United States of America
In the Matter of
TRUMP HOTELS &
CASINO RESORTS, INC.
PURSUANT TO SECTION
21C OF THE SECURITIES
EXCHANGE ACT OF 1934,
MAKING FINDINGS, AND
DESIST ORDER ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Trump Hotels & Casino Resorts, Inc. ("THCR" or "the Company") be, and hereby are, instituted.
In anticipation of the institution of these cease-and-desist proceedings, THCR has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings set forth herein, except that THCR admits the jurisdiction of the Commission over it and over the subject matter of these proceedings, THCR, by its Offer of Settlement, consents to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Issuing Cease-and-Desist Order ("Order").
On the basis of this Order and the Offer, the Commission makes the following findings:
A. On October 25, 1999, THCR issued a press release announcing its results for the third quarter of 1999 (the "Earnings Release" or the "Release"). To announce those results, the Release used a net income figure that differed from net income calculated in conformity with generally accepted accounting principles ("GAAP"). Using that non-GAAP figure, the Release touted THCR's purportedly positive operating results for the quarter and stated that the Company had beaten analysts' earnings expectations.
B. The Earnings Release was materially misleading because it created the false and misleading impression that the Company had exceeded earnings expectations primarily through operational improvements, when in fact it had not. The Release expressly stated that the net income figure excluded a one-time charge. The statement that this one-time charge was excluded implied that no other significant one-time items were included in THCR's stated net income. Contrary to that implication, however, the stated net income included an undisclosed one-time gain of $17.2 million.
C. The misleading impression created by the reference to the single one-time charge and the undisclosed inclusion of the one-time gain was reinforced by the comparison of the stated earnings-per-share figure with analysts' earnings estimates and by statements in the Release that the Company had been successful in improving its operating performance. In fact, without the one-time gain, the Company's revenues and net income would have decreased from the prior year and the Company would have failed to meet analysts' expectations. The undisclosed one-time gain was thus material, because it represented the difference between positive trends in revenues and earnings and negative trends in revenues and earnings, and the difference between exceeding analysts' expectations and falling short of them.
D. By knowingly or recklessly issuing a materially misleading press release, THCR violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
E. THCR is a publicly-held Delaware corporation. Through various subsidiaries, it owns and operates the Trump Taj Mahal Casino Resort (the "Taj Mahal") located in Atlantic City, New Jersey, as well as other casino resorts. THCR and its subsidiaries file reports, including their financial statements, on a consolidated basis. The Company's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is traded on the New York Stock Exchange. The Company's executive offices are in New York City, and its business and financial operations are centered in Atlantic City.
F. In September 1999, Taj Mahal Associates ("Taj Associates"), a THCR subsidiary, took over the All Star Café located in the Taj Mahal Casino from Planet Hollywood International, Inc. On September 15, 1999, Taj Associates, Planet Hollywood, and the All Star Café, Inc. reached an agreement pursuant to which, effective September 24, 1999, the All Star Café's lease of space at the Taj Mahal would be terminated and All Star would be relieved of its rental obligations to THCR. In return, Taj Associates would receive the All Star Café's leasehold improvements, alterations, and certain personal property. Because the Taj Mahal was going to continue to use the space as a restaurant, the Company's outside auditor advised that Taj Associates should record as operating income the fair market value of the leasehold improvements, alterations and personal property reverting to Taj Associates. Based on this advice and on an independent appraisal, and in conformity with GAAP, Taj Associates (and, on a consolidated basis, THCR) recorded $17.2 million, the estimated fair market value of these assets, as a component of operating income for the third quarter of 1999.
G. On October 25, 1999, THCR issued the Earnings Release, publicly announcing its results for the third quarter of 1999. The Release, and the accompanying financial data, defined net income, or net profit, for the quarter as income before a one-time Trump World's Fair closing charge of $81.4 million. Using this "pro forma" net income,1 the Release announced that the Company's quarterly earnings exceeded analysts' expectations, stating:
Net income increased to $14.0 million, or $0.63 per share, before a one-time Trump World's Fair charge, compared to $5.3 million or $ 0.24 per share in 1998. THCR's earnings per share of $0.63 exceeded First Call estimates of $0.54.2
H. The Release fostered the false and misleading impression that the positive results and improvement from third-quarter 1998 announced by the Company were primarily the result of operational improvements. In the Release, THCR's chief executive officer ("CEO") was quoted as saying:
Our focus in 1999 was three-fold: first, to increase our operating margins at each operating entity; second, to decrease our marketing costs; and third, to increase our cash sales from our non-casino operations. We have succeeded in achieving positive results in each of the three categories. The third quarter and nine month results for the company indicate that we have successfully instituted the programs that we focused on during 1999.
I. The Release failed to disclose, however, that the Company's pro forma net income for the quarter included the one-time gain resulting from the All Star Café lease termination. Accordingly, it failed to disclose the impact of that $17.2 million one-time gain upon the Company's $14 million pro forma net income or upon any of the other figures cited in the Release. Not only was there no mention of the one-time gain in the text of the Release, but the financial data included in the Release gave no indication of it, because, as discussed below, all revenue items were reflected in a single line item.
J. In fact, quarterly pro forma results that excluded the one-time gain as well as the one-time charge would have reflected a decline in revenues and net income and would have failed to meet analysts' expectations. The table below illustrates the impact of the one-time gain on the trends reported in the Earnings Release:
|3rd Q 1998||3rd Q 1999|
|3rd Q 1999 Excluding |
K. The Earnings Release was misleading. The Release used pro forma numbers that implied that all significant one-time items had been excluded, when they had not. The Release compared the pro forma EPS to analysts' expectations for quarterly EPS, which are generally and were in this case calculated on the basis of continuing business operations, thus reinforcing the false implication that all one-time items had been excluded. Moreover, the Release highlighted improvements in the Company's operations, i.e., the Company's increased operating margins, decreased marketing costs, and increasedcash sales from non-casino operations.3 By making these representations about THCR's quarterly performance, without disclosing the existence or impact of the one-time gain, the Release created the false and misleading impression that the Company's third-quarter results had improved over the results for third-quarter 1998 and had exceeded analysts' expectations primarily because management had been effective in improving the Company's operating performance.4
L. Historically, THCR announced its quarterly results in an earnings release that included financial data presented in a format similar to that of a Form 10-Q or Form 10-K financial statement. Among other things, financial data in these earlier earnings releases itemized revenues (on a Company-wide basis and also by property) by "Casino," "Rooms," "Food & Beverage," and "Other." In the third quarter of 1999, however, at the direction of the Company's CEO, and following similar models used by some of THCR's competitors, the Company adopted a less detailed, or "streamlined," format for the financial data contained in its earnings releases. Unlike the more detailed format used in earlier quarters, the new, streamlined format did not break out revenue items, but instead disclosed revenue as a single line item for each casino. Thus, the streamlined format did not break out "other revenue," the line-item classification in which the $17 million one-time All Star Café gain would have been reported under the old format.
M. The Earnings Release was prepared by the Company's corporate treasurer ("Treasurer") and its chief financial officer ("CFO"), under the supervision of the CEO, who approved the contents of the Release and made the decision to issue it. The contract of the CEO expired in June 2000 and was not renewed; he is no longer associated with the Company. 5
N. When the Release was issued, THCR knew that the estimated fair market value of the All Star Café lease termination would be recorded as part of operating income for third-quarter 1999and that the estimated fair market value of the transaction was $17.2 million. The Company also knew that the Earnings Release used a pro forma net income figure that expressly excluded the $81.4 million one-time charge but did not disclose the existence or impact of the $17.2 million one-time gain.
O. At 10:00 a.m. on October 25, 1999, the day the Earnings Release was issued, THCR held a conference call with analysts. During the call, the CEO told the analysts that increasing non-casino sales at the Taj Mahal had been a priority over the past year, and cited the Taj Mahal's third-quarter revenues as evidence that the emphasis had paid off. The CEO did not say that the Taj Mahal's non-casino revenue had increased primarily because of the All Star Café transaction.6
P. Immediately after the issuance of the Earnings Release and the conference call, analysts began asking questions about the details of the Company's increase in revenues. Within hours of the conference call, THCR's CFO spoke to several analysts who called with questions about specific aspects of Company's third-quarter results, and he provided them with information about the All Star Café gain. Over the next few days, additional analysts raised questions about the quarterly results, and the lack of detail in the Earnings Release. As a result, the Company's CFO and Treasurer attempted to speak to every analyst who had been on the conference call to explain the All Star Café transaction. In addition, the Company decided to accelerate the filing of its 10-Q for the quarter, which would contain a description of the one-time gain.
Q. After learning about the one-time gain, certain analysts informed their clients of its impact. One analyst at Bear, Stearns & Co. notified his clients on October 27, 1999 that the increased third-quarter EPS resulted from the inclusion in revenue of the one-time All Star Café gain. On October 28th, analysts at Deutsche Banc Alex Brown issued a report on the effect of the one-time gain, which was disseminated to subscribers to Deutsche Banc research over the First Call Research Network. The Deutsche Banc analysts reported that Company management had disclosed that day that roughly $0.47 of the $0.63 third-quarter pro forma EPS the Company had previously reported "were not operating EPS but were actually the result of an accounting gain." The analysts determined that after backing out the one-time $17 million gain, THCR's net revenues would have fallen 2.7 %, rather than rising 1.5 % as they did when the one-time gain was included. The Deutsche Banc report also explained that, without the one-time gain, the Company experienced negative trends in Company-wide cash flows and margins, as well as in Taj Associates' revenues from operations, rather than the positive trends indicated by the Earnings Release. Adjusting for the impact of the one-time gain, the Deutsche Banc analysts loweredtheir 1999 EPS estimate from -$1.17, contained in their initial report on THCR's third-quarter results, to -$1.64.7
R. On October 25th, the day the Earnings Release was issued, the price of the Company's stock rose 7.8 % (from $ 4 to $ 4.3125), on volume approximately five times the previous day's volume. On October 28th, the day of the second Deutsche Banc analysts' report, the stock price fell approximately 6%, on volume approximately four times the previous day's volume.8
S. On November 4, 1999, THCR filed its quarterly report on Form 10-Q. The 10-Q disclosed the existence and amount of the one-time gain in a footnote to the financial statements.
T. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful, in connection with the purchase or sale of securities, "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading."
U. To violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, a misrepresentation or omission must be material, meaning that a reasonable investor would have considered the misrepresented or omitted fact important when deciding whether to buy, sell or hold the securities in question. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S. Ct. 978, 983 (1988). To constitute a violation, the material misstatement or omission must be made with scienter. Aaron v. SEC, 446 U.S. 680, 701-02, 100 S. Ct. 1945, 1958 (1980). Scienter can be shown by knowledge of the misrepresentation and, in the Second Circuit, by reckless disregard for the truth or falsity of a representation. Sirota v. Solitron Devices, Inc., 673 F.2d 566, 575 (2d Cir. 1982), cert. denied, 459 U.S. 838 (1982). Recklessness is defined as "conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Rolf v.Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); see also SEC v. McNulty, 137 F.3d 732, 741 (2d Cir. 1998) (applying Rolf recklessness standard).
V. Thus, an issuer that knowingly or recklessly makes false or misleading statements in public announcements to investors, including press releases and other public statements, violates Section 10(b) and Rule 10b-5. See SEC v. Koenig, 469 F.2d 198 (2d Cir. 1972); SEC v. Great American Industries, Inc., 407 F.2d 453 (2d Cir. 1967), cert. denied, 395 U.S. 920 (1969). See also SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 861-63 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969). In Public Statements by Corporate Representatives, Securities Act Rel. No. 6504 (January 1984), the Commission reminded registrants that Section 10(b) and Rule 10b-5 apply to all public statements by persons speaking on behalf of a public company. The Commission also made clear that public announcements and press releases constitute public statements. Id. See also In re Carter-Wallace, Inc. Sec. Litig., 150 F.3d 153 (2d Cir. 1998) (advertisements by issuer can be "in connection with" the purchase or sale of securities); Sunbeam Corporation, Exchange Act Rel. No. 44305 (May 15, 2001)(issuer violated Section 10(b) and Rule 10b-5 when it disseminated materially false and misleading press releases).
W. The omission from the Earnings Release of the information that THCR's pro forma net income included a $17.2 million one-time gain was misleading, for several reasons.9 Absent disclosure to the contrary, the use of pro forma numbers in an earnings release reasonably implies that any adjustments to GAAP numbers were made on a consistent basis and do not obscure a significant result or a trend reflected in the GAAP numbers. Here, THCR's express exclusion of a one-time charge reasonably implied that no other significant one-time item was included in the pro forma net income figure. This implication was reinforced by the Company's assertions in the Release that its quarterly results had exceeded analysts' EPS expectations, which are generally, and were in this case, a measure of expected operating performance. Moreover, the misleading impression created by the use of the pro forma net income figure without disclosing the inclusion of the one-time gain was reinforced by the statements in the Release about improvements in the Company's operating performance, specifically, improvements in operating margins, marketing costs, and sales from non-casino operations.
X. In the context of the express exclusion from pro forma net income of the one-time charge, the comparison to analysts' earnings expectations, and the statements about the Company's operational improvements, the omission of information about the one-time gain was material, because the undisclosed one-time gain represented the difference between positive trends in revenues and earnings and negative trends in revenues and earnings, and the difference between exceeding analysts'expectations and falling short of them. Thus, the omission of information about the one-time gain obscured a negative trend and a failure to meet analysts' expectations, and therefore could reasonably have led analysts and investors to draw false conclusions about THCR's quarterly results.
Y. THCR, through the THCR officers involved in the drafting and issuance of the Earnings Release, knew that the estimated fair market value of the All Star Café lease termination was recorded as part of operating income for third-quarter 1999 and that the estimated fair market value of the transaction was $17.2 million. THCR knew that the Earnings Release used a pro forma net income figure that expressly excluded the one-time charge but did not disclose the existence or impact of the one-time gain. Accordingly, THCR knew or recklessly disregarded that the Earnings Release was materially misleading.
Z. While engaged in the conduct described above, THCR, directly and indirectly, used the means or instrumentalities of interstate commerce or the mails.
AA. Based on the foregoing, THCR violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by knowingly or recklessly issuing the Earnings Release.
In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by THCR and impose the cease-and-desist order specified in the Offer. In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by THCR, and the limited duration of the violations.
Accordingly, IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that THCR cease and desist from committing or causing any violation, and any future violation, of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
By the Commission.
Jonathan G. Katz
1 Although neither the text of the Release nor the accompanying financial data used the term "pro forma," the net income figure was pro forma in that it differed from net income calculated in conformity with GAAP by excluding the one-time charge. (Accordingly, the net income figure is hereafter referred to as "pro forma net income" and the earnings-per-share figure derived from the pro forma net income is referred to as "pro forma EPS.") The Release also used another pro forma figure, EBITDA, which it defined as earnings before interest, taxes, depreciation, amortization, corporate expenses and the $81.4 million Trump World's Fair closing charge.
2 The financial data contained in the Release also included figures for net income (loss) and earnings per share for the quarter that, in compliance with GAAP, included the World's Fair charge. Those figures were, respectively, a loss of $67.4 million and earnings per share of -$3.04.
3 Although the statements about increased operating margins, decreased marketing costs, and increased cash sales from non-casino operations were nominally true, in the context of the Earnings Release they were misleading, because, without the $17.2 million one-time gain, the increases in margins and cash from non-casino operations were negligible. Excluding the one-time gain, THCR's operating margins increased by 0.4% from third-quarter 1998 and its non-gaming revenue increased by $1.8 million, or approximately 2.25%. The Company's marketing costs (as represented by promotional allowances) decreased by approximately $549,000, or approximately 1%.
4 See note 7, infra (noting that the first research report by Deutsche Banc after the issuance of the Earnings Release had reported that the Company's $0.63 third-quarter EPS was driven by margin gains).
5 In addition, after the events at issue, the Company established a procedure by which earnings releases are reviewed by the Audit Committee before they are issued.
6 Without the $17.2 million one-time gain, non-casino sales at the Taj Mahal increased by only $300,000, or less than one percent, from third-quarter 1998 to third-quarter 1999.
7 The Deutsche Banc analysts first issued a report on THCR's third-quarter performance (also disseminated via First Call) on October 26th. The earlier report's headline announced that Trump Hotels had reported third-quarter operating EPS of $0.63, driven by margin gains. The analysts had also reported that net revenues were up 1.5%, despite a 1.3 % decline in gaming revenues at the Company's three Atlantic City properties. In the initial report, the analysts had said that the net revenue increase was the result of an increase in cash flow and profitability at the Atlantic City properties (including the Taj Mahal) and concluded that the increase in cash flow indicated that the Company's emphasis on cost reduction had been effective. As a result of the reported quarterly performance, in the initial report, the Deutsche Banc analysts had raised their 1999 EPS estimate.
8 October 28th was also the date on which an article discussing the impact of the one-time gain and the Company's failure to disclose it in the Earnings Release appeared in the Atlantic City Press.
9 As explained in note 1 above, the Earnings Release did not use the term pro forma but the figures in the Release were pro forma numbers in that they differed from numbers calculated in conformity with GAAP. Even if the Release had identified the numbers as pro formas, however, the Release would still have been misleading for the reasons discussed above. The presence or absence of the term pro forma is not, in and of itself, dispositive of the question of whether an earnings release or financial statement is misleading.
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