Towers Financial Corporation

Towers Financial Corporation was a debt-collection and securities firm based in Manhattan and controlled by Steven Hoffenberg, its chief executive from 1975 to April 1993. Between 1988 and 1993 it sold promissory notes and bonds to thousands of investors while operating as a Ponzi scheme, and it collapsed in 1993 following action by the Securities and Exchange Commission. The Bankruptcy Court fixed the valid claims of its noteholders and bondholders at 475,157,340 dollars. Jeffrey Epstein worked at the firm as a consultant from 1987, was never charged, and was later accused by Hoffenberg and by Towers investors of having helped design the fraud and of using its proceeds to start his own companies.¹²

Business Model

Towers Financial grew out of a debt-collection enterprise Steven Hoffenberg started in New York in the 1970s, reportedly from a small initial investment, that bought delinquent accounts at steep discounts and pursued the full balances.³ The firm presented itself as a debt-collection company that purchased portfolios of distressed receivables, paying a small fraction of face value for debts that sellers regarded as largely uncollectible; Vanity Fair described it as "a collection agency that was supposed to buy debts that people owed to hospitals, banks, and phone companies."⁴ According to Hoffenberg's 2018 affidavit, its subsidiaries included Towers Credit Corporation, which bought and collected commercial receivables, Towers Collection Services, Inc., which collected past-due accounts for third parties on contingency, and Towers Healthcare Receivables Funding Corporations I through V, which issued bonds and factored healthcare receivables.¹

To finance these operations the company raised capital from investors by issuing unsecured promissory notes and other securities, marketing them as backed by the receivables portfolios.⁵ In practice, prosecutors and regulators later found, the represented collateral and returns were not supported by the firm's actual collections.⁵ The SEC alleged that offering documents "significantly overstated Towers' revenues from its collection business" and "misleadingly described the promissory notes as insured and fully collateralized," and that "bogus documents and testimony were being provided to the Commission at a time when the promissory notes were being sold."² The Towers investors' 2018 complaint put the notes sold under six private placement memoranda from January 1988 to March 1992 at about 272 million dollars and the bonds sold under five memoranda from July 1990 to May 1992 at about 210 million dollars.¹ Terrence Corrigan, a lawyer for the investors' recovery committee, likened the operation to the film "The Sting": executives courted investors in a wood-paneled boardroom before touring them through the operating floor below, where staff were told by telephone to look busy. "It was a pure Ponzi scheme right from the inception," he said.⁶

In 1987 Towers acquired a controlling interest in United Diversified Corporation, which operated through two failing Illinois insurance companies, United Fire Insurance Co. and Associated Life Insurance Co.; the insurers served as additional funding sources for the firm and for attempted corporate takeovers.¹⁶ Regulatory approval was obtained on a promise to put 3 million dollars of new capital into United Fire. Hoffenberg, in grand jury testimony in Illinois in 1993 and in his 2018 affidavit, attributed that representation and the plan behind it to Epstein.¹⁴ The Illinois Department of Insurance, then directed by James Schacht, later moved the insurers into liquidation and brought a 1991 civil suit alleging their accounts had been drained, naming Jeffrey Epstein in connection with checks drawn on the United Fire and United Diversified accounts.⁶

The Ponzi Scheme

Money raised from new investors was used to pay returns and redemptions to earlier investors rather than generated by legitimate debt collection, the defining structure of a Ponzi scheme; the SEC alleged the proceeds "had been squandered on Towers' bloated operating expenses and perpetuating the fraudulent scheme."² Steven Hoffenberg diverted proceeds to personal expenditures and to attempted corporate acquisitions, including, according to Vanity Fair, a mansion on Long Island, homes on Sutton Place and in Florida, and a fleet of cars and planes, and the firm's reported revenues and asset values were inflated.⁴⁵ The fraud drew in thousands of noteholders and bondholders, who brought about 100 lawsuits against Hoffenberg and Towers beginning as early as 1989.⁷

Enforcement and Prosecution

The Securities and Exchange Commission sued Towers, Hoffenberg, the chief operating officer Mitchell Brater and Arthur J. Ferro in February 1993 (SEC v. Towers Financial Corporation, 93 Civ. 0744 (WK), S.D.N.Y., before Judge Whitman Knapp), and in March 1993 the company filed for protection under Chapter 11 of the Bankruptcy Code (In re Towers Financial Corporation, No. 93-B41558). The Commission later sued Marvin E. Basson and Charles H. Chugerman in 1994, obtained a consent judgment against Hoffenberg, and in September 1996 charged Michael Rosoff, Towers's chief legal officer since 1980, with participating in the fraudulent note sales. The SEC regional director whose office brought the charges, Richard Walker, declined to discuss the case in 2019.¹²⁵⁶ Corrigan turned his committee's investigation over to the SEC, whose charges did not involve Epstein.⁶ The matter became one of the largest financial frauds in the United States before that of Bernard Madoff.⁶

Hoffenberg was indicted in the Northern District of Illinois on April 19, 1994 and in the Southern District of New York on April 20, 1994; the Illinois case was transferred to New York in April 1995. He pleaded guilty on April 20, 1995 to conspiracy to commit securities fraud, mail fraud, conspiracy to obstruct justice and tax evasion (United States v. Hoffenberg, 94 Cr. 213 (RWS) and 95 Cr. 321 (RWS)). Judge Robert W. Sweet issued his sentencing opinion on March 4, 1997 and entered judgment on March 7, 1997: 20 years in prison, three years of supervised release, a one million dollar fine and restitution of 475,157,340 dollars, the figure the Bankruptcy Court had fixed in April 1996 as the valid claims of the noteholders and bondholders, which with interest the investors put at about one billion dollars by 2018. Brater and Rosoff received prison sentences of seven to nine years. Hoffenberg was released from federal custody on October 11, 2013.¹⁵⁶⁸ The 1993 prosecution was led by Daniel Nardello, who went into private practice soon afterward.⁶

The attempted corporate takeovers drove much of the cash drain. Beginning in November 1987 Hoffenberg used Towers and the captive Illinois insurers to mount unsuccessful bids for Pan Am and, in 1988, Emery Air Freight, deploying Jeffrey Epstein as a financial adviser on the financing; a 1987 Towers press release said Towers would use 3 million dollars from United Diversified toward the Pan Am bid.⁴⁶ The Pan Am effort collapsed amid the airline's broader decline following the December 1988 bombing of Pan Am Flight 103 over Lockerbie, and the failed raids left the insurers depleted and accelerated regulatory scrutiny of Towers.⁶ The Illinois Department of Insurance liquidated the insurers and sued Hoffenberg in 1991; he settled. The regulators' lawyer, Barry Gross, said of Epstein: "He was very elusive... It was hard to really track him down. There were a substantial number of checks for significant dollars that were paid to him, I remember... we presumed that he was involved with the Pan Am and Emery run that Hoffenberg made, but we never got a chance to depose him."⁴

Epstein's Role

Jeffrey Epstein was hired as a consultant around 1987, with reporting citing compensation of about 25,000 dollars per month and a 1988 two million dollar non-repayable loan, and the firm gave him offices at the Villard Houses in Manhattan.⁴⁶ Towers's financial statements for 1988 showed a separate 400,000 dollar loan to Epstein in the year he invested 1.6 million dollars in Riddell Sports; Epstein disputed the accuracy of the Towers reports.⁴ At the time Epstein operated his own consulting firm, International Assets Group, from his New York apartment after leaving Bear Stearns, and a Towers attorney confirmed his work at the firm and recalled drafting a consulting agreement.⁶ A 1987 company press release listed Epstein as "chairman of the board of directors of Intercontinental Asset Group" in the Pan Am financing, and the 1991 Illinois suit listed among improper disbursements "a series of checks payable to Jeff Epstein or Jeff Epstein & Co. totaling $215,000" drawn on the insurance-company accounts.⁶

The extent of Epstein's involvement in the fraud is disputed. Hoffenberg told an Illinois grand jury in 1993 that Epstein devised the idea of financing the Pan Am and Emery bids through the insurers, that he, Brater and Epstein arranged to use 3 million dollars of the insurers' bonds as collateral to buy the stock while reporting them as safely invested, and that "Epstein was the person in charge of the transactions." United Fire's former chief financial officer, Daniel Payton, recalled asking Epstein about the missing bonds: "He said, 'Oh, yeah, they still exist.' But we found out later that he had sold those assets." Its former treasurer, Richard Allen, recalled Epstein saying "We'll get them back"; "They never came back." In a 1989 deposition Epstein said he executed "all" of Hoffenberg's instructions to buy and sell the stock, which he called "making the orders." Epstein denied any dealings with the insurance companies and said he was merely asked how the bids could be accomplished, and Vanity Fair noted that much of Hoffenberg's testimony in his criminal case "has proven to be false."⁴ Steven Hoffenberg later called Epstein his "partner in what we did raising the billion dollars," and Terrence Corrigan said Epstein appeared on organizational charts as potentially the second or third most senior figure at the firm and that "I don't think there was anyone who worked for the company who didn't understand it was a fraud the whole time, from the secretary up to Hoffenberg." The bankruptcy trustee, Alan Cohen, four defense lawyers for Towers executives, and Hoffenberg's criminal defense lawyer Ira Sorkin told CBS News they did not recall Epstein.⁶ The 1991 Illinois Department of Insurance suit alleged Epstein manipulated Emery stock through multiple brokerage accounts he controlled and traded without a broker's license.⁶ Epstein left Towers before its collapse and was never charged in connection with the fraud; Corrigan said that by the time investigators arrived, "Epstein was either gone or on his way out."⁶

David Lewis, who represented Brater, said in 2003 that "from the government's discovery in the main sentencing against Hoffenberg it would seem the government was perhaps a bit lazy. They went for what they knew they could get ... and that was the fraudulent promissory notes... What they couldn't get, they didn't bother with."⁴ Hoffenberg swore in 2018 that "during the course of my criminal trial, Prosecutors offered me a reduced sentence in exchange for information about Epstein's role," and that he refused. His lawyer Gary Baise told CBS News that Sweet had asked him, "Why did he not give up Epstein?"; Epstein's lawyers wrote in 2016 that at a December 2013 conference "Judge Sweet stated he was unaware of Epstein."¹⁶⁷

Suits Against Epstein

After his release Hoffenberg pursued Epstein and Epstein's companies in court on behalf of the Towers victims. A June 11, 2015 verified petition in his criminal case named Epstein as an unindicted co-conspirator. On May 27, 2016 he sued Epstein and Financial Trust Company as self-described "constructive trustee of the Noteholders and Bondholders of Towers Financial Corporation"; after Epstein's counsel at Troutman Sanders announced a motion to dismiss for lack of standing, limitations, in pari delicto and failure to state a claim, Hoffenberg withdrew the suit with prejudice, and Judge Richard J. Sullivan dismissed it on July 5, 2016. On August 20, 2018 two Towers noteholders, Marvin Gerber and Kalma Koenig, filed a class action against Epstein and Financial Trust alleging that Epstein "raised over five hundred million dollars" for the scheme and used its proceeds "to start and grow" Financial Trust; it was terminated on October 5, 2018 after Epstein's lawyers moved to dismiss and threatened sanctions, the plaintiffs preserving the right to refile.¹⁷⁹