump’s tax returns with newfound power in the Ways and Means Committee.

Three committees in Congress already have the authority to take a peek at Trump’s — or any president’s — tax returns in a closed session: The Senate Finance Committee, the Joint Committee on Taxation, and the House Committee on Ways and Means.

Through section 6103 of the Internal Revenue Code, those three committees can request 10 years of Trump’s tax documents from the Secretary of the Treasury. They can then vote to make the returns public.

While the JCT is a nonpartisan committee operated by experienced economists and the Democrats’ chances of taking back the Senate are looking relatively slim, the House looks more likely to be changing hands come January, according to recent polling.

Taking back the House would allow Democrats, using their newfound control of the Ways and Means Committee, to review the tax returns and decide whether or not to release them.

The latest numbers from 538 have the House flipping by 40 seats. From its Election Update email:

You may have noticed a little bump for Democrats in the “Classic” version of our House forecast early this week. On Wednesday night, the party had a 5 in 6 chance (83.9 percent) of taking control; on Tuesday night, it had risen to 84.8 percent, the best Democrats have fared in our model since its August launch. The average number of seats Democrats are expected to pick up was 39; on Tuesday, that number reached 40 for the first time.

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