Risk & Compliance

Pro Forma Poster Boy? The Donald

Commission charges Trump Hotels & Casino Resorts with issuing misleading statement in 1999. First pro forma case brought by SEC.
John GoffJanuary 16, 2002

Chalk up another first for billionaire real estate developer and self-professed financial wizard Donald Trump. Today, the Securities and Exchange Commission slapped The Donald with The First pro forma enforcement action ever.

The cease-and-desist order stems from an SEC investigation into a statement issued by Trump Hotels & Casino Resorts Inc. back in October 1999. In that release, Trump Hotel management reported that the company turned a profit of $14 million in the third quarter of 1999, excluding a one-time charge of $81 million. Management at the casino and resort operator also noted that net income per share for the quarter came in at .63 cents a share, exceeding First Call estimates of .54 cents per share. The statement went on to quote CEO Trump, who noted that the good numbers were due to improvements in the company’s operating performance.

But according to the SEC, the statement failed to mention that the revenue numbers actually included a one-time accounting gain of around $17 million. That gain came from the earlier termination of a lease agreement with the All Star Café, which leased restaurant space at the Trump Taj Mahal Casino Resort in Atlantic City. Without that one-time fillip (and accounting for minority interests), Trump Hotels would have actually only turned around a $3 million profit for the quarter — and would not have met analyst estimates.

“In this case, the method of presenting the pro forma numbers and the positive spin the Company put on them were materially misleading,” says Stephen Cutler, director of the Commission’s division of enforcement. “The case starkly illustrates how pro forma numbers can be used deceptively and the mischief that they can cause.”

Indeed, the SEC seemed particularly peeved by Trump management mentioning the $81 million exclusion, while failing to note the $17 million one-off accounting gain. By stating that this one-time charge was excluded from its stated net income, the Commission noted, Trump management implied that no other significant one-time items were included in that figure.

On the day the earnings release was issued, the share price of Trump Hotels & Casino Resorts rose 7.8 percent. Three days later, after an analyst report revealed the one-time accounting gain, the share price fell about 6 percent.

The Commission found that Trump Hotels, through the conduct of its CEO (Trump), its CFO, and its treasurer, violated antifraud provisions by “knowingly or recklessly issuing a materially misleading press release.” The company, which consented to the issuance of the Commission’s order without admitting or denying the findings, was ordered to stop doing such things. Says one SEC official: “This case demonstrates the risks involved in mishandling pro forma reporting.”

Oh yes, in case you’re wondering: Trump’s auditor in 1999 was Arthur Andersen.

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