About 10 days ago, New York Attorney General Letitia James filed a civil lawsuit against Donald Trump, the Trump Organization, and their associates, largely seeking disgorgement for allegedly lying “to the tune of billions.” The complaint lists seven causes of action for fraud and conspiracy. Although New York’s Attorney General is seeking other remedies, such as orders barring the defendants from managing public companies in New York, the primary remedy consists of the restitution of ill-gotten gains resulting from irregularities. The claim amounts to approximately $250 million.[1]
I have previously addressed this topic, not only in a book (Responsabilidade civil pelo ilícito lucrativo. 2. Ed. Juspodivm, 2021) but also in articles and in a piece published in this prestigious weekly column exactly two years ago.
I often emphasize in my writings that in common law jurisdictions, the concepts of gain-based damages, disgorgement, and restitutionary damages, are used to justify the fluctuating objective parameters of the various remedies whereby a benefit unlawfully obtained by the wrongdoer must be transferred to the plaintiff based on the causal relationship between the unlawful acquisition of a gain and the unauthorized usurpation of a legally protected interest. In this sense, restitutionary remedies serve the same fundamental purpose: to prevent anyone from profiting from the commission of an unlawful act, by recovering the gains obtained through the breach of a legal duty or the violation of another’s right. The judgment will not take into account the actual existence of damages suffered by the plaintiff, or whether such damages existed, or even whether there is proportionality between the losses and the unjust enrichment obtained by the defendant.
Although disgorgement is a remedy continually applied in U.S. civil liability, the average person has little understanding of its concept and implications, perhaps because the moral appeal of punitive damages has always captivated the public’s attention, as they are also awarded by American citizens (the jurors), often in high-profile cases, not to mention the Hollywood-style appeal of massive awards.
However, we are now at a “turning point.” The outcome of the latest elections continues to stir voters on both sides of the political spectrum, and, since Nixon, Donald Trump has certainly been the most controversial figure on the U.S. political scene. Therefore, when a lawsuit is filed alleging that, for years, “persistent” and “repeated” acts of fraud and illegality against the people of New York occurred in the course of Trump’s various real estate deals, public curiosity is piqued, and the legal debate becomes intertwined with the political one. In short, the allegation is that over a 10-year period, there were more than 200 incidents, ranging from record falsification to tax fraud, insurance fraud, and criminal conspiracy.
It should be noted that this is a civil action separate from the criminal charges filed against the Trump Organization and its former CFO, Allen Weisselberg. The Attorney General’s complaint alleges that the defendants committed various state and federal crimes in New York. Because this is a civil action, the AG will not have to prove beyond a reasonable doubt that any of these offenses occurred; civil actions have a much lower standard of proof. That is to say, New York state law allows the attorney general to file a lawsuit against a person involved in “repeated fraudulent or illegal acts.” Since this statute exists to protect the people of New York from deceptive business practices, it does not require the attorney general to prove intent or deliberateness, nor does it require proof that specific individuals were harmed or injured by the fraud.
As much as Trump supporters dismiss the proceedings under the well-known “fake news” narrative and the former president himself labels the lawsuit a “witch hunt,” characterizing Attorney General James—the first Black person elected as New York’s attorney general — as “racist,” we are faced with detailed and factually specific allegations. While the Trump family’s real estate appraisals are notoriously inconsistent, and it may therefore be difficult to prove that they were fraudulent—rather than merely mistaken or innocently optimistic—on the other hand, the complaint focuses on objectively probable falsehoods. For example, the AG asserts that Trump lied about the size of his penthouse in Trump Tower, tripling the square footage of the unit in a way that led him to value the property at a staggering $327 million. Interestingly, Trump refused to testify in response to subpoenas from the attorney general’s office. But while the Fifth Amendment prevents a person’s silence from being used against them in a criminal proceeding, that same silence can be interpreted against the defendant in a civil proceeding.
The civil lawsuit seeks to have the court impose dramatic penalties, including the return of approximately $250 million in past profits and earnings (disgorgement), the dissolution and liquidation of Trump’s businesses in New York, and a five-year ban on Trump and family members serving in executive or other positions at other companies. These are draconian remedies, and a court’s willingness to impose them will depend on how persuasive the attorney general’s case proves to be at trial. For example, courts have historically been reluctant to forcibly dissolve an existing corporation, even when they have the legal authority to do so. Expect a court to insist on strong evidence of ongoing and future harm to the public before considering this possibility.
Two issues in particular catch my attention.
In January 2021, Congress overrode a legislative veto by then-President Donald Trump, thereby passing the National Defense Authorization Act (“NDAA”). From then on, section 6501 of the NDAA amends the Securities Exchange Act of 1934 (“Exchange Act”) to expand the SEC’s ability to seek disgorgement and other equitable remedies for violations of federal securities laws. The NDAA expressly authorizes the U.S. Securities and Exchange Commission (“SEC”) to seek disgorgement in any action or proceeding brought by the Commission under any provision of securities laws, where any person has received unjust enrichment as a result of the violation.
Furthermore, the statutory grant of authority under Section 6501 to the SEC to seek disgorgement exempts the SEC from the restrictions on this remedy imposed by the U.S. Supreme Court’s decision in the 2020 case Liu v. SEC.[2] On that occasion, SCOTUS had affirmed the SEC’s ability to obtain disgorgement as an equitable remedy, but limited it to an amount not exceeding the violator’s net profit after deduction of legitimate business expenses, and stipulated that the amount returned be allocated to the victims.” In a sense, the Supreme Court affirmed the SEC’s ability to use disgorgement, yet drastically mitigated the remedy’s effectiveness. In the case at hand, the lower courts ruled that the SEC could obtain the substantial return of all funds that investors had contributed, without any deduction—not even for legitimate operating expenses of the venture.
Nevertheless, in her opinion, Justice Sonia Sotomayor wrote for a nearly unanimous panel (8–1), that disgorgement is an equitable remedy, the purpose of which is to deprive the wrongdoer of its net profits from illegal activities, ensuring that it “is not punished” to the point of paying more than fair compensation to the injured party. She acknowledged that this is a “fundamental principle” established in a 19th-century Supreme Court opinion: “[I]t would be inequitable that [a wrongdoer] should make a profit out of his own wrong.” Sotomayor turns to a discussion of what limits on disgorgement are appropriate. She identifies three specific limits to the traditional equitable remedy. First, the effect of the “profits remedy,” as she calls it, is to impose a trust by returning unjust enrichment to wronged victims. The remedy made sense only as a way to return the defendant’s ill-gotten gains to those harmed by the defendant’s misconduct. Second, because the remedy was limited to the defendant’s profits, it did not justify the remedy against multiple wrongdoers under a theory of joint and several liability. Third, the remedy was limited to “net” profits or “gains derived from any business or investment, where both revenues and [expenses] are taken into account.”
The judge further asserts that the SEC’s pursuit of disgorgement violates each of these three limitations. That is to say, the SEC does not always return the full amount of disgorged funds to investors; instead, it deposits a portion into a Treasury fund. This practice is inconsistent with the court’s view that the equitable nature of disgorgement requires the SEC to return the gains to investors for their own benefit. Similarly, the opinion criticizes the SEC’s common imposition of “joint and several liability” in disgorgement cases, which Sotomayor considers inconsistent with the common law rule requiring individual liability for ill-gotten gains because it could transform any remedy focused on profits into a punishment. However, the opinion allows the trial court to determine that joint and several liability is appropriate in certain contexts, such as in family matters where the finances of the two defendants (husband and wife) are so intertwined that both spouses benefited from the proceeds of the scheme. Finally, Sotomayor categorically rejects the practice of ordering the return of all proceeds, explaining that courts must deduct legitimate expenses before ordering restitution. While she acknowledges the possibility that expenses for personal services may be disallowed as unjust in a case where the defendants operated a “wholly fraudulent scheme,” on the other hand, she emphasizes that this is not what ordinarily happens with a variety of routine expenses, including items such as rent and cancer treatment equipment that have value independent of funding a fraudulent scheme.
However, following Congress’s override of the presidential veto, Section 6501 was statutorily expanded to grant the SEC the authority not only to pursue disgorgement but also to free the SEC from the restrictions on this remedy imposed by the Supreme Court. In other words, the judicial obstacle was circumvented through legislative action.
Given that this turnaround has occurred over the past three years, did Donald Trump’s veto already have in mind a possible shield for his family’s assets?
The second peculiar aspect of the civil lawsuit is that one of the defendants is the “Donald J. Trump Revocable Trust,” described as the “owner of the entities that constitute the ‘Trump Organization.’” In principle, to a civil law practitioner (like myself), the idea of a trust as a holder of rights sounds unusual. How can a trust be sued? Or is this some kind of corporate trust? In any case, if the trust is not a legal entity, wouldn’t it have been better for the Attorney General to have sued the trustees (that is, Donald Trump Jr. and Allen Weisselberg)?
The fact is that in the U.S., there is considerable ambiguity regarding the concept of legal personality as it applies to trusts. It is not uncommon for funds of all kinds to have financial accounts held in their names and to be treated as owners of property. As a commentary on the Restatement (Third) of Trusts (2003) states: Increasingly, modern statutory and common law concepts and terminology tacitly recognize the trust as a legal “entity,” consisting of the trust property and the associated fiduciary relationship between the trustee and the beneficiaries. This is increasingly and appropriately reflected both in the language (referring, for example, to a trustee’s duties or liability to “the trust”) and in legal doctrine, especially in the distinction between the trustee personally—as an individual—and the trustee in the capacity of a fiduciary, with representative authority. In general, modern U.S. statutes governing business organizations tend to make this distinction explicit, whereas those governing trusts tend not to. Regardless, it is common for a personal trust to open a securities account or hold property in its own name (so that the trust can file a federal or state tax return).
Incidentally, regarding unusual features of U.S. legal personality (primarily focused on the limited liability company (LLC) and its ability to operate without members, subject only to a legal instrument or other agreement), I recommend reading the recent book Autonomous Organizations (Cambridge, 2021), authored by Shawn Bayern.
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