Disgorging ill-gotten gains

Trump: "But the banks were repaid!"

The Law: That doesn't matter. You committed fraud.

I watched Donald Trump on television last night. He stood in a doorway and said the fine he was assessed was unfair. I did nothing wrong, he said. The banks were repaid! Nobody lost a penny! 

I had a 30-year career as a financial advisor. One principle I learned early was the policy of disgorgement. There was a simple rule of the road: You can never, ever profit from a mistake.

From time to time a financial advisor will make a trading error, for example buying the wrong stock, selling when he should have bought, or buying or selling the wrong amount of something. Mistakes are easy to make if you are working quickly. For example, you have been talking with a client about buying either Microsoft or Apple, and the client decides on Apple. But Microsoft was in your head and you accidentally buy Microsoft instead of Apple. If you catch your mistake an hour later, possibly Microsoft went up and Apple went down -- a lucky error. The office adjusts the two prices back to what they should have been, making a profit on each side of the trade. The advisor never gets to keep that profit. You never profit from an error.

If markets go the other way and Apple goes up and Microsoft goes down, then one has two unfortunate errors at once. One needs to buy Microsoft at the higher price and credit the client with the correct lower price, and one needs to sell the Microsoft at a loss and pay the difference. The Advisor always pays for the losses to make the client whole.

It is simple: Errors can cost you but never help you. So one learns to be careful.

Trump argues that "no one got hurt." Banks loaned Trump money and they got paid back. No harm, no foul, right? No. Trump provided fraudulent statements, thus establishing the error. The law sets the ground rules. Don't lie on loan documents. Banks set loan interest rates based in part on the creditworthiness of the borrower. Banks were harmed by underpricing the loans to him. How much they were harmed determines the amount of disgorgement. What matters is the original fraud, not whether the unpriced risk came to a bad end.

Sometimes events disguise harm. Consider an insurance agent who takes a fire insurance deposit from a homeowner, but instead of depositing it with the insurance company, chooses to pocket the money, leaving the person uninsured and unaware of it.  Fires are rare. Perhaps the year passes and the homeowner had no fire and no claim, and never knew he was uninsured. No harm, no foul? Of course not. That homeowner was harmed. He had an unwanted, unpaid risk of financial catastrophe.

The law on fraud and disgorgement is designed to reduce temptation to cheat and hope that events or markets work out for you and the person you cheated. That's how the law works. That's how it should work. The courts computed Trump's unjust benefit from his fraudulently-priced loans and added penalties and interest, just as the law directs.

Disgorgement deters financial crime. Others see Trump's predicament and recalculate the cost-benefit ratio of fudging numbers on loan documents.  

Trump is a cautionary example. He serves America by getting caught and paying the price.

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