Throughout the presidential campaign, Donald Trump has cast himself as both an anti-Wall Street populist and a straight shooter fed up with the waffling and equivocating that dominates business and politics. He disdains “crooked” Hillary Clinton, as he calls her, but the blunt-talking Trump is no stranger to the art of the lawyered caveat. In one of his most significant court battles, Trump protected his business empire with carefully parsed fine print—a “perfect prospectus” that secured a landmark ruling helping to insulate Wall Street from charges of fraud.
According to hundreds of pages of court documents reviewed by International Business Times, Trump notched a victory for himself and the financial industry by convincing judges that his own fine print warnings meant he had not deceived investors when he lured them to bet—and ultimately lose—hundreds of millions of dollars on one of his riskiest development projects. The real estate mogul known for his litigiousness helped Corporate America secure a ruling making it harder for investors to file lawsuits. Unlike his other past business moves that appeared to affect only Trump’s business partners, vendors and customers, this Trump case helped set a court precedent that was soon codified into law.
Trump is now asking voters to invest in his vision for America. But after reviewing the case about his fine print disclaimers, Democratic Sen. Elizabeth Warren, a Clinton supporter, told IBT that Americans should take note. “The pattern is pretty clear: He dodges his taxes, cheats his workers, scams students and misleads investors — all to line his own pockets,” said Sen. Warren, a former law professor who has raised concerns about weak investor protections and risk-disclosure requirements. “Donald Trump plays by his own set of rules, and he looks out for only one person: Donald Trump."
The Trump campaign did not respond to repeated requests for comment by IBT.
The Trump case culminated in 1993, when the real estate mogul was a defendant in a case before future Supreme Court Justice Samuel Alito, who had once worked for Trump’s sister. Sixty miles east of Alito’s Philadelphia courtroom, the centerpiece of Trump’s casino empire — Atlantic City’s Taj Mahal — was in financial turmoil. The case revolved around that doomed project: A group of investors alleged that Trump had misled them about the dangers involved with betting their money on the boardwalk casino.
Bond prospectuses obtained by IBT show that Trump in 1988 pitched potential investors on his plan to build a colossus “of luxurious grandeur in an East Indian motif.” He said it would draw “high-end gaming patrons” with “a luxurious environment” and provide event facilities that would give the Taj an “added ability to attract customers that most other casino/hotels in Atlantic City do not have.” Soon after the bonds sold, though, Trump declared bankruptcy. Investors argued that in order to entice them, Trump overstated his net worth, omitted key cautionary information and used fantastical revenue estimates—a situation they said set them up to get fleeced.
Trump did not explicitly challenge the plaintiffs’ allegations that his prospectus contained misleading or inaccurate information. Instead, his lawyer argued that “the cautionary language in this prospectus was so complete, so repetitive, so obvious and so well designed” that it could not have misled investors. The court concurred.
“Cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law,” wrote Judge Edward Becker, who then dismissed the case before it could be heard by a jury.
That ruling helped solidify the “bespeaks caution” doctrine which allows companies to make financial predictions, but also shields them from securities fraud lawsuits if they include enough fine print warnings about risks. Trump’s case was soon cited as a model in subsequent Republican legislation designed to limit financial firms’ liability in securities fraud cases.
In practice, say legal experts, the doctrine today allows judges to short circuit lawsuits’ discovery phase, which is the key time when plaintiffs can use subpoenas to force companies to disclose what they knew.
“It is troubling that some courts throw out cases before discovery based upon the bespeaks caution doctrine,” said Jordan Thomas, a former Securities and Exchange Commission enforcement official who now represents corporate whistleblowers. “That denies injured parties the ability to establish that there was actual knowledge or recklessness when a company makes false forward-looking statements.”
For their part, Trump’s lawyers said financial firms needed and deserved the doctrine’s protection from securities fraud lawsuits.
“What are the investment bankers and what are people who are worried about capital formation going to do if they're going to raise money for a project such as this one?” Trump attorney Richard Posen asked in oral arguments. “There must be, if people are going to be able to issue prospectuses, sell bonds and stock in this society under the regulatory and statutory framework with which we live, a way that you can accurately write what you mean and not be sued because the bonds declined in value.”
‘Investors Needed to Be Told More, Not to Be Sold More’
“Before ‘bespeaks caution,’ if you could establish that there was a misstatement in a prospectus, there was strict liability, but then the smart guys came up with bespeaks caution,” Robert Schachter, one of the plaintiffs in the Trump case, told IBT. “It was important — the shift gave smart lawyers a way to stick all this cautionary language in documents to get a safe haven.”
Just as the doctrine was being cemented in the courts during the late 1980s, Trump and his lawyers were crafting the Taj’s bond offerings into what Trump’s lawyer would later boast was a “perfect prospectus.” The document—which sought to attract investors to the Trump project—expounded on plans for a lavish state-of-the-art facility that would be backed by a powerful “marketing strategy to actively promote the Taj Mahal not only as a first class casino hotel, but also as a convention site and destination resort facility.”
Though the casino would be twice the size of the largest one ever constructed in Atlantic City—and would cost $805 million to complete—Trump said that the project would be finished in less than three years, and that management “believes that funds generated from the operation of the Taj Mahal will be sufficient to cover all of its debt." It also reassured prospective investors that Trump was worth a half-billion dollars—an assertion that Trump was simultaneously playing up in national media profiles.
Though marketing a junk bond, the “perfect prospectus” got the job done: It convinced outside investors to pony up $675 million—or 83 percent of the total cost of the casino—while obligating Trump to put up only $75 million for his own project. Even more important for Trump, when his business empire declared bankruptcy only a few years after the rosy projections helped get the bonds sold, the fine print in the prospectus made sure investors absorbed most of the losses.
When Trump’s bankruptcy exposed the financial calamity behind his empire’s gilded facade, bondholders said they were the victims of outright fraud. In a lawsuit, their lawyers asserted that Trump officials “intentionally, recklessly, or negligently, overstated and misrepresented the financial and operating condition and prospects of Donald and his empire, including the Taj Mahal, intending to deceive [the] investing public.”
As proof they had been defrauded, the plaintiffs asserted that while Trump said he believed the revenue projections were solid, he actually knew otherwise. The amount of daily revenue the Taj would have to take in to merely break even, the plaintiffs said, would need to be five times that of the average Atlantic City casino—and therefore, they argued, Trump knew it was impossible to achieve. While a well-respected casino analyst raised this concern before the casino was operational, Trump's team ignored his report — which turned out to be true.
“Investors needed to be told more, not to be sold more—they needed to be told more about the risks that were inherent in buying the bonds and less about how spectacular the investment was going to be,” Mark Rifkin, one of the lead plaintiffs attorneys, told IBT. "If investors had been told more about the risks of investing in the bonds, some of them would have decided not to invest.”
The complaint suggested that Trump had based projections on his own overly optimistic appraisal report—and ignored a more sober independent appraisal report that had already been conducted, but was not included in the prospectus. They also said Trump had understated his financial obligations and publicly overstated his own personal net worth—a situation they said harmed them because “the success of the Taj Mahal depended on the strength of Donald's name, financial position, personal liquidity, and business reputation.”
None of that seemed to matter to Trump’s legal team, and they did not explicitly dispute the veracity of the allegations. Instead, they became the first to go all-in on the bespeaks caution defense in New Jersey’s powerful federal court: They bet the house on the argument that as long as the bond proposal included explicit, fine print warnings that his projections could fall through, Trump and his business empire were immune from legal liability.
The crux of the defense rested on the sheer number of warnings in the prospectus. It mentions “risk” over a dozen times and its predictions are couched with numerous qualifiers: “The project cost could increase,” it warns. “Competition in the Atlantic City casino/hotel market is intense,” it explains, and “no assurance can be given that, once opened, the Taj Mahal will be profitable or that it will generate cash flow sufficient to provide for the payment of the debt service.”
From the beginning, the court recognized that the Trump team’s argument would carry implications far beyond the casino case. During the court proceedings, the judge asked Trump’s lawyer whether the bespeaks caution concept conflicted with “the principle that misrepresentations are normally actionable and that statements made without a reasonable basis are deemed untrue.” Posen acknowledged that “there is a tension between those doctrines,” but argued that because warnings were included, “the text of the prospectus itself is a complete defense.”
The court agreed. Even if Trump forecast preposterous earnings, omitted negative information about his personal finances, or buried inconvenient appraisals that contradicted his braggadocious narrative about the Taj Mahal—these were legal irrelevancies, so long as his prospectus “bespoke caution.”
“Adequate cautionary language in a prospectus is the equivalent of full disclosure,” wrote New Jersey District Court Judge John F. Gerry, an influential jurist who was chairing the executive committee of the group that oversees the federal judiciary. Of Trump’s alleged omissions of inconvenient facts, Gerry ruled that firms are not required to publish a prospectus that “disparages the very viability of that investment,” nor are they “required to apply pejorative or derogatory descriptors to the investment”—even if investors believe they are entitled to such disclosures. He then dismissed the case, ruling that the well-crafted disclaimers were “relieving defendants of securities fraud liability.”
Though Trump was the most famous business icon to use the fine print defense, he was not the first. Fifteen years before his Taj Majal case, a federal court in Missouri first mentioned the phrase “bespeaks caution” in the footnote of a case about an aviation firm that investors said wrongly told them it had contracts lined up to cover its costs. The court ruled that since since the company used words like “expected” and “possible,” it had “bespoke caution in outlook” and therefore investors couldn’t sue for their money back.
In 1985 and 1986, the federal court in New York pulled the “bespeaks caution” language out the footnotes and began fashioning it into a formal theory. In the latter case, judges threw out a lawsuit alleging, among other things, that a Manhattan developer wooed investors by promising to rent out condos in a building that, unbeknownst to the investors, legally could not be zoned residential. It didn’t matter whether the firm knew the building would never be converted into condos, the court ruled, as long as it included fine print warnings when communicating with investors.
Then in a 1991 case about a bankrupted retirement community, a Missouri court threw out a securities fraud case where investors claimed they’d been duped by a feasibility study that made “misrepresentations, omitted material facts and made economic predictions with reckless disregard for their validity.” It didn’t matter if the statements in question were indeed false, the court found, since the firm’s documents “contained a number of risk statements, detailed cautionary language and disclosures” that immunized it from punishment.
The legal shift underway was significant. After the stock market crash and the ensuing Great Depression, landmark statutes in 1933 created strict and seemingly straightforward rules about how firms could — and could not — market financial products. Under those laws, securities dealers were legally liable if their bond prospectus “includes an untrue statement of a material fact or omits to state a material fact.”
But with more conservative, business-friendly jurists getting judicial appointments during the Reagan era — and with Wall Street looking to reduce a growing number of securities fraud suits — the cases interpreting and applying those laws to corporate fine print were reshaping financial jurisprudence.
Trump’s defense against his investors — strengthened by emerging case law — helped turn fine print into a legal firewall. The dismissal of the Taj Mahal case in New Jersey was appealed to Alito’s court in Philadelphia, and there, federal judges sided with Trump in the highest-profile case bolstering the “bespeaks caution” doctrine.
“‘Bespeaks caution’ is essentially shorthand,” the court reasoned, “that a statement or omission must be considered in context, so that accompanying statements may render it immaterial as a matter of law.”
‘Investors Shouldn’t Have Had to Take That Risk’
The ruling was a big win for financial firms and moguls like Trump—and Trump’s team appeared to recognize its larger significance beyond absolving their client. "It is a synthesis of an emerging doctrine of law," Trump attorney Posen told the New York Times. He said the opinion "will serve to discipline the worst of the plaintiffs' class-action cases, which essentially say: 'I bought the stock. It went down. Someone gypped me.'”
Three years after a federal appeals court ratified Trump’s argument, congressional Republicans did the same. Fresh off their takeover of Congress in 1994, GOP lawmakers passed a far-reaching measure designed to shield corporations from lawsuits, and statutorily affirming the spirit of the bespeaks caution doctrine. In congressional reports accompanying the legislation—known as the Private Securities Litigation Act—lawmakers explicitly pointed to the Trump case for inspiration. Citing the Taj Mahal lawsuit, the Senate report said a key provision in the bill “protects from liability certain ‘forward-looking’ statements that are accompanied by sufficient cautionary language.”
President Bill Clinton vetoed the measure in 1995, saying the bill would “have the effect of closing the courthouse door on investors who have legitimate claims.” Congress overrode the veto.
To be sure, Trump was not solely responsible for the bespeaks caution doctrine—both the congressional legislation and rulings from other courts have independently affirmed it. Trump’s case, though, remains a key reference point not only in case law, but also among corporate law firms advising clients about how they can protect themselves against aggrieved investors who claim they were ripped off.
“The ‘bespeaks caution’ doctrine has become an important weapon in securities defendants' arsenals,” wrote one prominent law firm in an emblematic article calling the doctrine “a useful tool for early dismissal” and touting the Trump suit as “one of the leading bespeaks caution cases.” Another major firm more recently published an article advising clients that the Trump case means that “if a statement has been rendered immaterial by cautionary language, it remains immaterial, even if known to be false when made.” A partner at Posen’s own firm boasted that the Trump case “gave the clearest and broadest articulation” of a doctrine that “dramatically strengthens an important defense” for corporations. “That's bad news for plaintiffs and their attorneys,” he said, but “good news for accountants.”
During the Trump case, the judge worried aloud about “the troubling possibility that the ‘bespeaks caution’ doctrine will encourage management to conceal deliberate misrepresentations beneath the mantle of broad cautionary language.” More than 20 years after those concerns were raised, there remains a debate over the merits of the doctrine.
University of Virginia law professor Andrew Vollmer, who served as the SEC’s general counsel, defended the doctrine, telling IBT: “Companies were getting sued all the time for predicting their revenues and the like — the plaintiffs bar would sue them for any variation from their predictions.” By contrast, Thomas, the former SEC regulator, asserted that while the doctrine encourages fine print warnings, “The problem with many companies’ risk disclosures today is that they are not tailored and they do not enumerate the assumptions built into their projections. In cases where you have these generalized, cookie cutter disclosures, companies shouldn’t be able to shield themselves from liability.”
The number of securities fraud cases has declined in recent years — and courts continue to fine tune the fine print doctrine that rescued Trump. Since 2006, the “bespeaks caution” principle has been invoked in cases involving major Wall Street banks, high-frequency traders and — perhaps most famously — the MF Global hedge fund that lost investors billions. Former SEC chairman Arthur Levitt told IBT that for the most part, the prospects for investors have worsened since Trump’s Taj Mahal case helped establish the precedent.
“The standards of liability have made it much more difficult to bring cases against wrongdoers,” said Levitt, who raised concerns about the 1995 legislation that cited the Trump case in codifying the bespeaks caution doctrine. “Congress and the judiciary have made it more difficult to bring private rights of action and investors are obviously less well protected today than they were 25 years ago — and I think that is unfortunate.”
Two decades after plaintiffs charged Trump with making unrealistic promises, he is again making bold predictions—this time about America’s future prosperity under a Trump presidency. As voters decide whether to bet on that vision, the Taj Mahal bondholders’ experience may bespeak caution.
“Investors are taking a risk that the casino may not be doing as well as Trump hoped it would do,” plaintiffs’ attorney Schachter told IBT. “The economy could be bad; real estate could be bad — that’s a risk that reasonable investors take,” he said. “The risk of not being told the complete truth by Trump? Investors shouldn’t have had to take that risk.”
John Osborne contributed research to this report.
This story was originally published on International Business Times.