Cohen’s clumsy payments gave paper trail to prosecutors
Michael Cohen may be known as “the fixer”, but clumsy contracts meant to separate the president from plans to pay off two women for their silence about alleged affairs with Trump instead gave prosecutors the paper trail needed to pressure Cohen to plead guilty and connect his actions to Trump.
Cohen testified that “in coordination with and at the direction of” Trump, between August and September of 2016, he and David Pecker, the chairman of America Media, publisher of the National Enquirer, agreed to pay off two women to suppress the stories about alleged affairs with Trump—Karen McDougal, the former Playboy model, and adult film actress Stormy Daniels.
Cohen pleaded guilty on Tuesday to tax and bank fraud, but the two convoluted campaign finance violations that he admitted were the result of his attempt to get paid what he was owed for making a payoff to Stormy Daniels, paying some other campaign-related expenses, and earning a bonus likely for his efforts to silence Daniels and Karen McDougal, who was paid off by Pecker and American Media.
Cohen was an employee of the Trump Organization, an executive vice president and special counsel to Trump for a decade..
In late 2016, while he was still a Trump Organization employee, Cohen concocted a scheme with the chairman and chief executive of “Corporation-1,” widely reported to be David Pecker of American Media, the publisher of the National Enquirer, according to the plea agreement he signed.
Their goal, say prosecutors, was to “deal with negative stories” about Trump’s relationships with women. Pecker would assist the Trump campaign in identifying such stories “so they could be purchased and their publication avoided.”
Pecker, the criminal complaint says, agreed to keep Cohen informed if any such stories came up.
Cohen admitted that he arranged for American Media, Inc., publisher of The National Enquirer, to pay McDougal $150,000 thereby gaining exclusive rights to McDougal’s story and a non-disclosure agreement that would protect the Trump campaign.
Cohen planned to reimburse American Media $125,000 for the non-disclosure rights to McDougal’s story via a new shell company, Resolution Consultants LLC. However, after the agreement was signed but before Cohen had paid out the $125,000, Pecker contacted Cohen and told him to tear up the agreement. Cohen did not tear it up and it was later found when law enforcement searched his office in April 2018.
Corporations are prohibited from making contributions directly to presidential candidates, including making donations that are coordinated with candidates or their committees and representatives, and candidates are prohibited from accepting corporate contributions. Individual contributions to any presidential candidate, including expenditures coordinated with a candidate or their political committee, are limited to $2,700 per election.
On Oct. 8, 2016, an agent for an adult film actress Stormy Daniels told Pecker that she was planning to make public statements and confirm on the record her alleged past affair with Trump. Pecker told Cohen, then Cohen negotiated an agreement to pay Daniels’ attorney $130,000, according to the federal charges.
Cohen created another shell corporation, Essential Consultants LLC, drew down $131,000 from his own home equity line of credit, and deposited it into a recently opened bank Essential Consultants bank account. On Oct. 27, 2016, Cohen wired approximately $130,000 from Essential Consultants to Daniels’ attorney. Cohen falsely indicated on the bank forms that the purpose of the wire was a “retainer,” according to the court filing.
In early 2017, after Trump was elected president, Cohen “began holding himself out” as the president’s personal attorney, according to court filings. In a January 2017 interview with The Wall Street Journal, Cohen said: “I am the fix-it guy. Anything that he needs to be done, any issues that concern him, I handle.”
In January 2017, after Trump had won the election and Cohen was no longer a Trump Organization employee, he contacted the company and sought reimbursement for some unreimbursed expenses.
He submitted a copy of the Essential Consultants bank statement to a Trump Organization executive to prove he had made the $130,000 payment to the bank account of Daniels’ attorney, and added a note that he was also owed $35 fee for the wire transfer.
Cohen also handwrote on the bank statement that he sought an additional $50,000 for “tech services,” but was, according to prosecutors, actually related to work Cohen had arranged from a technology company in connection with the Trump campaign.
Trump Organization executives agreed to “gross up” the reimbursement to Cohen for tax purposes.
That means they increased the payment to Cohen cover the taxes he would owe on it, since the payment would be characterized as income to Cohen. The Trump Organization agreed to pay him $360,000 for the two items, based on a maximum combined federal, state and local tax burden of approximately 50% for Cohen who works in New York City, resulting in the after-tax net payment of $180,000 he said he was owed.
The Trump Organization also added a “bonus” of $60,000 and arranged to pay $420,000 in total. Cohen and the Trump organization agreed he would be paid the $420,000 in monthly amounts of $35,000 over twelve months, and that Cohen had to send an invoice each month for the charges.
On Feb, 14, 2017, Cohen sent an executive of the Trump organization the first of his monthly invoices for $35,000, requesting “[p] ursuant to [a] retainer agreement, payment for services rendered for the months of January and February, 2017.”
An email from one executive of the Trump Organization to another, obtained by the prosecutors, stated: “Please pay from the Trust. Post to legal expenses. Put ‘retainer for the months of January and February 2017’ in the description.”
“There were many easier, less complicated ways to do this,” said Jon Kerr, a professor of accounting at Ohio State University who researches federal income tax issues.
“The Trump Organization could have paid these expenses directly or reimbursed them to Cohen as ordinary employee business expenses,” said Kerr.
“But that would have required adequate paperwork and a valid business purpose,” Kerr told MarketWatch. If the Trump Organization paid the expenses directly that would have also tied the Trump Organization to the payments to the two women.
Cohen, as an individual taxpayer, may have deducted these expenses in 2016 as an unreimbursed employee business expense since they were business expenses he paid out in 2016, and were related to carrying on his responsibilities as an employee of the Trump Organization. He also likely considered them “ordinary and necessary, ” which is a requirement under IRS rules for deductibility of unreimbursed employee business expenses.
Under IRS rules, an expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary, according to the IRS, if it is appropriate and helpful to your business, which Cohen likely believed the activities were. An expense doesn’t have to be required to be considered necessary under IRS rules.
“Cohen and the Trump organization chose this complicated process, likely, to reduce the paper trail and make it hard to trace the payments back to Trump,” Kerr told MarketWatch.
Michael Cohen’s attorney, Lanny Davis, did not respond to a request for comment sent via email and phone message to his law office.
As a former employee, Cohen could have instead filed a simple expense report and the reimbursement for the expenses he incurred would have not been taxable. The additional bonus payment of $60,000 for his prior services as a top Trump Organization executive would have also been taxable to Cohen but likely not considered out of the ordinary given his prior position.
Cohen could have also paid the expenses and not sought any reimbursement, but then would have exceeded the individual $2,700 contribution limit, since the actions benefitted the Trump campaign. Someone who doesn’t forget to ask for reimbursement of a $35 wire transfer fee is likely not going to forget about a $130,000 favor.
Given the criminal charge of campaign finance violations associated with arranging the payment to Karen McDougal by American Media and the $130,000 payment to Stormy Daniels, could the Trump Organization, still owned and controlled by President Trump, have any legal liability?
The prosecutors did not say whether the Trump campaign ever reimbursed the Trump Organization for the reimbursements to Cohen that caused the federal campaign contribution violations.
In an interview to be aired by Fox and Friends on Thursday, President Trump said the campaign did not pay. “They didn’t come out of the campaign, they came from me.”
The Trump Organization routinely made payments to the Trump campaign beginning in 2015 and continuing until now, according to records at the Federal Election Commission based on reports filed by the Trump campaign, now gearing up for the 2020 election.
A representative for the Trump Organization did not respond to a request for comment.
Francine McKenna is a MarketWatch reporter based in Washington, covering financial regulation and legislation from a transparency perspective. She has written about accounting, audit, fraud and corporate governance for publications including Forbes, the Financial Times, Accountancy and the American Banker. McKenna had 30 years of experience at banks and professional-services firms, including at PwC and KPMG, before becoming a full-time writer.
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