In the Matter of Trump Hotels & Casino Resorts, Inc.

Trump Hotels & Casino Resorts, Inc. (THCR) (defendant) was a publicly traded company that owned and operated the Trump Taj Mahal Casino Resort in Atlantic City, New Jersey. THCR’s common stock traded on the New York Stock Exchange and was subject to federal securities laws, including the Securities Exchange Act of 1934. On October 25, 1999, THCR announced its earnings for the third quarter of 1999. In issuing the earnings release, THCR included a one-time gain of $17.2 million that THCR earned from the acquisition of leasehold improvements to restaurant space formerly leased to All Star Café, Inc.; this lease had been terminated during the third fiscal quarter. However, THCR did not include a one-time closing charge of $81.4 million relating to Trump’s World Fair. The press release expressly stated that the one-time charge of $81.4 million was omitted from the earnings calculation but did not make any specific mention of the one-time gain associated with the acquisition of the All Star Café leasehold improvements. The press release also highlighted changes to business operations that purportedly created greater efficiencies and improved profitability over the quarter, such as increasing revenue from noncasino operations, decreasing marketing costs, and improving margins. By including the one-time gain and excluding the one-time cost, THCR was able to illustrate earnings of $0.63 per share, whereas if the one-time gain had been excluded, the earnings would have been $0.14 per share. The prior year’s third-quarter earnings were $0.24 per share. Therefore, the inclusion of the one-time gain made the difference between reporting a positive or negative trend in year-over-year earnings. The stock price rose 7.8 percent on the day of the earnings announcement. By October 28, 1999, however, analysts learned of the specifics regarding the accounting irregularities, causing the stock price to fall 6 percent. Based on these actions, the Securities and Exchange Commission (SEC) (plaintiff) deemed it appropriate to initiate a cease-and-desist proceeding against TCHR, alleging that THCR violated § 10(b) of the Securities Exchange Act of 1934 (the exchange act) and rule 10b-5 of § 10(b).