Blog Ipsa Loquitur

Thursday, June 14 was President Trump’s birthday. Now, for my birthday, I got a notebook with special fountain pen-friendly paper because I live in Brooklyn, and they’ll kick me out if I don’t use an old-fashioned pen.

For the President’s birthday, he and his three favorite children found out they were the subjects of a lawsuit filed by the New York State Attorney General, Barbara Underwood. The AG is suing the four Trumps for their maladministration of the Donald J. Trump Foundation, a not-for-profit corporation; as a bonus, the Foundation itself is a party to the lawsuit.

Now, first things first. This is a civil suit, not a criminal case. While the defendants (the four Trumps and the Foundation they run) are accused of breaking the New York State Not-For-Profit Corporation Law, nobody’s going to jail at the end of this trial. The law says non-profits have to do ABC and can’t do XYZ, and the Attorney General has complained to a court that the Foundation did not do ABC and did do XYZ in violation of the law. Think penalties being imposed and business permits being revoked, not people going to jail.

So in a civil suit, the complainant is the person who files the complaint to the court. In addition to complaining that the defendant(s) did something wrong, the complainant asks the court to do something about it. In this case, the AG has asked the NY Supreme Court to freeze the Foundation’s assets, dissolve the Foundation (i.e. the not-for-profit death penalty), fine the Trumps for the benefits they accreted by breaking the Not-For-Profit Corporation Law, and ban the various Trumps from running New York charities for various lengths of time.

And one last thing: the terms “non-profit” and “not-for-profit” can be used interchangeably. A non-profit is just a kind of corporation with some extra rules on it: it’s not allowed to pay dividends to its shareholders, for example. (More on that below.) A charity is a specific kind of non-profit corporation in New York; not all non-profits are charities, but all charities are non-profits.

Okay Let’s Do This

In the first ten paragraphs of the complaint, the AG sets the stage. The Trump Foundation has been under investigation since June 2016, at the height of the presidential campaign. The AG says it has discovered “over a decade of persistent violations without any oversight, to the benefit of Trump’s own personal, political, and business interests.” (As the AG is the New York State entity actually responsible for oversight of charities, this veers perilously close to a self-own.)

Anyway, that last bit about “Trump’s own benefit” is no small problem, because charities in New York are given a special benefit in exchange for some of those rules I mentioned above. For example, charities don’t have to pay sales or income taxes, and people who give charities money get to deduct that money from their income when doing their own taxes. That’s a pretty big state-created incentive for other folks to give money to charities. And in exchange for those benefits, charities are supposed to put their money toward the public interest in one fashion or another. The definition of “public interest” is pretty forgiving: there are public education charities, there are public health charities, and so on.

The important thing is that once money is donated to a charity, that money becomes a charitable asset, and the charity can either donate the charitable asset to another charity, or it can take the money and use it for some sort of charitable purpose. The Red Cross accepts donations, and then it turns around and donates some of that money to local charities when disasters strike. There’s a little wiggle room here: for example, the Red Cross is allowed to pay a for-profit company to rent office space, and they can buy pens from the for-profit company Staples. But note the person running the Red Cross can’t rent out his garage as office space to the Red Cross, or sell his favorite pen to the Red Cross for a million dollars. That would be using the Red Cross’s charitable assets to personally benefit the people running it. Huge problem there.

The Charges

But it’s more than just “hey, the Trumps weren’t very charitable with their charity’s assets.” Specifically, the AG alleges the defendants are responsible for:

  • Making numerous false statements in their annual filings;
  • Engaging in repeated self-dealing, where money donated to the Foundation was used to enrich the people running the Foundation;
  • Wasting charitable assets, where the Foundation used money donated to the Foundation for non-charitable purposes;
  • Violating the Internal Revenue Code’s prohibition on charities making political expenditures;
  • Violating the Foundation’s Certificate of Incorporation.

For all of these, the AG seeks to dissolve the Foundation, and to require the Trumps to pay back all their ill-gotten gains from self-dealing, plus a 100% penalty. Also, the Trumps could be banned from serving on the Boards of Directors of other New York State nonprofits for a number of years.

That bit about Certificates of Incorporation is important; back in the 19th century, the legal system thought that corporations were dangerous vehicles that con men would abuse to rob the public. (Thank goodness they were wrong!) One of the first measures devised to keep corporations honest was requiring them to have a corporate purpose. Anyone forming a corporation had to explain what the thing was being formed to do. Some examples of a corporate purpose: buying and selling land in Upstate New York, owning and operating shoe factories, etc.

These days, Certificates of Incorporation almost always describe the corporate purpose in the broadest possible terms, such as “to take any action for which it is legal that corporations in this State take.” That’s because corporations taking any actions in conflict their corporate purpose can have those actions voided by a court. Repeatedly having your corporation do something prohibited by its corporate purpose shows the court that you’re not the kind of person who ought to be trusted with a corporation.

The Trump Foundation, as a nonprofit corporation, was formed in accordance with the language of the Internal Revenue Code for nonprofits, §501(c)(3): “exclusively for charitable, religious, scientific, literary or educational purposes either directly or by contributions to other nonprofits.” In addition, the corporate purpose explained that “no part of the property […] of the corporation shall be diverted in any manner directly or indirectly or otherwise inure to the benefit of any member, trustee, director or officer of the corporation or any private individual” and likewise forbids the Foundation from engaging in any political activity.

But the Foundation apparently did all of those things the corporate purpose promised they wouldn’t do. That’s going to be a big problem.

The Laws

In paragraphs 11 to 24, the AG’s complaint covers the relevant state laws. There are a lot of them, because the Trump Foundation is alleged to have broken enough laws to be one heck of a law school exam. Here’s the short version:

Charities cannot distribute any part of their income to directors or officers of the corporation. (¶ 13) New York State Law forbids charities from self-dealing to the owner or their family. (¶ 14) Directors have to act in good faith and diligence. That means, at an absolute bare minimum, meeting once a year to talk about what the corporation has been doing and how much money it has left over, etc. (¶18)

Later in the complaint, the Attorney General cites nine specific laws and rules the corporation violated, by:

  1. Having conflicts of interest per the NYS Not-for-Profit Corporation Law § 202(a)
    1. Participating in political campaigns per the Federal Internal Revenue Code §501(c)(3)
    2. Participating in political campaigns and engaging in self-dealing per § 406 of the NYS Not-for-Profit Corporation Law and 8-1.8 of the NYS Estates, Powers, and Trusts Law
    3. Letting assets, income, or profit inure to benefit of officer or director of charity per NYS Not-for-Profit Corporation Law § 102(5)
    4. Directors skipping the required annual meeting to review a report on the activities of the charity per NYS Not-for-Profit Corporation Law § 519
    5. Not having an investment policy for the charity’s assets per NYS Not-for-Profit Corporation Law § 552(f)
    6. Not having a conflicts of interest policy per NYS Not-for-Profit Corporation Law § 715-a
    7. Making material false statements to AG’s office per §§ 172 and 175 of the NYS Executive Law
    8. Charities soliciting donations not registering with AG’s Charities Bureau. § 172 of Article 7-A of the NYS Executive Law

Any one of those things isn’t necessarily going to get your charity dissolved, but Trump and Foundation are accused of doing all of them, over the course of years and even decades. Dissolution, the remedy the AG suggests, is a corporate death penalty. A court forces the charity to give its assets away to charity and un-incorporates. In this case, dissolution isn’t much of a penalty, because the Foundation already tried to dissolve itself after some of these abuses came to light. However, in a fun wrinkle, New York State nonprofits trying to dissolve themselves need the permission of […] the Attorney General, and in the complaint at ¶117, the AG’s folks essentially say “FYI, we reported all this stuff to the IRS and FEC, and we won’t let you dissolve until they say how much they’re going to fine all of you.”

The Facts

Beginning in paragraph 25, the complaint gets into the specific facts the AG’s office uncovered during their investigation.

The Foundation has no staff, so it uses the Trump Organization staff. (¶25) Remember that “Trump Organization” is the name for the umbrella company that owns the hundreds of companies that make up Donald Trump’s business holdings. Having Organization staff do work for the Foundation is not illegal per se, but the Trump Organization and the Foundation are two legally distinct entities. If Organization staff are directed to do work for the Foundation, that’s a donation from the Organization to the Foundation and ought to be reported as such. As we’ll see below, that’s the least of the Foundation’s accounting problems.

New York State law requires charities to prepare an annual report concerning their activities and operations, and for that annual report to be presented to the Board …annually. As the Board hasn’t met since 1999, it seems vanishingly unlikely that this requirement has been met. (¶26) The Attorney General isn’t going to dissolve a corporation for failing to meet this requirement, but this throws fuel on the fire. The adults were asleep at the wheel.

Since July 2014, every charity in NY has been required to adopt a conflict of interest policy, defining conflicts of interest, announcing the charity’s policy on avoiding them, mandating conflict of interest reports by employees, describing what the GC and Board will do to prevent such conflicts, and what happens when an employee violates that policy. The Trump Foundation has no such policy. (¶29) The Foundation is also required to have an investment policy as of 2010, but it doesn’t have one of those, either. The AG dings them for failing to earn any interest on their substantial cash holdings. (¶32)

The Iowa Stuff

Individually, those are all relatively minor violations. Collectively, those are a recipe for getting slapped with a stiff fine and having your charity shut down. What you could see real, criminal repercussions for is the next bit: the Foundation allowed itself to be absorbed into the Donald Trump 2016 campaign, operating as an arm of Trump’s Political Action Committee in violation of State and Federal law and outside of the Foundation’s corporate purpose.

Trump’s PAC planned, organized, and financed a charity fundraiser in January 2016, and asked the Foundation to participate in it. The charity fundraiser raised about $5.6m in donations, half of which went directly to non-Trump charities, and the other half went to the Foundation. Then the Foundation asked one of Trump’s campaign manager how to distribute the money. That manager, Corey Lewandowski, named a bunch of local Iowa Veterans groups and asked the Foundation to donate just before the Iowa caucuses for maximum political impact. If the guy running the Political Action Committee asks you to take an action for the purposes of helping a politician, it’s hard to argue that you’re following that “no politics” rule.

To make matters worse, the campaign and the Foundation were hopelessly intertwined in the use of the donated funds. The Foundation did donate their half of the $5.6 million, but they held a bunch of public events in which the Foundation handed out giant novelty-sized checks for $100k with Trump campaign slogans and logos on them. Again, the Foundation is a completely separate legal entity from the campaign, and shouldn’t be participating at all in any politics ever, period. During the Iowa Caucus, Trump himself talked about how his poll numbers were going up because of the highly-publicized charitable donations. By May, Trump had moved on to bragging at campaign rallies about how much he’d given to charities.

Every single charity that received money from the Foundation was selected by the campaign; that’s a big problem. As ¶58 of the complaint explains, this:

“provided Mr. Trump and the Campaign a means to take credit at campaign rallies, press briefings, and on the Internet, for gifts to veterans charities. The Foundation’s grants made Mr. Trump and the Campaign look charitable and increased the candidate’s profile to Republican primary voters and among important constituent groups.”

The AG also notes that by the time the Iowa fundraiser took place, Trump had contributed only $250,000 to his campaign, but had loaned his PAC $17.5 million. That $2.8m is actually a campaign donation, because it’s a thing of value given to the Trump campaign. For all the free publicity Trump’s campaign got courtesy of his outrageous Tweets, this $2.8m is a relatively small drop in the bucket. However, accepting millions of dollars in illegal and unreported campaign donations is a crime. (One that the Federal Election Commission has already announced it won’t investigate lol)

The AG’s complaint goes on to note that Donald Trump was acutely aware of the prohibition on charities’ political activities and related party transactions, because Trump personally signed the Foundation’s tax returns. On those tax returns, he signed—under penalties of perjury—IRS Forms 990 in which he attested that the Foundation did not engage in prohibited transactions with interested parties, and that the Foundation did not carry out prohibited political activity. In addition, in February 2016, shortly after the $2.8m fundraiser, Trump actually spoke out against that prohibition on charities participating in political campaigns. Ignorance of the law is no defense, but Trump is going to have a hard time pleading ignorance here regardless. (¶60)

The Florida Stuff

There’s a weird side-plot in the complaint, starting in ¶61, where the Foundation contributed $25k to a PAC supporting Florida AG Pam Bondi, but reported to the IRS that the donation was to a Kansas pro-life religious charity with a similar name. The pro-Bondi PAC was named “And Justice For All”, but the Kansas charity was named “Justice For All.” On the face of it, it seems like it might be an honest mistake.

Except for the details in ¶¶64-65, where Trump Organization staff printed the email from a Bondi campaign staffer (with a PamBondi.com email address) who said something like ’thanks for committing to donate $25k to the Bondi effort’ Donald Trump personally signed that printout, and his signed copy was sent to the Trump Organization’s accounts payable department. Apparently, that’s how they authorized those sorts of things. When interviewed by the NY AG’s office, the Trump Organization staffer said she looked up “And Justice For All” in the IRS’s public records, and thought it was a Utah-based charity. (But what about the @PamBondi.com email address?) Therefore, she drafted the check and sent it to Trump for his signature. Nobody knows who sent the check.

Also, there’s the whole part where it looks like Trump gave that $25k donation to Bondi so she would stop investigating his Trump University scam, because within weeks of that donation, the Florida AG’s office announced it wasn’t going to investigate Trump University. The timing is lousy at best, but there’s no paper trail documenting a quid pro quo, so we’ll just pretend this is a funny coincidence.

There’s more Florida stuff, too: ¶72 lists hundreds of thousands of dollars of self-dealing where the Foundation buys stuff for Trump, advertises his businesses, or pays settlements when the Trump Organization is sued. (Paying off debts on behalf of someone else is legally indistinguishable from just giving them money to repay their own debts.) The Trump Organization repaid all the benefits they got from the illegal self-dealing—with interest—after the investigation started, but the AG’s still seeking penalties for the organization and the Trumps.

Almost Done, I Swear

Phew. That’s a lot of facts. Now that we’ve spent seventy-plus paragraphs learning about all the stuff the Trump Foundation did, the complaint lays out what was wrong with all that.

All four Trumps are being sued for Breach of Fiduciary Duty and Waste. Fiduciary duty is when you have to act in the best interests of someone else. For example, if you go to a car dealership, the salespeople there don’t owe you a fiduciary duty to help you get a good deal. They can’t lie to you, and your state probably has certain consumer protection laws that make sure the salespeople have to tell you certain things, but there’s no fiduciary relationship between you and the salesperson. Now, if you have a lawyer, that’s a fiduciary relationship; your lawyer has to do what’s best for you, whether or not that makes the lawyer the most money. The Board of Directors of a corporation owe their company a fiduciary duty to do what’s best for the corporation. Because the Trumps wasted the assets of the Foundation, they breached the fiduciary duty Directors owe their charities.

Similarly, all four Trumps are being sued for failure to properly administer charitable assets and waste. It’s a bad idea for directors to breach their fiduciary duty by carelessly spending the charity’s money, but breaking the law when administering charitable assets is an extra bad idea.

Donald Trump is also being personally sued for his illegal related-party transactions. He personally signed off on the use of Foundation money to enrich himself and his family. That’s a violation of New York State law. While I mentioned above that the Organization has already paid back its ill-gotten gains, the AG has asked the court for an addition 100% penalty: every dollar the Foundation misspent could be a dollar the Trumps are fined.

The most comprehensive bit is the fourth cause of action: the Foundation is being sued for exceeding its authority and Donald Trump is being sued in his personal capacity for causing his charity to exceed its authority. That’s all laid out in those nine bullet points about two thousand words ago. Repeatedly abusing the laws favoring charities makes every other violation in this complaint much worse; this is why the court is going to shut down and fine the Trumps lots and lots of money.

The fifth cause of action is kind of a funny one. In New York, the Attorney General is allowed to pretend they’re a member of any nonprofit’s board of directors for certain purposes. One of those purposes comes up here: the AG wants to pretend to be a Director in this case to take advantage of the law that lets any one Director petition the Supreme Court to dissolve their nonprofit without the consent of the other directors. Directors, whether real or pretend, can only do this if the other directors have acted illegally under the NYS Not-for-Profit Corporation Law § 1102(a)(2)(D).

In the meantime, the AG’s seeking an injunction while the case moves forward; as the complaint describes it, “[t]here are no directors remaining who have demonstrated an understanding and respect for not-for-profit law and fiduciary duties. Court supervision is necessary to ensure that charitable assets are appropriately marshaled and distributed.” (¶123) There have never been a ton of assets in the Trump Foundation’s coffers, but this paragraph is trying to stop the misuse of charitable assets by having the court essentially freeze the Foundation’s bank accounts.

Final Thoughts

There’s a ton of illegality here. Like, if this were a law school exam, you’d sweat bullets trying to remember all the laws the Foundation broke. This blog post would have been a lot shorter if I listed what the Foundation did right, instead of listing what it did wrong.

Oh, and the best thing about the Foundation wasting charitable assets over and over is that Donald Trump hasn’t given the Trump Foundation any money in a decade. It’s all other people’s money that he’s wasting.

This trial begins on October 11, 2018. As I mentioned above, the FEC has already announced it’s not going to do anything about the Foundation’s illegal electioneering. The IRS still could, and unlike the NY Attorney General, the IRS brings criminal charges instead of a civil lawsuit.