## Facts

- Trump Hotels & Casino Resorts, Inc. (THCR) was a public company whose stock traded on the NYSE and was subject to Exchange Act reporting and antifraud provisions.
- On Oct. 25, 1999, THCR issued a third-quarter 1999 earnings press release using a net income figure not calculated in accordance with GAAP (a non-GAAP figure).
- The release excluded an $81.4 million one-time closing charge related to Trump’s World Fair and explicitly disclosed that exclusion.
- The release did not disclose that the reported earnings included an approximately $17.2 million one-time gain from acquisition of leasehold improvements after termination of a restaurant lease.
- The release portrayed results as reflecting operational improvement and stated THCR had beaten analysts’ earnings expectations.
- Including the undisclosed one-time gain while excluding the disclosed one-time charge yielded reported earnings of about $0.63 per share; excluding the gain would have yielded about $0.14 per share, below the prior-year quarter’s about $0.24 per share.
- THCR’s stock price increased after the earnings announcement and declined after analysts learned of the one-time gain’s impact.
- The SEC instituted an administrative cease-and-desist proceeding under Exchange Act § 21C; THCR settled without admitting or denying the findings (other than jurisdiction).

## Issues

1. Whether THCR’s earnings press release was materially misleading by excluding and disclosing a large one-time charge while including, but not disclosing, a significant one-time gain, and attributing performance to operational improvements.
2. Whether presenting a non-GAAP earnings measure and related narrative in a manner that obscures the effect of non-recurring items violates Exchange Act § 10(b) and Rule 10b-5.
3. Whether THCR caused violations of Exchange Act reporting requirements under § 13(a) through materially misleading public disclosures.

## Decision

- The SEC found THCR’s Oct. 25, 1999 earnings release materially misleading.
- The SEC found violations of Exchange Act § 10(b) and Rule 10b-5 and violations of Exchange Act § 13(a) and related reporting rules.
- The SEC entered a cease-and-desist order requiring THCR to cease and desist from committing or causing future violations of the cited provisions and to comply with undertakings set out in the order.
- The proceeding was resolved through settlement; THCR consented to the order without admitting or denying the findings (except jurisdiction).

## Legal Principles

- An issuer communication may be materially misleading based on the overall impression it creates, including implications arising from selective disclosure and omission of necessary context.
- When an issuer highlights the exclusion of certain non-recurring items, failure to disclose other significant non-recurring items included in the stated performance can render the disclosure misleading.
- Use of non-GAAP financial measures is subject to antifraud standards; a non-GAAP metric and accompanying narrative are actionable if they misstate or omit material facts about the source and quality of earnings.
- Materiality may be shown where an omitted item significantly alters EPS trends, affects whether results appear to meet or beat expectations, or changes the apparent sustainability of performance.
- Exchange Act antifraud liability can attach even if individual accounting entries comply with GAAP, where the disclosure package misleads investors about what drove reported results.

## Conclusion

The SEC concluded that THCR’s earnings release misled investors by implying improved operating performance while omitting that reported results depended materially on an undisclosed one-time gain, and it ordered THCR to cease and desist from future violations of Exchange Act antifraud and reporting provisions.


In re Trump Hotels & Casino Resorts, Inc., Exchange Act Release No. 45287 (SEC Jan. 16, 2002)