Law & the Courts

N.Y. State Authorities Probe Trump Organization Payments to Michael Cohen

Michael Cohen arrives at his hotel in New York City, June 20, 2018. (Brendan McDermid/File Photo/Reuters)
Did the president’s company violate the law in representing pay-off reimbursements to Cohen as legal fees?

Earlier today, we posted my column about yesterday’s revelation that federal prosecutors in Manhattan granted immunity to two American Media Inc. executives, including CEO David Pecker, a longtime friend and collaborator of President Trump’s. As I detail in the column, while news of the immunity grants just broke yesterday, the grants almost certainly happened many weeks ago — likely just after the April search warrants executed at Michael Cohen’s office and residences. The point, it appears, was to shore up the case against Cohen, President Trump’s former lawyer. The immunity grants are not a new development signaling sudden momentum in an investigation of President Trump. Of course, if there is such an investigation, they would be relevant.

In the column’s penultimate paragraph, I note that in the eight-count criminal information to which Cohen pled guilty on Tuesday, prosecutors suggested that fraud may have been committed by Cohen and the Trump Organization (President Trump’s real-estate conglomerate). At issue is the manner in which Cohen was reimbursed for the $130,000 hush-money payment to Stephanie Clifford (the porn star better known as Stormy Daniels). Specifically, there are peculiarities in the way Cohen’s reimbursement was totaled up, invoiced, and processed for payment.

Right about the time I submitted the column to my tireless editors late last night, the New York Times broke the news that the Manhattan district attorney’s office is considering criminal charges against the Trump Organization over these payments.

The Times’ William K. Rashbaum reports that this state probe is in its infancy. This, no doubt, is because it was triggered by the aforementioned criminal information the feds filed against Cohen — to be precise, the part of the Cohen case outlined in the last four paragraphs of the “Campaign Finance Violations” section of the press release issued by the U.S. attorney for the Southern District of New York (SDNY).

So . . . what’s this all about?

First, the president has indicated that he personally reimbursed Cohen for the $130,000 Stormy Daniels pay-off. As noted in my aforementioned column, this is important because, under campaign-finance law, there is no dollar limit on what a candidate may spend on his own campaign (while other donors have a $2,700 ceiling, which is why Cohen was charged). One question that federal prosecutors have certainly looked into is whether the president himself paid Cohen, as opposed to reimbursing him through a Trump business entity.

Cohen did not seek reimbursement directly from the president. He sought it from the Trump Organization, which the Justice Department’s press release refers to as Trump’s “Manhattan-based real estate company.” The just-described campaign-finance exemption that permits a candidate to make unlimited expenditures and contributions does not necessarily extend to businesses controlled by the candidate. So, the question is: Are Donald Trump and the Trump Organization one and the same for federal election-law purposes?

In this instance, they probably are. While Donald Trump is president, the Trump Organization is being run by his two adult sons, Don Jr. and Eric. The Stormy paper trail indicates that, upon receiving Cohen’s invoices, Trump Organization executives directed that reimbursement payments to Cohen be paid “from the Trust.” Presumably, this refers to the trust fund, managed by his sons, into which the president transferred most of his business assets shortly before taking office. Assuming Cohen was paid out of the president’s personal assets, a $130,000 “in-kind” expenditure would be permissible for campaign-finance purposes. (The law would still require that the expenditure be reported to government campaign monitors.)

From there, though, things appear to get dicey.

As just noted, Cohen sought reimbursement by submitting invoices to the Trump Organization. Initially, in January 2017, he presented a bank statement from “Essential Consultants LLC,” the dummy corporation he created to make the Stormy Daniels pay-off (which was further concealed by using pseudonyms in the non-disclosure agreement). All told, Cohen asked to be compensated for laying out approximately $180,000 in campaign expenditures — the $130,000 Stormy Daniels payment and a $50,000 item for technology services that SDNY prosecutors appear to concede was legitimate.

This $180,000 amount was “grossed up,” in the words of Trump company executives, by doubling it to $360,000. This was done, prosecutors say, “for tax purposes.” “Grossing up” is an accounting technique sometimes used in reimbursement transactions so the payee can be made whole regardless of tax implications. It is not problematic as long as taxes are properly computed and paid. (At this point, there is no suggestion that they were not. The tax-evasion charges to which Cohen pled guilty do not relate to the Stormy Daniels transaction.)

On top of the $360,000, Trump Organization executives added a $60,000 “bonus” for Cohen, for a grand total of $420,000. This amount was to be drawn down by Cohen during 2017, in twelve monthly installments of $35,000.

For each installment, it was up to Cohen to submit an invoice. Prosecutors intimate that these invoices, and the processing of them, were fraudulent: The pertinent records indicate that the payments were for legal services rendered in 2017 pursuant to a retainer agreement. In reality, prosecutors counter, the payments were for campaign expenditures in 2016; they were not for legal services. And Cohen did not have a retainer agreement to provide legal services. As the SDNY press release puts it:

On February 14, 2017, COHEN sent an executive of the [Trump] Company (“Executive-1”) the first of his monthly invoices, requesting “pursuant to [a] retainer agreement . . . payment for services rendered for the months of January and February, 2017.” The invoice listed $35,000 for each of those two months. Executive-1 forwarded the invoice to another executive of the Company (“Executive-2”) the same day by email, and it was approved. Executive-1 forwarded that email to another employee at the Company, stating: “Please pay from the Trust. Post to legal expenses. Put ‘retainer for the months of January and February 2017’ in the description.”

Throughout 2017, COHEN sent to one or more representatives of the Company monthly invoices, which stated, “Pursuant to the retainer agreement, kindly remit payment for services rendered for” the relevant month in 2017, and sought $35,000 per month. The Company accounted for these payments as legal expenses. In truth and in fact, there was no such retainer agreement, and the monthly invoices COHEN submitted were not in connection with any legal services he had provided in 2017.

During 2017, pursuant to the invoices described above, COHEN received monthly $35,000 reimbursement checks, totaling $420,000.

Prosecutors have not identified “Executive-1” and “Executive-2” from the Trump Organization. According to the U.K.’s Daily Mail, Lanny Davis, one of Cohen’s lawyers, has suggested that “Executive-1” is Allen Weisselberg, the Trump Organization’s chief financial officer. That would make sense: Last month, Weisselberg was reportedly subpoenaed to testify before the SDNY grand jury investigating Cohen.

The Times report explains that the Manhattan DA’s interest is piqued because it is potentially a state-law felony for a business to misrepresent the basis for a reimbursement — e.g., to claim or deduct as a “legal expense” something that was not a legal expense. Meanwhile, New York’s attorney general, Barbara D. Underwood, has taken the preliminary steps necessary to investigate Cohen for possible state tax violations. These would be separate from the five federal tax-evasion offenses to which Cohen pled guilty this week. Such an investigation could expand into a state tax probe of the Trump Organization — at least to the extent of its accounting for Cohen’s reimbursement.

As the Times further notes, a president has no power to pardon violations of state law.

IN THE NEWS: ‘[WATCH] Trump Slams Justice Department’

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