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Adding a bit of bite to its bark, the Securities and Exchange Commission issued its first enforcement action against a company on the basis of a “pro forma” earnings release, a form of financial reporting designed to downplay negative events. The SEC’s Northeast Regional Director Wayne M. Carlin announced Wednesday that the agency had cited New York’s Trump Hotels & Casino Resorts for making misleading statements in the company’s third-quarter 1999 earnings report. The SEC found that the release used pro forma figures to trumpet the company’s purportedly positive results, but failed to disclose that those results were primarily due to an unusual one-time gain. The announcement of the action came on the heels of a formal warning from the agency last month that companies could face sanctions for playing fast and loose with pro forma earnings. The SEC did not fine the company, although it had the power to do so. Rather, it issued only a cease-and-desist order for what Jay Goldberg, Trump Hotels’ lawyer, described as “a single, isolated incident for which remedial actions were promptly taken.” The company neither admitted nor denied the allegations. “The case is more warning than sanction,” said Daniel J. Kramer, a partner at New York’s Schulte Roth & Zabel who took no part in the SEC matter. “It’s a very sensible way to put the financial community on notice that the SEC is going to crack down on improper pro forma figures.” Carlin said that the pro forma figures issued by Trump Hotels were misleading because at the same time they excluded a one-time expense, they included a one-time gain. The company also misleadingly asserted that it had beaten analysts’ expectations of earnings, and implied that certain minor operational improvements were responsible for the favorable results, Carlin said. Goldberg said the practice complained of — simply giving a figure and not breaking it out — had been used by “a number of Trump Hotels’ competitors.” INCREASINGLY POPULAR In fact, pro forma earnings, which unlike formal earnings reports to the SEC are not audited or subject to regulation — other than they not be “misleading” — have become increasingly popular over the past few years. Companies like pro forma statements because it allows them to calculate earnings “as if” certain items — usually expenses — did not exist. But they have also been the subject of a growing concern about the worsening quality of earnings reports. Carlin said that the agency’s action against Trump Hotel sends a message to companies not to “hide the ball” in reporting earnings. “You can’t use pro forma figures to create the impression that you have met or exceeded expectations when in fact you have not.” He added that “literal truth is not necessarily a defense.” In Trump Hotel’s case, for example, the company suggested that its positive results were the product of three relatively insignificant gains, while failing to disclose the one-time event that was the real boost to its earnings. He refused to comment on whether the agency had any other investigations of pro forma earnings practices pending. However, securities lawyers speculated that there were more to come. “My guess is that the next case we see in this area may have a more serious sanction attached to it,” Kramer said. “Companies are going to have to be very careful in how they report pro forma earnings.” In its order, the agency found three Trump Hotel officers guilty of violating the anti-fraud laws in issuing the misleading press release. However, its high-profile chairman and chief executive officer, Donald Trump, was not named and, according to Goldberg, “there was no proof whatsoever that Donald Trump knew about, participated in or acquiesced in any of this.”

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