You Can't Cheat an Honest Man - James Walsh [142]
• Towers Healthcare Receivables Funding Corporation, which engaged in factoring health care receivables.
The last subsidiary was the most promising. In the late 1980s, Hoffenberg had gotten into lending money against accounts receivable of financially strapped health care providers. Towers would purchase the receivables—bills owed to hospitals and nursing homes by Medicare, Medicaid and private insurance companies—at a discount from face value.
The genius of the business was that Hoffenberg convinced the cashstrapped hospitals to give him financing (though they may not have realized this was what they were doing). He’d pay half the cash right away and the another 40 percent or 45 percent after he’d collected the receivables.
The collection cycle usually took 30 to 90 days, so Towers was earning an annual return on its money of anywhere from 20 percent to 60 percent. Many of the hospitals paid the premium without complaint. One former finance executive at a New Jersey hospital said, “I needed the cash, and I didn’t care what I paid.”
Hoffenberg ran into some trouble in 1988, when the Securities Exchange Commission discovered that Towers had violated federal securities law by selling $37 million worth of unregistered bonds. But the SEC agreed to close its investigation in exchange for a consent decree which required, among other things, that Towers make a refund offer to the holders of the bonds.
Towers made the offer—but couched it in such vague terms that only a small percentage of the bondholders took advantage of the chance to get their money back. The company only refunded $440,000 of more than $30 million it had received from the notes in question. As one court would later observe:
Had a substantial majority of these noteholders reclaimed their investments, Towers, thus being deprived of funds to pay interest on its other notes, would have been forced to default. The Ponzi scheme would then have been over.
But they didn’t...and it wasn’t.
Hoffenberg treated his own employees in much the same way he treated investors. He compartmentalized his company, assigning narrow duties to each manager so that only a few people—and maybe only Hoffenberg himself—knew how Towers really worked.
And there was a lot of expensive bluster. Towers Financial’s corporate offices in Manhattan were decorated with tasteful furniture, plush carpeting and oil paintings. It looked like a prestigious old-line law firm. The image of respectability helped Hoffenberg carry out his fiveyear growth plan, fueled by repeated note and bond offerings.
Most of the notes were distributed by some 240 small regional brokerdealers, while the bonds were privately placed by Towers itself. In its Offering Memoranda, which paved the way for the various bond offerings, Towers stated that it had developed a remarkably profitable operation. The fat profits allowed it to pay fantastic interest rates.
Between February 1989 and March 1993, Towers sold over $245 million of bonds to more than 3,500 investors in 40 states. The money raised from these offerings was supposed to go to buying high-quality accounts receivable that the company could collect easily. Hoffenberg didn’t buy many accounts receivable. And, when he did, he bough low-quality, uncollectable ones for pennies on the dollar. He’d then claim this crap was worth 95 percent of face value.
Another trick he used was to sign deals with corporate clients under which Towers would collect bills which remained the client’s property. He’d then enter these bills on Towers Financial’s books like accounts receivable his company had purchased.
Towers’ Annual Reports for 1988, 1989 and 1990 stated that the company expected to collect 30 percent of all collection receivables as “fees.” It never kept anything like that amount.
From 1988 through March 1993, Towers generated almost $400 million in losses—though these losses didn’t show up in any of the company’s financial reports. Hoffenberg was keeping the company operating by misallocating the infusions of cash provided