Blue state verdicts against Trump, Elon Musk raising alarms

Politics reared its ugly head in judicial decisions against Donald Trump and Elon Musk in recent days. The verdicts – not to mention the whopping $350 million civil fraud penalty in Trump’s case – surprised a lot of investors and business owners.
The questions many people are asking:
Is it safe to do business in blue states like New York and Delaware?
Can we count on the courts to uphold the law?
Or should we think about moving to greener pastures?
No financial victims came forward in Trump case
Donald Trump’s legal woes recently took a turn for the worse in New York City. The state’s attorney general (AG) Letitia James indicted Trump on dozens of financial fraud violations. James accused the former President of inflating his net worth and high-balling the value of his properties in order to secure more favorable loan terms from banks.
The judge hearing the case agreed with James’ assessment – that Trump and his managers engaged in fraud – on the very first morning of the trial. All that was left to work out was how many of the charges the AG could make stick, and how much money the court could fine Trump.
After the guilty verdict, the judge ordered Trump to pay $335 million and banned him from running a business in the Empire State for three years. Work restrictions were also placed on two Trump executives and his two sons who helped run parts of the business empire.
To put the gravity of the penalty in perspective, The New York Times (no fans of Trump’s) noted “the victims – the bankers who lent to Mr. Trump – testified that they were thrilled to have him as a client. And while a parade of witnesses echoed Ms. James’s claim that the former president’s annual financial statements were works of fiction, none offered evidence showing that Mr. Trump explicitly intended to fool the banks.”
The Times also called the fine “steep … in a case with no victim calling for redress and no star witness pointing the finger at Mr. Trump.”
Governor tells businesses ‘nothing to see here’
New York Governor Kathy Hochul described the Trump verdict as unique. “[T]his is really an extraordinarily unusual circumstance that the law-abiding, rule-following New Yorkers who are businesspeople have nothing to worry about because they’re very different from Donald Trump and his behavior,” Hochul told WABC 770 radio.
“To the law-abiding businesspeople in our state, we want to continue to welcome you,” said Hochul. “We welcome all honest businesses.”
But just days after Hochul told the business community it had nothing to worry about, AG James warned she would seize one or more of Trump’s properties in New York if he doesn’t pay the fine. Nothing out of the ordinary here?
Canadian investor Kevin O’Leary of Shark Tank fame begged to differ. O’Leary made the rounds on cable TV networks and sounded the alarm: “Everything [Trump was charged with] is done by every real estate developer, everywhere on Earth, in every city.”
O’Leary told TV hosts that friends of his in business, presumably all of them rich, say they’re wary of investing in the Big Apple anytime soon. “Every investor [should be] worried because where is the victim? Who lost money? … I know I’ll never invest in New York [again].”
Musk bonus package voided for being too generous
Way back in 2018, the share price for Elon Musk‘s flagship company Tesla hovered around $22 and the company was valued at $59 billion. Musk wanted more. He believed he could make Tesla one of the richest companies in the world and boldly bet on himself to do it.
He negotiated a bonus package with the Tesla board allowing him to cash in stock if he met “jaw-dropping” financial milestones, as CNBC then described the deal. Musk would max out compensation owed if he could make Tesla roughly 10 times bigger in 10 years.
Fast forward to 2023: Tesla shares sold at a high of $252. Now valued at $789 billion, Tesla has cemented itself among the so-called Magnificent Seven of publicly traded companies that are driving the current S&P 500 bull market run. (Alphabet, Amazon, Apple, Meta, Microsoft and Nvidia are the others.)
Tesla stockholders sued after Musk cashed in roughly $56 billion in shares. Like 68% of other Fortune 500 companies, Tesla is incorporated in Delaware, so the dispute went before the Delaware chancery court. Musk faced a familiar face – Chancellor Kathaleen McCormick, who prevented him from backing out of a verbal deal to buy Twitter in 2022.
Result: McCormick voided the Tesla bonus package deal and ordered Musk to pay back the money. The judge ruled Tesla’s board failed to prove “the compensation plan was fair.” She also asked in her decision, “was the richest person in the world overpaid?”
Soon after the ruling, Musk tweeted “Never incorporate in Delaware” to his millions of followers. He also announced Tesla and Space-X would sever ties in Delaware and incorporate in Texas.
The bonus battle may not be over, as Musk can appeal to the Delaware supreme court. No doubt Musk will argue the shareholders who sued got a lot richer because of his efforts.
Lower taxes, less crime make red states a draw
The trends in recent years are unmistakable. Businesses are slowly but surely leaving blue states and setting up shop in red states for various reasons:
- Corporate and individual income tax rates are lower
- Crime and general living conditions are better
- Fewer laws and regulations that hit businesses in the wallet, and
- Real estate is cheaper.
The last thing blue states like New York, California and Illinois need is to give employers another reason to shut down or relocate. Courts and AGs deemed to be hostile to investors and contracts aren’t selling points. We may see the Trump and Musk verdicts contribute to some companies deciding to operate in more business-friendly states and avoid all of those risks.
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