EFTA01120694

U.S. v. Hoffenberg, Not Reported in F.Supp. (1997) UDC, Associated and United Fire. 1997 WL 96563 Hoffenberg obtained the Illinois Department of Only the Westlaw citation is currently available. United States District Court, Insurance's approval for this acquisition by representing S.D. New York. that Towers would contribute $3 million to the surplus of United Fire, supplying $2 million immediately and an UNITED STATES of America additional $1 million at a later date. In approximately v. November 1967, Hoffenberg and his co-conspirators used Steven HOFFENBERG, Defendant. certain of the Associated and United Fire bonds as collateral in securities brokerage accounts in order to Nos. 94 Cr. 213 (RWS), 95 Cr. 321 (RWS). I March 5, purchase stock of Pan American Airways, Inc. ("Pan 1997. Am"). When this attempted acquisition failed, United Fire and Associated suffered trading losses of over $80,000. Opinion Between November 1987 and July 1988, Hoffenberg also removed blank checks belonging to UDC and United Fire from the offices of both companies, and then issued over fifty checks on these accounts. Many of those checks SENTENCING OPINION were issued for his own benefit or for expenditures, totalling over $3 million, unrelated to the insurance SWEET, District Judge. companies, including tuition costs and credit card bills for Hoffenberg's stepdaughter; the payment of investment *1 Defendant Steven Hoffenberg ("Hoffenberg") pled consultant fees for Towers; the purchase of Emery Air guilty on April 20, 1995, to five counts: (i) conspiracy to Freight stock; the payment of margin interest; the violate the securities laws by fraudulently selling payment of private airplane leasing expenses; legal and securities, in violation of 18 U.S.C. § 371; (ii) mail fraud, consulting expenses; and payments to Towers and one of in violation of 18 U.S.C. §§ 1341, 1342; (iii) conspiracy its affiliated companies, totalling $1.1 million. to obstruct justice, in violation of 18 U.S.C. § 371; (iv) tax evasion, in violation of 26 U.S.C. § 7201; and (v) mail Between December 1987 and June 1988, Hoffenberg and and wire fraud in violation of IS U.S.C. §§ 1341, 1342, his co-conspirators again used Associated and United Fire exposing him to a total maximum sentence under the bonds as collateral in securities brokerage accounts to applicable statutes of 25 years imprisonment followed by purchase and sell stock and options of companies, three years of supervised release. including Emery Air Freight. In this instance, as well as with the previous attempted Pan Am acquisition, For the reasons set forth below, Hoffenberg will be Hoffenberg did not intend for these purchases of stock to sentenced to serve a term of imprisonment of 240 months, be solely for the benefit of the insurance companies, but followed by three years supervised release, to make rather intended them to benefit Towers. restitution in the amount of $475,157,340, and to pay a fine of $1,000,000, all subject to the hearing now set for *2 On January 24, 1988, Towers contributed $1.8 million March 7, 1997. Pursuant to 18 U.S.C. § 3013, a special in capital to United Fire, $1 million of which was assessment of $250.00, $50.00 per count, is mandatory. intended to fulfill Towers' agreement with state insurance regulators to make a $3 million capital contribution by December 31, 1987. However, prior to this contribution, Hoffenberg used the $1.8 million to pay for stock in The Offense Conduct Emery Air Freight in an attempt to acquire that company. Until April 1993, Hoffenberg was the chief executive officer, president and chairman of the board of Towers The attempted acquisition of Emery Air Freight Financial Corporation ("Towers"). In 1987, Towers ultimately failed. United Fire and Associated lost over $1 acquired a controlling interest in United Diversified million on the purchase of Emery securities, as those Corporation ("UDC"), which conducted business through stocks were purchased with funds borrowed by using its subsidiaries, Associated Life Insurance Co. insurance company bonds as collateral. Hoffenberg ("Associated") and United Fire Insurance Co. ("United concealed his activities from Associated and United Fire Fire"). Hoffenberg later became chairman of the boards of by: routing all securities trade confirmations, periodic WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 1 EFTA01120694 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) account statements and other communications from Racketeer Influenced and Corrupt Organizations Act (the brokerage firms to Towers, rather than to the insurance "RICO Action"). The RICO Action alleged that the companies' headquarters; causing false entries to be made defendants had caused UDC, Associated Life and United on the records of the insurance companies; failing to Fire to suffer damages in excess of $4 million, become provide supporting documentation for certain insolvent, and be placed in conservation and/or expenditures; providing false information or withholding liquidation. accurate information in annual and quarterly reports regarding the location and use of bonds, capital In an agreement dated May 4, 1992, the Insurance contributions made to the insurance companies, securities Director and the defendants agreed to settle the RICO trading done with insurance company assets, and the Action, with Towers paying $3.5 million. Towers also financial condition of United Fire and Associated. agreed to sell its interest in Towers Diversified to the Hoffenberg and his co-conspirators also created false Insurance Director for $1, and to withdraw objections to documents and filed false pleadings in related legal the liquidation of Towers Diversified. According to the proceedings brought by state insurance regulators; closed SEC, Towers never disclosed the liquidation of these out securities positions without regard to the profitability companies or the filing of this civil suit to its investors, of the transactions; committed and suborned perjury; and and continued to carry the investment at its full cost. concealed their fraudulent activities in connection with Towers further misrepresented this information in its state insurance regulators' investigations. Annual Reports of 1989 and 1990. In the Towers Annual report of 1989, a note to the financial statements Finally, in a further attempt to conceal their activities, (completed after the agreement by Hoffenberg that the Hoffenberg and his co-conspirators filed a lawsuit in the companies were insolvent and could be liquidated) United States District Court for the Northern District of suggested that Towers had never completed its agreement Illinois against individual State of Illinois insurance to purchase the companies and that the conclusion of the regulation employees, alleging that these employees matter was "being held in abeyance pending the instituted "sham conservation proceedings" against the finalization of certain regulatory matters." The 1989 insurance companies and that their actions were report also falsely stated that there was no "other material motivated by a "personal animus." litigation in which the Company [was] involved." As a result of Hoffenberg's fraudulent activity, over $3 The 1990 Towers Annual Report disclosed the litigation million of the funds and assets of United Fire and between Towers and the previous UDC owners, but made Associated were misappropriated through trading losses, no mention of the "regulatory matters" referred to in the margin interest expenses and Hoffenberg's unauthorized 1989 report. Upon issuance of the 1991 Towers Annual use of insurance company funds for personal Report, the company admitted that Towers had purchased expenditures. These misappropriations significantly UDC in 1987 and that the company was placed in reduced the capital available to operate the insurance "receivership within six months of the acquisition"; companies, adversely affecting policyholders and however the note also stated that the Insurance Director shareholders of UDC. had "instituted a legal action to take possession of all assets of UDC." The financial statement continued, In July 1988, the Illinois Director of Insurance obtained stating that it was management's belief that the Illinois an order placing UDC, Associated and United Fire in Insurance Director would not prevail and "that the conservation. On February 14, 1989, Hoffenberg agreed, Company will ultimately be determined to be entitled to in a signed stipulation, to an entry of an order liquidating all assets of UDC, in which case the Company would Associated and United Fire, based on Hoffenberg's experience no loss on this investment." At the time that agreement that both companies were insolvent. this statement was made, the Insurance Director had Hoffenberg lost control of these companies on March 3, already prevailed in the liquidation order, and Towers had 1989, when the liquidation order was entered. already suffered a total loss on its investment. *3 On June 27, 1991, three days before the end of Hoffenberg, through Towers, was also engaged in illegal Towers' 1991 fiscal year, the Illinois Insurance Director conduct in the New York area. Towers had two filed an action charging Hoffenberg and others with using subsidiaries: Towers Credit Corporation, which was the insurance companies as an instrumentality of Towers, engaged in "factoring," purchase at a discount of and with transferring investments and cash belonging to commercial accounts receivable, and Towers Collection the insurance companies into various Hoffenberg- Services, Inc., which was engaged in the collection of controlled brokerage accounts, in violation of the past-due receivables for third parties on a contingency-fee WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 2 EFTA01120695 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) basis. Towers also owned and controlled Towers certain healthcare receivables purchased by the THRFC Healthcare Receivables Funding Corporations I, II, III, IV Bond Funds. Receivables not actually owned by Towers and V (the "THRFC Bond Funds"), which were formed to could not properly collateralize the Notes. raise funds for the purchase of accounts receivable, and which purchased accounts receivable due to hospitals In about July 1990, Hoffenberg and his coconspirators from Towers pursuant to an agreement with the made additional efforts to raise capital and expand bondholders' indentured trustee. Hoffenberg controlled Towers by engaging in the sale of a series of Bonds. To Towers' daily operations, including the flow of funds this end, Hoffenberg and his co-conspirators created the among checking accounts and the escrow accounts THRFC Bond Funds, a series of corporations which established for the proceeds of the promissory notes. issued Bonds to purchase accounts receivable due to healthcare institutions from Towers in accordance with a *4 In the mid-1980's, Hoffenberg decided to expand series of Indenture Agreements. Towers. In order to raise capital, he and his co- conspirators devised a plan to sell Promissory Notes (the The Bonds were sold pursuant to five separate, private "Notes"). Towers sold the Notes in private placements by placement memoranda prepared at the direction of means of six separate offering memoranda prepared at Hoffenberg and his co-conspirators. The private Hoffenberg's direction. Each issuance of the Notes was placement memoranda for each issuance of the Bonds purportedly collaterized by accounts receivable owned by represented that the proceeds from the sales of the Bonds Towers subsidiaries, and was additionally guaranteed by would be used by the THRFC Bond Funds: in whole or in Towers to the extent of its consolidated assets. The six part, to purchase healthcare receivables from Towers, and offering memoranda, dated from January 1988 through that the healthcare receivables purchased from Towers March 1992, resulted in the sale of approximately $272 would collateralize the Bonds. According to the offering million in Notes through a network of registered broker- documents, the obligors on the healthcare receivables dealers throughout the United States. would be major insurance companies such as Blue Cross/Blue Shield, State Farm Insurance Company, Aetna Hoffenberg and his co-conspirators fraudulently induced Insurance Company, Allstate Insurance Company, or the purchase of the Notes by preparing and providing to government entities. The documents provided that more investors financial statements which used bogus income than 50% of the healthcare receivables must represent the and asset figures to falsely conceal Towers' true financial payment obligations of insurers having a rating of "A" or condition. The bogus figures were created after it was better and Government entities under Medicaid or determined that the company's net cash position was Medicare programs who had agreed in writing to send all negative, and that a certain profit must be shown in order payments directly to the servicer. No more than 50% of to sell the Notes. In addition to creating fraudulent the healthcare receivables could represent the obligations financial statements, Hoffenberg and his coconspirators of government entities which had not so agreed. arranged to have a certified public accountant falsely certify that the financial statements accurately reflected *5 Between July 1990 and May 1992, Towers sold Towers' financial condition. approximately $210 million in bonds through the five THRFC funds. The offering documents touted not only Only a small fraction of the proceeds from the sale of the the quality of the healthcare receivables, but also the Notes were used for the expansion of Towers' business, financial soundness of Towers; the Bond sales were the purpose stated in the offering documents. The promoted by the figures in the fraudulent Towers proceeds were used instead to pay Towers' operating financial statements. The offering documents described expenses, including a private jet and a yacht used by Towers and its subsidiaries as having engaged in either Hoffenberg, and to pay interest on the Notes themselves. servicing or acquiring accounts receivable having an aggregate value in excess of $630,000,000—a vastly The Notes were not properly collaterized. Hoffenberg and inflated number. The gross revenue figures in the offering his co-conspirators represented to investors that the face documents were based on the bogus figures created by value of the collateral exceeded the face value of the Hoffenberg and his co-conspirators and certified by the Notes. In fact, the collateral was comprised in significant certified public accountant. Accordingly, the Bond sales, part of phony receivables, which were not worth the total like the Note sales, were promoted by fraud. outstanding debt of the investors. In addition, the accounts receivable reflected in the financial statements consisted Hoffenberg and his co-conspirators also deliberately mainly of collection receivables which Towers did not misrepresented how investor funds would be used, and own, but only collected as agent and took a fee, and of misused the proceeds from the sale of the Bonds. The WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 3 EFTA01120696 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) strictures in the offering documents and the Indenture In or about 1989, the Securities & Exchange Commission Agreements were ignored, and Hoffenberg and his co- ("SEC") began an investigation of the fraudulent sale of conspirators used substantial amounts of the proceeds Towers' securities by Hoffenberg and his co-conspirators. from the sales to meet Towers's operating expenses. In the course of this investigation, which ultimately Towers provided two kinds of reports to the Trustee on a resulted in a lawsuit against Towers, the SEC deposed regular basis: a cash request report and a collateral ratio Hoffenberg and numerous officers, employees and agents report. Both were used to fraudulently obtain money from of Towers. The SEC also issued numerous subpoenas and the Trustee. requests for documents to Towers, Hoffenberg and his co- conspirators. Hoffenberg and his co-conspirators had When Towers acquired healthcare receivables, it provided agreed from the outset of the SEC's investigation to take to the Trustee a total figure for the receivables it planned whatever steps they deemed necessary to obstruct that to acquire, and the Trustee then released 50% of the value investigation 3nd conceal their criminal activities. of the receivables to Towers to make the first payment on the receivables. As Hoffenberg needed more money to As part of his attempt to obstruct the SEC investigation, operate Towers, he directed his co-conspirators to provide Hoffenberg gave false testimony to the SEC in New York inflated figures for receivables to accommodate Towers's City on several occasions between November 21 and cash needs. In this way, the Trustee released 50% of the December 12, 1991. In 1992, Hoffenberg directed Towers value of bogus receivables, and Hoffenberg had cash with employees and associates to testify falsely during the SEC which to meet his operating expenses. investigation. Hoffenberg and his co-conspirators have also admitted to fabricating and falsifying documents in Towers was also required to send collateral ratio reports response to the SEC subpoenas. For example, in response to the Trustee. These reports were designed to ensure that to the SEC request for accounting records supporting each of the Bond Funds were properly collateralized by Towers' financial statements, in or about May 1992, accounts receivable. Since Hoffenberg was using monies Hoffenberg and his co-conspirators instructed employees from the Bond Funds to pay his operating expenses, the to fabricate computer runs of certain accounts receivable Bond Funds did not have sufficient collateral to support to reflect a 30% collection rate and to substantiate payments to Towers. To cover up the fraud, Hoffenberg Towers's bogus accounting theories used in compiling its directed his co-conspirators to move collateral from one financial statements for 1989, 1990, and 1991. After these Bond Fund to another, and to fabricate collateral for the false computer runs were created, Hoffenberg directed reports. On numerous occasions, Hoffenberg and his co- two employees to make tick marks on the runs so that it conspirators created phony receivables, then included appeared as if an accountant had used the runs in those items in reports designed to misrepresent the Bond certifying the financial statements for the appropriate Funds' true financial picture. years. Towers then provided the runs to the SEC. One condition to the issuance of the Bonds was that Duff Between 1987 and 1991, Hoffenberg evaded personal & Phelps Credit Rating Company rate the Bonds as AA or income taxes by causing his personal expenses to be paid better. Because Hoffenberg and his co-conspirators were by Professional Business Brokers, a corporation acquiring healthcare receivables that were not from A Hoffenberg owned. Some of the personal items that rated insurers, and this might have affected Duff & Professional Business Brokers paid included: Phelps's rating of the Bonds, Hoffenberg directed his Hoffenberg's rent and his stepdaughter's rent, salaries for employees to alter the reports sent to Duff & Phelps by personal servants, furniture and antiques for his residence, combining healthcare receivables from small insurers and personal automobiles and maintenance, and maintenance adding those numbers to the amounts of receivables for his personal residences. The additional tax due and acquired from A rated insurers. owing for each year is as follows: 1987: $7,230; 1988: $31,068; 1989: $43,606; 1990: $199,674; 1991: *6 The Indenture Agreement also prohibited Towers from $386,702. holding any healthcare accounts receivable on its books for more than 90 days. After 90 days, it is less likely that In March 1993, after the SEC had filed a lawsuit against a receivable will be collected. To secretly enable Towers Towers, Towers declared bankruptcy. The loss to the to keep old accounts on their books, Hoffenberg directed Noteholders and Bondholders, the victims of employees to "freshen" accounts—if an account was Hoffenberg's fraud, was enormous. At the time of the more than 90 days old, it was deleted and reentered as a Towers bankruptcy, Noteholders and Bondholders (as "new" account. well as victims such as vendors and collections clients) filed petitions with the Bankruptcy Court to support their WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 4 EFTA01120697 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) loss claims. As of April 1996, the Bankruptcy Court has securities laws by fraudulently selling securities, in already determined the following Notch°'der and violation of I8 U.S.C. § 371; mail fraud, in violation of Bondholder claims to be valid claims: the Bondholders 18 U.S.C. §§ 1341, 1342; conspiracy to obstruct justice, filed valid claims of $196,948,864; the Noteholders filed in violation of 18 U.S.C. § 371; (iv) and tax evasion, in valid claims of $258,244,618; and a second class of violation of 26 U.S.C. § 7201. On April 20, 1995, Noteholders' filed valid claims of $19,963,858. The total Hoffenberg entered a guilty plea to these four counts. of those claims equals a loss of $475,157,340. This figure represents the approximate losses resulting from the On January 27, 1994, and on February 14, 1994, the Towers fraud only and does not include losses resulting Government confronted Hoffenberg with allegations that from the Illinois insurance company fraud, which totalled he had violated his obligations under the Agreement. On between $3 million and $4 million. The total losses February 17, Hoffenberg was advised that the Agreement attributable to Hoffenberg's conduct are $478,157,340. had been terminated, and he was arrested. On April 19, 1994, a thirteen-count Indictment, 94 CR The Agreement and the Guilty Plea' 272, was filed in the Northern District of Illinois, *7 As a result of its investigation, on February 8, 1993, charging Hoffenberg with numerous fraud counts, the SEC filed an action in this District against Hoffenberg including conspiracy to commit mail fraud, in violation of and others. On February 17, 1993, Hoffenberg and certain 18 U.S.C. § 371, and mail fraud, in violation of 18 U.S.C. other defendants agreed to a preliminary injunction issued § 1341, in connection with the misappropriation and by the Honorable Whitman Knapp which, among other misuse of over $3 million worth of funds and assets of things, enjoined Hoffenberg and "each of his controlled, United Fire. On April II, 1995, Indictment 94 CR 272 related, or affiliated entities ... to hold and retain within was transferred to the Southern District of New York, and their control, and otherwise prevent any withdrawal, became 95 CR 32 l(RWS). transfer, pledge, encumbrance, assignment, dissipation, concealment, or other disposal of any funds, or other *8 April 20, 1994, Hoffenberg was indicted in the properties." Southern District of New York and charged with the four counts contemplated in the Agreement, as well as six In 1993, the United States Attorney for the Southern additional counts alleging substantive securities fraud District of New York began a criminal investigation of violations in connection with the sale of notes and bonds Hoffenberg and others for conspiracy to obstruct the of Towers, additional violations of the mail fraud statute, SEC's investigation during 1991 and 1992, and for and obstruction of justice for disobeying an order of the various other criminal violations of the securities laws. United States District Court for the Southern District of New York. In March of 1993, Hoffenberg, through counsel, initiated a number of proffer sessions with the United States Following his indictment, Hoffenberg moved for specific Attorneys office which culminated in an oral enforcement of the Agreement. By opinion dated July 21, understanding. Pursuant to that understanding, 1994, see United States v. Hoffenberg, 859 F.Supp. 698 Hoffenberg agreed to talk to representatives of the United (S.D.N.Y. 1994), Hoffenberg's motion was denied as States Attorney's Office for the Southern District of New premature in the absence of a plea. Hoffenberg then York and the Northern District of Illinois, the FBI, and moved to reargue that motion and to suppress the the SEC (collectively, the "Government"). In return, the statements he had made in reliance upon the Agreement. Government agreed to grant Hoffenberg limited The motion for reargument and suppression was denied immunity. On September 24, 1993, Hoffenberg and the by an opinion rendered on January 11, 1995, again on the Government entered into a plea agreement, dated grounds that it was premature. September 23, 1993 (the "Agreement"). Discussions with Hoffenberg continued. After the filing of the Indictment against him, the Government, nonetheless, permitted Hoffenberg to plead The Agreement provided, among other things, that upon to the four counts specified in the Agreement. On April performance of the Agreement, Hoffenberg would plead 13, 1995, the Superseding Information was filed in the to the four counts specified in the Agreement and the Southern District of New York, charging Hoffenberg with Government would advise the sentencing judge of (i) conspiracy to violate the securities laws by Hoffenberg's cooperation through the issuance of a letter, fraudulently selling securities, in violation of 18 U.S.C. § pursuant to § SKI. I of the Sentencing Guidelines. The 371; (ii) mail fraud, in violation of 18 U.S.C. §§ 1341, four counts agreed upon were: conspiracy to violate the 1342; (iii) conspiracy to obstruct justice, in violation of 18 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 5 EFTA01120698 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) U.S.C. § 371; (iv) tax evasion, in violation of 26 U.S.C. § *9 On January 15, 1997, Hoffenberg was granted an 7201. On April 20, 1995, Hoffenberg entered a guilty plea adjournment from January 22 to March 7, 1997 to enable to these four counts. him to retain additional counsel to assist him upon sentencing in connection with the securities act violations Beginning on June 5, 1995, and continuing through June with which he has been charged. On February 20, 1997, 14, 1995, the Court conducted a hearing on Hoffenberg's that counsel, Michael F. Bachner, sought and obtained renewed motion for specific performance of the relief from his engagement, stating he was unable to Agreement. On September 12, 1995, the Court heard oral complete his assignment within the time provided by the argument on that motion. On December IS, 1995, this most recent adjournment. Court issued an opinion denying Hoffenberg's motion and finding that Hoffenberg had breached the Agreement. Hoffenberg, continuing his past practice, has directly United States v. Hoffenberg, 908 F.Supp. 1265 applied for a further adjournment on the grounds of his (S.D.N.Y.1995). dissatisfaction with Daniel Meyers, his third appointed counsel,' and his fourth counsel, who has been permitted On July 29, 1996, Hoffenberg filed a motion to withdraw to withdraw. In addition, Hoffenberg has claimed inability his guilty plea, arguing that the Court violated Rule II of to assist in his defense as a consequence of loss of vision the Federal Rules of Criminal Procedure by failing to in his left eye. inquire, at the plea allocution, about the effect of Hoffenberg's mental condition, and the medication he At the time of the appointment of his present counsel in was taking for his mental condition, on his decision to April 1996, Daniel Meyers, Hoffenberg was advised that plead guilty. Oral argument on the motion was heard on his dissatisfaction with counsel would not be considered September 27, 1996, at which time the motion was as a grounds for adjournment. Meyers, Hoffenberg's considered fully submitted. By Opinion dated October 28, present counsel, has amply demonstrated his capacity as a 1996, the Court held that the colloquy which occurred at competent and able criminal lawyer in the submissions the plea allocution established that Hoffenberg was and proceedings before the court. competent to plead guilty, and that his guilty plea was voluntary. The Court further held that no Rule 11 Although Hoffenberg's activities were complex, the violation occurred, and the motion was denied. United criminal charges against him to which he has pled are States v. Hoffenberg, 169 F.R.D. 267 (S.D.N.Y.1996). straightforward. The implications and dimensions of his conduct certainly have been under consideration by Hoffenberg and his various counsel since Hoffenberg was indicted in April 1994. Hoffenberg's current counsel, Sentence Will Be Imposed on March 7 Meyers, has had the opportunity and possesses the skill to Sentencing in this matter has been adjourned several explore the validity of the Governments contentions times, always at Hoffenberg's request and as a regarding sentencing. In view of the amount of loss consequence of motions such as those described above. involved and the availability of relevant evidence for On June 5, 1995, the sentencing date was adjourned sins nearly three years, a further adjournment of the sentence die in order to allow Hoffenberg the opportunity to move to assess the effect of Hoffenberg's pm-indictment for specific performance of his cooperation agreement conduct is not warranted. with the Government. Following the denial of that motion, the Court set a sentencing date of March 21, Hoffenberg's claim that he requires the assistance of 1996. On March 7, 1996, sentencing was adjourned until counsel with an expertise in securities law is not only April 16, 1996, and on March 28, 1996, the sentencing unsupported by the facts, it is flatly inconsistent with was adjourned again until May 20, 1996—both of these applicable law. As the Supreme Court has recognized in a adjournments because Hoffenberg's then-counsel was in variety of circumstances, "[t]he Sixth Amendment right to the process of withdrawing from his representation, and choose ones own counsel is circumscribed in several new counsel had yet to be appointed. Hoffenberg's important respects.... [A] defendant may not insist on current counsel, Daniel Meyers, was appointed on April representation by an attorney he cannot afford or who for 23, 1996, and sentencing was again adjourned in order for other reasons declines to represent the defendant." Wheat Hoffenberg to move for withdrawal of his April 20, 1995 v. United States, 486 U.S. 153, 159, 108 S.Ct. 1692, 100 guilty plea. By Opinion dated October 29, 1996, that L.Ed.2d 140 (1987). Hoffenberg has cited no authority for motion was denied and sentencing was scheduled for the the proposition that he is entitled to be appointed week of December 9, 1996. At Hoffenberg's request, additional counsel with an expertise in securities law, and sentencing was adjourned until January 22, 1997. the Court is unaware of any such authority. WesliawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 6 EFTA01120699 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) probation and restitution. Hoffenberg's conviction arose As to Hoffenberg's alleged physical impairment, it is out of the theft of a diamond ring valued at $10,500 from unsupported by any medical evidence. The opthamologist an employee of a jewelry store. Hoffenberg requested the who examined Hoffenberg found no ocular damage as a ring be independently appraised, and accompanied the result of the incident in which Hoffenberg claims to have employee to the appraiser. Hoffenberg's co-conspirator been injured. Even accepting Hoffenberg's statement, the then demanded the ring under threat. alleged loss of vision does not affect his ability to confer with counsel or to direct the presentation of any material Hoffenberg has had a history of mental illness dating back which Hoffenberg may wish to present upon sentencing. to a hospitalization in 1970, which included electroconvulsive therapy, anti-psychotic medications *10 The day of reckoning has been set for March 7, 1997 such as thorazine, and the mood stabilizer lithium. He was and will not be adjourned. diagnosed at that time as manic depressive. According to Hoffenberg, his depression returned in 1994, but he received no further treatment. In March 1995, as the time of his plea approached, he consulted Dr. Eugene \Voider, Hoffenberg's History a psychologist ("Dr.Walder"), who referred him to Dr. Hoffenberg is fifty-two years old. After attending New Joel S. Hoffman ("Dr.Hoffman"), a psychiatrist, for York City Technical College in 1964 and 1965, medication. On March 16, 1995, Dr. Walder determined Hoffenberg was self-employed as a sales agent and that Hoffenberg was suffering from a major depressive manufacturers representative in connection with a series episode. of businesses he operated. Between 1963 and 1971, he operated Steven Hoffenberg Associates, Consultants and During March and April of 1995, Hoffenberg was taking Manufacturers Representatives. Between 1969 and 1971, homeopathic and herbal medication for his depression, as Hoffenberg operated a business in New York City under well as prescription medications. On March 24, 1995, Dr. the name Quality Cord Company, which manufactured Hoffman prescribed clonazepan (Klonopin), an anti- automobile accessories and hardware. As set forth above, anxiety medication. On April 7, 1995, Hoffenberg's in 1974 Hoffenberg became chief executive officer, dosage of Klonopin was increased, and he was prescribed president and chairman of the board of Tower, and fluoxereine (Prozac), an anti-depressant, as well. On remained in those positions until April 1993. March 24, 1995, Dr. Hoffman diagnosed Hoffenberg as suffering from a Probable Bipolar II Disorder and a After the SEC filed a civil action against Hoffenberg and Mixed Personality Disorder, with a global assessment of Towers declared bankruptcy, Hoffenberg continued to functioning of 40 out of a scale of 100. serve as a "consultant" to several debt collection organizations, which were nominally run out of Hoffenberg's offices by his former associates, including Hayley Capital Corporation, Diversified Credit The Guidelines Corporation, and Stratford Credit Corporation. *11 The Presentence Report and Addendum prepared by the U.S. Probation Office grades Hoffenberg's offense In early 1993, as the SEC investigation neared conduct under the United States Sentencing Guidelines completion, Hoffenberg attempted to purchase the then- (the "Guidelines") at a total offense level of 31 and failing New York Post. Hoffenberg lost control of the assigns him a Guidelines criminal history category of I, paper after running it for less than two months. After the resulting in a Guidelines sentencing range of 188 to 235 SEC filed a civil action against Hoffenberg and Towers, months. Towers assets were frozen, and Towers declared bankruptcy, the Bankruptcy court ruled that Hoffenberg's The Presentence Report recommends a sentence of 235 former partner was in a better financial position than months incarceration, followed by a three year term of Hoffenberg to run the New York Post. Thereafter, supervised release. The three year term of probation is to Hoffenberg started a new publication, Her New York, include the following mandatory special conditions: which began as a daily newspaper, cut back to a weekly, Hoffenberg shall not commit another federal, state or then closed its doors. local crime; Hoffenberg shall not illegally possess a controlled substance; and Hoffenberg shall not possess a Hoffenberg has one prior conviction for a criminal firearm or destructive device. offense. In 1971, Hoffenberg plead guilty to attempted grand larceny in New York County Supreme Court The Presentence Report further recommends that the (Indictment No. 202-70) and was sentenced to five years standard conditions of supervision 1 through 13 be WestlawNext' © 2013 Thomson Reuters. No claim to original U.S. Government Works. 7 EFTA01120700 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) imposed. The Presentence Report provides that a fine of harmfulness and seriousness of the conduct." § 2F1.I, between $20,000 and $956,314,680 may be imposed, and App. Note 10. Therefore, an upward departure in sentence restitution ofup to $478,157,340 may be ordered. would be justified to address this discrepancy. See United States v. Carrozzella, slip. op. at 1282-83 (2d Cir. Jan. 15, 1997). The Court Has Discretion to Depart *12 In addition, § 2F1.1, Application Note 10 states that In spite of the limitations imposed upon this Court by the "in cases in which the loss determined under subsection Sentencing Guidelines, the "court has an independent (b)(I) does not fully capture the harmfulness and power and responsibility to impose the proper sentence in seriousness of the conduct, an upward departure may be the exercise of discretion." United States v. Agu, 763 warranted." This section also states that "the extent to F.Supp. 703 (E.D.N.Y.1991) (Weinstein, J.). See also which an offense is planned or sophisticated is important United States v. Hernandez—Santiago, 92 F.3d 97, 100 (2d in assessing its potential harmfulness and the Cir.I996) (Court of Appeals "will not overturn the courts dangerousness of the offender, independent of the actual application of the Guidelines to the facts before it unless harm. A complex scheme or repeated incidents of fraud we conclude that there has been an abuse of discretion") are indicative of an intention and potential to do (quoting United States it Santiago. 906 F.2d 867, 871 (2d considerable harm." Either or both of these sections could Cir.1990)); Koon v. United States, 518 U.S. 81, 116 S.Ct. be applied to the instant circumstances to justify upward 2035, 2046, 135 L.Ed.2d 392 (1996) (under Sentencing departure. Guidelines, "district courts retain much of their traditional sentencing discretion"). Thus the Court must assess Moreover, while § 2F1.1(b)(2XB) addresses the issue of whether it has discretion to depart from the Guidelines, multiple victims, it does not take into account an offense and then must determine whether such a departure is victimizing over 3,000 individuals, companies, trust funds warranted by the circumstances. and pension plans. Accordingly, an upward departure to address the number of victims of this offense would be The Presentence Report notes that numerous factors exist warranted. See United States v. Barakett, 994 F.2d 1107 that would support departure from the range provided by (5th Cir.I 993) (affirming upward departure based in part the Guidelines. Section 51(2.0 provides, lu]nder 18 on large number of victims). U.S.C. § 3553(b), the sentencing court may impose a sentence outside the range established by the applicable Finally, the complex and unique circumstances of the plea guideline, if the court finds that there exists an agreement, the subsequent decisions relating to its aggravating or mitigating circumstances of a kind, or to a enforcement, and Hoffenberg's cooperation constitute degree, not adequately taken into consideration by the circumstances which were not contemplated by the Sentencing Commission in formulating the guidelines that Guidelines, and which provide justification for departure should result in a sentence different from that described.' pursuant to Section 51(2.0 of the Guidelines. " See also United States v. Moe, 65 F.3d 245 (2d Cir.1995). In addition, Hoffenberg's history of mental illness may provide the basis for a downward departure. Section This section continues, "where, for example, the 51(2.13 of the Guidelines provides the following Policy applicable guideline and adjustments do not take into Statement: "(if] the defendant committed a non-violent consideration a factor listed in this subpart, departure offense while suffering from significantly reduced mental from the applicable guidelines range is warranted only if capacity ... a lower sentence may be warranted to reflect the factor is present to a degree substantially in excess of the extent to which reduced mental capacity contributed that which ordinarily is involved in the offense." to the commission of the offense." "This provision establishes that two elements are required for a downward Section 5K2.5 notes that if the offense caused property departure: reduced mental capacity and a causal link damage or loss not taken into account within the between that reduced capacity and the commission of the guidelines, the court may increase the sentence above the charged offense." United States v. Piervinanzi, 23 F.3d authorized guideline range. Pursuant to § 2F1.1, the 670 (2d Cir.1994) (citing United States v. Prescott, 920 highest loss amount considered in this section is $80 F.2d 139, 145-46 (2d Cir. 1990)). million. Hoffenberg is responsible for losses of over half a billion dollars, more than six times the loss figure Even apart from the Policy Statement addressing considered by the guidelines. The Sentencing Guidelines diminished capacity at the time of the offense, provide that an upward departure may be warranted where Hoffenberg's history of mental illness, combined with the the "loss determined ... does not fully capture the WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. EFTA01120701 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) lengthy and complex criminal and civil charges he has of bilking elderly investors out of over $136 million in faced and the agreement reached in connection with those retirement savings. William E. Cooper, the founder of charges, provide grounds for a downward departure. See First Pension, was sentenced by the district court to ten United States v. Ekwunoh, 888 F.Supp. 369, 373-74 years in prison, and ordered to repay $73.1 million. (E.D.N.Y.I 994) (Weinstein, J.) (finding negative Robert Lindley, First Pensions chief financial officer, was psychological effects of pre-sentence incarceration sentenced to nine years in prison for his role, and Valerie warrant downward departure); United States v. Corso, 793 Jensen, the companys president, was sentenced to 51 F.Supp. 64, 66 (E.D.N.Y.1992) ("A court may take into months in prison. account mental conditions in granting a motion to depart downward."). Other grounds are also present that provide the basis for Victim Impact downward departure. Hoffenberg has provided substantial The Court has received hundreds of letters detailing the assistance to private parties in their civil suits to recover devastating economic, psychological, and even physical losses against Towers. He also provided significant effects of Hoffenberg's successful scheme to defraud over assistance to the Government during the period of March 3,000 individuals, companies, trust funds and pension 1993 to February 1994, by explaining the circumstances plans. The correspondence received by the Court details and participants involved in the Towers case. again and again the effects on working people, the elderly, the disabled, single parents and their children, and police officers and firefighters whose lives were forever altered when their life savings, retirement and college Comparative Sentencing ofSimilar Offenders funds were destroyed as a consequence of Hoffenberg's *13 The central offense to which Hoffenberg has plead acts. As indicated above, the losses suffered approximate guilty amounts to a Ponzi scheme, a fraudulent pyramid- nearly half a billion dollars. type investment scheme which involves luring small, vulnerable investors into buying high interest notes, and then, in order to create an incentive for further investment, paying large returns to the initial investors The Sentence with money raised by the sale of the notes to a new group Notwithstanding the effort of the Sentencing Guidelines of investors. The "Ponzi scheme" was named after to create uniformity in sentencing criminal defendants, no Charles Ponzi, a Boston-based swindler who made a sentence in our system of justice should be regarded as fortune. by inviting investment in his "Ponzi Plan," and routine. Indeed, the Supreme Court has observed that the then initially paying out 40% interest rates in order to Sentencing Guidelines do not diminish the continued need encourage further "investment." for a sentencing judge to consider a broad range of information concerning the offender and the offense in Federal courts have repeatedly recognized the determining the appropriate sentence for a given appropriateness of, and indeed the need for, lengthy individual. Witte v. United States, 515 U.S. 389, —, prison terms to punish those found guilty of implementing 115 S.Ct. 2199, 2201, 132 L.Ed.2d 351 (1995) Ponzi and other financial schemes that cause devastating (recognizing that the judges broad factfinding powers date economic injury to hundreds of investors. William back to the Colonial era). See also United States v. Kennedy Jr., the head of Western Monetary Consultants, DeRiggi, 893 F.Supp. 171, 17-177 (E.D.N.Y.1995) a Colorado firm, was convicted of 17 counts, including (Weinstein, J.) (if the sentence were fixed, "any racketeering and mail fraud, for his role in a Ponzi Schoolboye might pronounce it: and then what need of scheme which defrauded some 600 investors of any speciall wisdom; learning; Courage, zeale or approximately $37 million. In January 1994, Kennedy faithfulnesse in a Judge?") (quoting 4 John Winthrop was sentenced by a Denver district court to concurrent Papers 468-84, A Defense of Discretionary Justice 20—year sentences for several of the counts. Theresa (1644), reprinted in Bradley Chapin, Criminal Justice in Rodriguez, a Houston businesswoman who was convicted Colonial America, 1606-1660 (1983)). of mail fraud and money laundering for cheating 300 investors out of approximately $67 million, was sentenced *14 Whatever the ultimate outcome of the debate over the in June 1995 by a Texas district court to nearly 22 years Sentencing Guidelines and the quest for uniformity, this in prison. sentence and this defendant are truly unique and beyond the reach of any attempt to impose uniformity through a Several executives of First Pension Corporation, an system of grids and calculations. As set forth above, the Orange County investment firm, were convicted in 1995 circumstances here are such that departure either above or WestlawNext" © 2013 Thomson Reuters. No claim to original U.S. Government Works. 9 EFTA01120702 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) below the Guideline range could be justified. overestimated. Accordingly, the Court here properly has the discretion to impose a sentence within the limits set by Congress, just *15 Hoffenberg's history of mental illness does not as it did in the sentencing process that existed prior to obviate the fact the he is ultimately responsible for his implementation of the Guidelines. actions and for the consequences of those actions. Hoffenberg has been suffering from a condition that from Section 3553 of Title 18 of the United States Code details time to time has limited his ability to perceive reality the factors the Court must consider at sentencing. The accurately. As this Court has previously found in denying Court must "impose a sentence sufficient, but not greater Hoffenberg's application to be relieved of his plea, it than necessary, to comply with the purposes set forth" in would be impossible to determine on this record exactly the statutes. 18 U.S.C. § 3553(a). The primary purposes to when, how and to what degree, Hoffenberg's mental be served by sentencing, as enumerated in Section 3553, condition affected his criminal conduct. Nonetheless, the are deterrence, both specific and general, just punishment facts establish beyond dispute that Hoffenberg's conduct, reflecting the seriousness of the offense, retribution, which presumably resulted in part from his mental incapacitation, rehabilitation and restitution. These condition, well exceeded the limits of reality as well as purposes reflects the fundamental purpose of criminal those of the law. Notwithstanding the role Hoffenberg's law—to maintain social order. That purpose is carried out mental condition may have played in driving his illegal through the imposition of appropriate punishment upon conduct, in our society and under our system of justice, those who violate the rules that society has agreed upon. responsibility remains with the individual. The Court has considered each of these stated purposes, Hoffenberg has known of his condition since he was first and the proper weight to be given each purpose under hospitalized in 1970, and has had the resources to manage these circumstances. The greatest weight must be given to and cope with it. The responsibility for his failure to do retribution and just punishment. Here, an unstable so, and the tragedy that has resulted from that failure, lies individual with manic tendencies and a sense of squarely on the shoulders of Hoffenberg and his co- grandiosity violated the law in order to satisfy his own conspirators. That responsibility cannot be evaded by a greed and sense of entitlement. His acts resulted in the failure or refusal to come to grips with a destabilizing but loss of the savings and investments of thousands of ultimately treatable condition. people. Not only must he be punished, he must be effectively barred from causing further damage to the There is no doubt that this sentence will cause suffering society. for this intelligent and ambitious man, but that suffering is ultimately the result of his own acts, not this sentence. Hoffenberg's ambition and greed have ended tragically "CONSEQUENCES! Every action produces an equal and for those defrauded by Hoffenberg and for Hoffenberg opposite reaction. Cause and effect. Cause and effect!" himself. Such tragedy is hardly unique. The pages of These are the words of a character in K2, a play by literature and history abound with stories of excessive Patrick Meyers about two men stranded on the ledge of a ambition and self-aggrandizement thwarted by the limits mountain, facing death and seeking to understand how of reality, from Julius Caesar and Napoleon to Charles their prior decisions had brought them to that moment. Ponzi and Michael Milken. Such ambition, when it These words are equally applicable to the sentence operates outside the order of society and wreaks havoc on Hoffenberg now faces. innocent lives, must be punished, both as a matter of retribution and in order to foster respect for the law. That It is with these considerations in mind that Hoffenberg result must be achieved here. will be sentenced to 240 months of incarceration, followed by a three year term of supervised release. As "Encouraging respect for the law requires judges to conditions of his supervised release, Hoffenberg shall consider not only the crime and the criminal, but those abide by the Standard Conditions of Supervision affected by his or her actions." United States v. Smith, 893 through 13, Guidelines § 5B1.4(a). Hoffenberg will be F.Supp. 187, 189 (E.D.N.Y.1995) (Weinstein, J.). In ordered to pay restitution in the amount of $475,157,340. Payne v. Tennessee, 501 U.S. 808, Ill S.Ct. 2597, 115 This figure represents the losses, as determined by the L.Ed.2d 720 (1991), the Supreme Court held that Bankruptcy Court, resulting from the Towers fraud. A evidence of victim impact is relevant to the seriousness of One Million dollar fine will be imposed on Hoffenberg. an offense, and therefore to the appropriate sentence. As An assessment of $250.00 is mandatory. This sentence set forth above, the scope and severity of the impact of constitutes an upward departure of one level. Hoffenberg's conduct on his victims cannot be WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 10 EFTA01120703 U.S. v. Hoffenberg, Not Reported In F.Supp. (1997) As set forth above, an upward departure is warranted here incapable of any repetition of his criminal conduct. The by the fact that the Guidelines did not contemplate the sentence is imposed with the hope that the threat of a number of victims impacted and the amount of the loss twenty-year prison term, restitution and a one million caused by Hoffenberg's offenses. The instant Opinion, as dollar fine may deter others from engaging in similar well as the Presentence Report, serves as "reasonable conduct in the future. notice" that the Court intends to depart from the Guidelines sentencing range. See Fed. It Cr. P. 32; This sentence is subject to the sentencing hearing now set Guidelines § 6A1.2, App. Note I; United States v. for March 7, 1997. Contractor, 926 F.2d 128 (2d Cir.1991). It is so ordered. *16 This lengthy term of incarceration is intended to accomplish the purposes discussed above, primarily that of retribution, and to insure that Hoffenberg remains Footnotes The prior proceedings in this action are fully set forth in several prior Opinions of the Court, familiarity with which is assumed. See United States v. Hoffenberg, 859 F.Supp. 698 (S.D.N.Y.1994); United States p. Hoffenberg, 1995 WL 10840 (S.D.N.Y. Jan.12, 1994); United States Hoffenberg, 908 F.Supp. 1265 (S.D.N.Y.I995); United States v. Hoffenberg, — F.Supp. — (S.D.N.Y.1996). 2 His second appointed counsel, Ernest Hammer, was appointed on April 3, 1996 and withdrew on April 16, 1995, being unable to accomplish satisfactory terms for his engagement. End of Document CP 2013 Thomson Reuters. No claim to original U.S. Government Works. WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 11 EFTA01120704