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UNITED STATES v. HOFFENBERG

December 18, 1995

UNITED STATES OF AMERICA, against STEVEN HOFFENBERG, Defendant.


The opinion of the court was delivered by: SWEET

 The defendant Steven Hoffenberg ("Hoffenberg") has moved under the unusual circumstances described below to enforce the Cooperational Plea Agreement of September 23, 1993 (the "Agreement") between Hoffenberg and the United States Attorneys for the Southern District of New York and the Northern District of Illinois (the "Government").

 Upon the hearing on contested facts, the prior proceedings and the facts and conclusions set forth below, the motion is denied.

 The Issues

 This proceeding sets the framework for the final resolution of the responsibility of Hoffenberg for the massive frauds at his company, Towers Financial Corporation ("Towers") in the early 90's which resulted in more than $ 400 million in losses. While other cases involving the fraud remain open, Hoffenberg's sentence upon his criminal liability may well turn upon the applicability of the Section 5K1.1(a)(1)-(5) exception to the Sentencing Guidelines which he has sought to enforce in this proceeding.

 This determination must resolve the following issues: (1) the applicable standard and procedures for the enforcement of cooperation agreements, (2) the factual findings as to the conduct of Hoffenberg and the Government, (3) the effect of any partial performance by the Government, and (4) the propriety of the Government's refusal to comply with the Agreement. It is anticipated that with these determinations in hand the Government and Hoffenberg will proceed to a sentencing hearing.

 Prior Proceedings

 The prior proceedings have been described in prior opinions of this Court familiarity with which is assumed. See United States v. Hoffenberg, 859 F. Supp. 698 (S.D.N.Y. 1994) (the "July Opinion"), United States v. Hoffenberg, 1995 U.S. Dist. LEXIS 152, 1995 WL 10840 (S.D.N.Y. Jan. 12, 1995). Some restatement is required in the interest of continuity.

 Sometime prior to 1991, Hoffenberg and a number of corporate entities with which he was associated, including Towers, and others, came under investigation by the Securities & Exchange Commission ("SEC"). The SEC filed an action in this District against Hoffenberg and others on February 8, 1993, and on February 17, 1993, Hoffenberg and certain other defendants agreed to a preliminary injunction issued by the Honorable Whitman Knapp (the "Consent Order") which, among other things, enjoined Hoffenberg and "each of his controlled, related, or affiliated entities . . . to hold and retain within their control, and otherwise prevent any withdrawal, transfer, pledge, encumbrance, assignment, dissipation, concealment, or other disposal of any funds, or other properties." It also allowed for "ordinary living and business expenses...."

 In 1993 the United States Attorney for the Southern District of New York began a criminal investigation against Hoffenberg and others for conspiracy to obstruct the SEC's investigation during 1991 and 1992, and for various other criminal violations of the securities laws.

 In March 1993 Hoffenberg, through counsel, initiated a number of meetings which culminated in an oral understanding. Pursuant to that understanding, Hoffenberg agreed to talk to representatives of the United States Attorney's Office for the Southern District of New York and the Northern District of Illinois, the FBI, and the SEC (collectively, the "Government"). In return, the Government agreed to grant Hoffenberg limited immunity for each of his proffers or debriefings.

 On September 24, 1993, Hoffenberg and the Government entered into the Agreement dated September 23, 1993.

 On January 27, 1994, and on February 14, 1994, the Government confronted Hoffenberg with allegations that he had violated his obligations under the Agreement. On February 17 he was advised that the Agreement had been terminated, and he was arrested.

 On April 19, 1994 he was indicted in the Northern District of Illinois on fraud charges. On April 20, 1994 he was indicted in the Southern District of New York and charged with the four counts contemplated in the Agreement, as well as six additional counts alleging substantive securities fraud violations in connection with the sale of notes and bonds of Towers; additional violations of the mail fraud statute, and obstruction of justice by disobeying an order of the United States District Court for the Southern District of New York.

 Hoffenberg moved to enforce the Agreement and by opinion dated July 21, 1994 (the "July Opinion"), see United States v. Hoffenberg, 859 F. Supp. 698 (S.D.N.Y. 1994), his motion was denied as premature. He then moved to reargue his earlier motion and to suppress the statements which he had made in reliance upon the Agreement, which motion was denied by an opinion rendered on January 11, 1995 (the "January Opinion").

 After the filing of the Indictment against him, the Government continued to permit him to plead to the charges as had been set forth in the Agreement and on April 20, 1995, Hoffenberg entered a guilty plea to four counts: (i) conspiracy to violate the securities laws by fraudulently selling securities; (ii) mail fraud, (iii) conspiracy to obstruct justice; and (iv) tax evasion.

 The Government continued also its previously stated refusal to file a motion to advise the sentencing judge of Hoffenberg's cooperation and to request sentencing in the light of the factors set forth in Section 5K1.1(a)(1)-(5) of the Sentencing Guidelines (the "5K1 Letter"). The parties in a pretrial conference agreed upon the necessity of a hearing to resolve the factual contentions. From June 5 to June 14, 1995, the parties submitted evidence by way of testimony and exhibits. Post hearing briefs were filed. On September 12, 1995 final argument was heard. A final submission was made to the Court on December 1, 1995 and the issues were considered fully submitted at that time.

 Facts

 The Background and the Agreement

 Sometime in 1991 Hoffenberg and a number of corporate entities with which he was associated, including Towers, came under investigation by the SEC for securities fraud arising out of the affairs of Towers. On February 8, 1993, the SEC filed an action in this District. See SEC v. Towers Financial Corporation, et al., 93 Civ. 0744 (WK) (the "SEC Action"). As it related directly to Hoffenberg, the complaint alleged that he violated the anti-fraud provisions of the securities laws by false and misleading statements to investors who had purchased $ 215 million in promissory notes issued by Towers. The SEC also charged Hoffenberg with failing to register the offerings of promissory notes with the SEC, and selling his Towers common stock while in possession of inside information that the stock was worthless.

 In early 1993, the United States Attorney for the Southern District of New York commenced the criminal investigation against Hoffenberg and others for conspiracy to obstruct the SEC's investigation during 1991 and 1992 and for various other criminal violations of the securities laws. An investigation was also commenced in the Northern District of Illinois with respect to a scheme to defraud the Illinois Department of Insurance and two Illinois insurance companies acquired by Towers.

 In March 1993, Hoffenberg and the Government agreed that Hoffenberg would talk to representatives of the United States Attorney's Office for the Southern District of New York and Northern District of Illinois, the FBI and the SEC and receive limited immunity for these proffers. On at least 22 separate occasions, Hoffenberg and his counsel met with representatives of the Government who were interested in the subject matter of Hoffenberg's debriefings.

 On September 24, 1993, the parties entered into the Agreement, dated September 23, which provided that Hoffenberg would be charged with the four felony counts in a Southern District Information. It was further agreed that Hoffenberg would plead guilty to and be sentenced in this District on an information filed in the Northern District of Illinois, charging him with one count of mail fraud.

 The Agreement also provided in relevant part as follows:

 
If Steven Hoffenberg fully complies with the understandings specified in this Agreement, he will not be further prosecuted by the Offices for any crimes related to his participation in: (i) the fraudulent sale of unregistered debt securities, namely, promissory notes and bonds, of Towers Financial Corporation ("Towers") from in or about 1986 through in or about February 1993; (ii) making illegal payments to representatives of pension funds to induce the purchase of Towers' securities, from in or about 1989 to in or about February, 1993; (iii) making illegal payments to representatives of a foreign country in order to secure a loan to Towers from that country's bank, from in or about 1989 to in or about February 1993; (iv) obstructing the Securities and Exchange Commission's investigation of the fraudulent sale of Towers' securities from in or about 1988 to in or about September 1993; (v) a scheme to illegally convert to Towers' use monies collected by Towers as collection agent for its clients, from in or about 1980 to in or about April 1993; (vi) the failure to report on his Individual U.S. Income Tax Returns for the calendar years 1987 through 1991 income Steven Hoffenberg obtained by having corporate entities controlled by him pay his personal expenses; and (vii) a scheme to defraud, misappropriate, and misuse the funds and assets of two Chicago insurance companies, from in or about October 1987 to in or about 1992. In addition, if Steven Hoffenberg fully complies with the understandings specified in this agreement, no testimony or other information given by him (or any other information directly or indirectly derived from such testimony or other information) will be used against him in any prosecution for criminal tax violations not described above. This Agreement does not provide any protection against prosecution for any crimes except as set forth above.
 
The understandings are that Steven Hoffenberg shall truthfully disclose all information with respect to the activities of himself and others concerning all matters about which the Offices inquire of him, shall cooperate fully with the Offices, the Securities and Exchange Commission, the Federal Bureau of Investigation, the Internal Revenue Service, the United States Postal Inspection Service and any other law enforcement agency so designated by the Offices, shall attend all meetings at which his presence is requested with respect to the matters about which the Offices inquire of him, and further, shall truthfully testify before the grand jury and/or at any trial or other court proceeding with respect to any matters about which the Offices may request his testimony. Any assistance Steven Hoffenberg may provide to federal criminal investigators shall be pursuant to the specific instructions and control of the Offices and those investigators. This obligation of truthful disclosure includes an obligation upon Steven Hoffenberg to provide to the Offices, upon request, any document, record or other tangible evidence relating to matters about which the Offices or any designated law enforcement agency inquires of him.
 
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It is further understood that the sentence to be imposed upon Steven Hoffenberg is within the sole discretion of the sentencing judge. The Offices cannot and do not make any promise or representation as to what sentence Steven Hoffenberg will receive, nor will they recommend any specific sentence to the sentencing judge. However, the Offices will inform the sentencing judge and the Probation Department of: (i) this Agreement; (ii) the nature and extent of Steven Hoffenberg's activities with respect to this case; and (iii) the full nature and extent of Steven Hoffenberg's cooperation with the Offices and the date when such cooperation commenced. In addition, if it is determined by the Offices that Steven Hoffenberg has provided substantial assistance in an investigation or prosecution, and if Steven Hoffenberg has otherwise complied with the terms of this Agreement, the Offices will file a motion, pursuant to Section 5K1.1 of the Sentencing guidelines, advising the sentencing judge of all relevant facts pertaining to that determination and requesting the Court to sentence Steven Hoffenberg in light of the factors set forth in Section 5K1.1(a)(1)-(5).
 
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It is further understood that Steven Hoffenberg must at all times give complete, truthful, and accurate information and testimony and must not commit any further crimes whatsoever. Should Steven Hoffenberg commit any further crimes or should it be determined that he has given false, incomplete, or misleading testimony or information, or should he otherwise violate any provisions of this Agreement, Steven Hoffenberg shall thereafter be subject to prosecution for any federal criminal violation of which the Offices have knowledge, including, but not limited to, perjury and obstruction of justice. (emphasis added).

 The Cooperation

 During the period from March 1993 to February 1994 Hoffenberg responded to all inquiries put to him by the Government concerning the affairs of Towers. He was interrogated principally by Assistant United States Attorney Daniel A. Nardello ("Nardello") who was responsible for the criminal investigation surrounding the affairs of Towers. He also testified before the grand jury on January 13 and 14, 1994 and at the Government's direction engaged in recorded conversation.

 The Representations

 Throughout 1993 the Government remained concerned about Hoffenberg's compliance with the Consent Order entered in the SEC Action which had required Hoffenberg to provide an accounting of all his assets. Of particular concern was Hoffenberg's involvement with Diversified Credit Corporation ("DCC"), another collections corporation which Hoffenberg set up prior to the termination of his relationship with Towers. DCC was to do business in a manner similar to that conducted by Towers. A second area of concern relating to the Consent Order related to certain payments made to Hoffenberg and finally his relationship to Stratford Credit Corporation ("Stratford") which was started in December 1993.

 a. DCC

 Following his termination from Towers, Hoffenberg represented that his involvement in DCC was limited to "sales consultant," that he was only involved in DCC's sales in its New York office and had no involvement in DCC's collections or operations which were conducted in its Long Island office, nor any real influence over DCC's independent president, Lawrence Lowy ("Lowy").

 These representations were significant. In a collection business, such as had been conducted by DCC or its predecessor Towers, the operations side controlled the money collected on behalf of clients. According to the SEC and the Government, certain of the fraudulent activity at Towers centered around the failure of operations employees, at the direction of Hoffenberg and his co-conspirators, to remit funds to Towers' clients. By the representation of separation from the collections side of DCC, Hoffenberg gave assurances that (1) he ...


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