EFTA00612518.pdf

ci nt UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVIgOK1 4 ,-, PI; " 2.• 12-7RA JAMES W. SCHACHT, Acting Director DISTRICT Cu'L ' ) of Insurance of the State of Illinois, in his capacity ) ) as Conservator of UNITED ) DIVERSIFIED CORPORATION, as Liquidator of ASSOCIATED gtattila LIFE INSURANCE COMPANY, and as Liquidator of UNITED FIRE INSURANCE COMPANY, VIA p 8_1991 No. - _ Plaintiff, vs. ) 91r4024 STEPHEN HOFFENBERG, MITCHELL BRATER, CHARLES H. ) ) CHUGERMAN, MICHAEL ROSOFF, ) TOWERS FINANCIAL CORPORATION, and TOWERS DIVERSIFIED ) ) COMPANY, MAeISTRATE JUDGEL4113KOYIURY DEMANDED Defendants. ) COMPLAINT Plaintiff, JAMES W. SCHACHT, Acti ng Director of Insurance of the State of Illinois, in his capa city as Conservator of United Diversified Corporation, and as Liqu idator of Associated Life Insurance Company and United Fire Insurance Company, 'by his attorneys, complains of Defendants, Stephen Hoffenberg ("Hoffenberg"), Mitchell Brater ("Br ater"), Charles Chugerman ("Chugerman"), Michael Rosoff ("Rosoff "), Towers Financial Cor- poration ("Towers Financial") and Towers Diversified Company ("Towers Diversified"), as foll ows: znn iqv nc:i I 1 C107-t7-AAV EFTA00612518  Parties, Jurisdiction and venue 1. James W. Schacht, Acting Director of Insurance of the State of Illinois ("Director"), is the successor of the duly appointed Conservator of United Diversified Corporation ("Diversified") and Liquidator of Associated Life Insurance Company ("Associated") and United Fire Insurance Company ("United Fire"), pursuant to the Orders of Conservation and Liquidation entered by the Circuit Court of Cook County, Illinois on July 29, 1988 ("Conservation Order"), and March 3, 1989 ("Liquidation Orders"), and by virtue of the laws of the State of Illinois. 2. At all relevant times Diversified was an Illinois corporation with its principal place of business in Des Plaines, Illinois. United Diversified acted as a holding company whose principal business activities were conducted through and for its insurance subsidiaries, namely; Associated and United Fire. 3. At all relevant times Associated was a domestic stock legal reserve insurance company organized under the laws of the State of Illinois with its principal place of business in Des Plaines. Illinois. Associated is a wholly-owned subsidiary of Diversified and was in the business of writing life, accident and health insurance for individuals and groups. 4. At all relevant times United Fire was a domestic stock property, casualty and fire insurance corporation organized under the laws of the State of Illinois with its principal place of business in Des Plaines Illinois. United Fire is a wholly-owned -2- rnn wv nr:II IM1 C107-4,7_1121; EFTA00612519  subsidiary of Associated and was in the business of writing health insurance for individuals and groups as well as various lines of property and casualty coverages. 5- Hoffenberg is a resident of the State of New York, and at all relevant times, was Chairman of the Board of Directors of United Fire, Associated, Diversified, Towers Diversified and Towers Financial. On information and belief, Boffenberg, through an entity known as the "Hoffenberg Family Trust", at all relevant times owned 100% of Professional Business Broker's Inc., a New York corporation which owned 82.5E of Towers Financial. 6. Brater is a resident of the State of New York, and at all relevant times, was the Vice Chairman of the Board and Chief Operating Officer of Towers Financial and a member of the Board of Directors of United Fire, Associated, and Diversified. 7. Chugerman is a resident of the State of New York, and at all relevant times, was Vice President and Secretary of Towers Financial and a member of the Board of Directors of United Fire, Associated, and Diversified. 8. Rosoff is a resident of the State of New York, and at all relevant times, was Senior Vice President, Chief Legal Officer and Assistant Secretary of Towers Financial and acted as counsel for United Fire, Associated, and United Diversified. 9. Towers Financial is a publicly held Nevada corporation with its principal place of business in New York, New York. Towers Financial is in the business of providing financial services. -3- VIII 'A WV nc• rr IV] Clf.•_l,'_VIV EFTA00612520  10. Towers Diversified is a Delaware corporation with its principal place of business in New York, New York, and a wholly— owned subsidiary of Towers Financial. Towers Diversified was established to acquire certain capital stock of Diversified, representing approximately 82% of its outstanding shares. 11. This Court has jurisdiction over Count /X pursuant to 18 U.S.C. SS 1964(a) and 1964(c). Additionally, the sum or value of the claims in this case, exclusive of interest and costs, exceeds $50,000.00, and there is diversity of citizenship between the parties. This Court, therefore, has jurisdiction over the remaining Counts pursuant to 28 U.S.C. S 1332(a). 12. Plaintiff resides in this District. In addition, the claims arose in this District. Venue in the Northern District of Illinois is, therefore, proper under 28 U.S.C. $ 1391(a). Factual Background 13. This is an action for money damages against several former members of the Boards of Directors of Diversified, Associated and United Fire (collectively "the Companies") and an attorney for the Companies and their parent companies, Towers Diversified and Towers Financial (collectively "the Controlling Companies"). The defendants initiated, caused and/or permitted on a continuing basis certain transactions, some of which are more 'fully described below, which caused the Companies to suffer damages in excess of $4 million, become insolvent and be placed in conservation and/or liquidation. -4-- cin NV nc: it cin-_t-..viv EFTA00612521  14. In 1987, 'Diversified and its insurance company subsidiaries, Associated and United Fire, experienced significant financial difficulties in maintaining the minimum capital and surplus requirements of the Illinois Insurance Code in accordance with statutory accounting practices. On May 21, 1987, the Companies were placed in conservation by an order of the Circuit Court of Cook County, Illinois at the request of the Director and the Attorney General of the State of Illinois. 15. In July, 1987 Diversified retained Towers Financial to assist it in obtaining additional capital financing to infuse into the Companies as part of a rehabilitation plan in lieu of liquidation. 16. Thereafter uoffenberg and Rosoff, on behalf of Towers Financial, began negotiations to acquire approximately 82% of the outstanding capital stock of Diversified. 17. On October 6, 1987, Towers Financial, through Towers Diversified, purchased approximately 82$ of the outstanding capital stock of Diversified. 18. Immediately following the closing of the purchase, Hoffenberg and the Controlling Companies assumed full and complete control and operation of Diversified and its insurance company subsidiaries. 19. On October 21, 1987, the Illinois Department of Insurance approved Tower Financial's acquisition of control of Diversified and its insurance company subsidiaries. In granting the approval, the Director relied upon Towers Financial's -5- Qnn NV nc:ii INA C157-47-1)V EFTA00612522  representation to the Director that it would contribute $3 million to the surplus of United Fire. On information and belief, Towers Financial never intended to contribute the S3 million. 20. Following the closing of the acquisition, Hoffenberg, on behalf of Towers Financial, controlled and dominated the Companies as a mere instrumentality of Towers Financial, as further described herein. Hoffenberg, without corporate formalities, appointed Grater and Chugerman to the Hoards of Directors of each of the Companies. Similarly, absent corporate formalities, the Boards of Directors of the Companies named Hoffenberg, Brater and Chugerman to Executive Committees and, upon information and belief, Hoffenberg, Brater, Rosoff and Chugerman to Investment Committees which controlled all of the investments for the Companies. 21. Pursuant to I11. Rev. Stat. Ch. 73, S 622(2) (1987), the corporate powers of Associated and United Fire were to be exercised by, and their business affairs were under the control of, their Boards of Directors. 22. The individual defendants owed the Companies fiduciary duties of loyalty and care of the highest order consistent with the Illinois Insurance Code, the regulations issued thereunder, common law, their oral employment contracts and sound insurance practices. The individual defendants acting on behalf of the Controlling Companies, breached their duties of loyalty and care causing the Companies to lose in excess of $4 million by engaging in the wrongful conduct described herein. inn wv nc:ti IN4 cln7.47_NAv EFTA00612523  23. The individual defendants breached the terms of their oral employment agreements with the Companies by engaging in the wrongful conduct described herein. 24. The individual defendants negligently managed the affairs of the Companies as hereinafter alleged. 25. The individual defendants also engaged in secret and fraudulent business transactions which were hidden from the Companies, their officers, policyholders, shareholders and the Director as hereafter alleged. 26. Upon assuming control of the Companies, Hoffenberg took certain of their checks with him to New York, then signed and issued a series of checks drawn on a United Fire account, as the sole signator, contrary to Illinois law. Upon being advised that Illinois law required at least two signatures on checks over $5,000 disbursing insurance company funds, Hoffenberg attempted to circumvent the law by writing checks drawn on Diversified bank accounts holding Associated and United Fire funds. Many of the checks were issued for the benefit of Hoffenberg and the Controlling Companies. 27. In violation of Illinois law, Hoffenberg failed to provide vouchers supporting the disbursements by check. When repeatedly asked by the officers of the Companies and representatives of the Director to provide vouchers and/or supporting documentation for the checks, Hoffenberg refused and still refuses to provide this information. -7- RN 'el WY IA4 CIE-17.—Ndv EFTA00612524  28. In violation of Illinois law, Hoffenberg, on behalf of the Controlling Companies, began a transfer of the investments and cash of the Companies, including all of their bonds, into various brokerage accounts in the State of New York. The funds were used to purchase additional securities which were held in various names, concealed and moved from one brokerage firm to another within the State of New York. 29. Even though representatives of the Director and Daniel Peyton, the Chief Financial Officer of the Companies, asked Hoffenberg to return the securities to Illinois, Hoffenberg refused to do so until ordered to return the securities by the Circuit Court of Cook County, Illinois. 30. The investments in the securities were imprudent and contrary to sound insurance business practices. The Companies lost approximately $2 million as a result of these investments. 31. In violation of Illinois law, Hoffenberg signed and issued at least two checks totalling $1,100,000 to the Controlling Companies or their affiliates. These checks were either illegal dividends or constituted waste of the Companies funds. 32. Hoffenberg caused Associated and United Fire to issue or deliver insurance policies at a time when he knew that Associated and United Fire were insolvent or impaired in violation of Section 144.1 of the Illinois Insurance Code. (I11. Rev. Stat. Ch. 73 I 756.1 (1987). -8- Ron 'd NY IE:li !ai ;10C-4;qg EFTA00612525  33. Hoffenberg knowingly caused Associated and United Fire to file false and misleading annual statements for 1987 and quarterly statements for the first quarter of 1988 with the Illinois Department of Insurance in violation of Section 139(2) of the Illinois Insurance Code. (I11. Rev. Stat. Ch. 73, if 751(2) (1987). 34. Through the defendants' failure to provide the Illinois Department of Insurance with complete and accurate information, defendants artificially prolonged the operation of the Companies by the Controlling Companies beyond the point of insolvency. 35. Each of the above described transactions constituted waste of the Companies' assets and lacked any legitimate business purpose. Brater, Chugerman and Rosoff, acting on behalf of the Controlling Companies, failed to properly supervise the activities of Hoffenberg. Moreover, they negligently, and in breach of their fiduciary duties, approved (or failed to review) the above described transactions which were contrary to law, fraudulent, blatantly unsafe, unsound and dangerous to the economic well-being of the Companies. Brater, Chugerman and Rosoff failed to take corrective action to cure the violations of law and overall mismanagement. 36. As a consequence of the above described conduct, the Director filed a petition for the conservation of the assets of the Companies on July 29, 1988. The petition alleged, inter alia, that Associated and United Fire were insolvent; they failed to establish and maintain books and records which were sufficient —9— rim WV IC:li In cirr_b"_Niv EFTA00612526  for the determination of their financial condition; and that they violated the laws of the State of Illinois by: failure to meet the minimum capital and surplus requirements; failure to maintain adequate policyholder Security Deposit Accounts; failure to comply with the laws relating to the proper registration and location of securities, failure to obtain the requisite approval for transfer or sale of securities and failure to obtain the appropriate signatures, authorizing the transfer or sale of securities. The Director also alleged that Diversified was insolvent and that its books and records were in such a condition that its financial condition could not be ascertained with a reasonable degree of certainty. On September 2, 1986, the Director filed a verified complaint for liquidation against Associated and United Fire, alleging, inter alia, similar misconduct. Improper Disbursements 37. To protect policyholders and shareholders, the Illinois Insurance Code requires that certain procedures be followed in dealing with the funds of insurance companies. Specifically: (a) ill. Rev. Stat. Ch. 73, V 745 (1987) requires that books, records, accounts and vouchers must be prepared so that the company's financial condition and financial statements may be readily verified; (b) Ill. Rev. Stat. Ch. 73 V 752 (1987) requires that vouchers must be maintained for disbursements in excess of $100; -10-- i ln'A WV lc:II 1A4 Clir-r_ggy EFTA00612527  (c) Ill. Admin. Code tit. 50, $ 904.30 (1987) requires at least two authorized signatures on checks in excess of $5,000. 38. In violation of these laws and regulations issued thereunder, Hoffenberg issued a series of checks, for which he was the only signator and provided no supporting documentation. These checks were drawn from United Fire and Diversified accounts as follows: COMPANY: United Fire Insurance Company Check 4 Date Amount Payee. 100111 11/06/87 $50,000.00 United Air Fleet 100110 11/13/87 25,000.00 Jeff Epstein 100108 11/20/87 25,000.00 Corporate Risk 100107 11/30/87 8,000.00 Mintz, Fraade & Sieger PC 100064 12/01/87 50,000.00 United Air Fleet 100066 12/01/87 25,000.00 Jeff Epstein 100527 12/03/87 17,000.00 GAB Services, Inc. 100106 12/11/87 75,000.00 United Air Fleet 100105 12/24/87 6,266.75 Sonnenschein Carlin Nath & Rosenthal 100068 01/05/88 25,000.00 Jeff Epstein 100104 01/06/88 50,000.00 United Air Fleet 100070 01/06/88 1,196.21 American Express 100071 01/06/88 3,479.80 American Express 100069 01/08/88 4,019.78 American Express 100072 01/14/88 1,625.22 Ford Motor Credit Company 100102 01/21/88 1,800,000.00 Merrill Lynch, Pierce, Fenner & Smith, Inc. 101378 01/29/88 24,595.01 MTH Consulting 100103 02/01/88 25,000.00 Jeff Epstein 100073 02/04/88 25,000.00 United Air Fleet 100074 02/08/88 87,570.00 EAF 100075 02/10/88 32,058.12 United Air Fleet 100077 02/17/88 36,000.00 Bear Stearns 100076 02/18/88 20,837.84 American Express -11- WV IF:I1 144 41117-K44V EFTA00612528  COMPANY: United Diversified Corporation Check # Date Amount Payee 7266 O1/O4/88 6,OO9.OO Wellesley 7O62 O2/23/88 29,695.54 United Air Fleet 7O63 O3/O1/88 25,OOO.OO Jeff Epstein 7O64 O3/O1/88 1O,88O.OO United Air Fleet 7O65 03/02/88 2O,OOO.OO Jeff Epstein 7452 O3/O4/88 25,OOO.OO Jeffrey Epstein 7453 03/04/88 5,OOO.OO Robert Biegen 7O66 O3/O7/88 31,21O.OO Sonnenschein Carlin Nath & Rosenthal 7O72 O3/O7/88 11,38O.13 American Express 747O O3/ 1O/88 2O,OOO.OO United Air Fleet 745O O3/1O/88 629.5O Stephen Juncker 7O71 O3/15/88 9O,819.OO EAF 7O67 O3/15/86 11,69O.97 American Express 7O7O O3/15/88 1OO,OOO.OO TEC Management Inc. 7O68 O3/16/88 3,401.98 American Express 7O69 O3/16/88 1,854.27 United Air Fleet 7451 O4/O1/88 5,OOO.OO Mintz, Fraade & Zeiger 7454 O4/O6/88 15,OOO.OO Parker, Chapin, Flattau & Klipl 7455 O4/O6/88 2O,OOO.OO Jeff Epstein 7457 O4/13/88 19,060.00 GAB Business Services, Inc. 7458 O4/21/88 1O,OOO.OO Certilman, Haft, Balin, etc. 7459 O4/21/88 1,OOO.OO Certilman, Haft, Balin, etc. 7468 O5/O3/88 25,OOO.OO Jeff Epstein 7469 O5/O2/88 5,59O.OO Robert Biegen 746O O5/O5/88 15,OOO.OO Gerry Gilbert Company Advertising 7467 O5/11/88 1O,OOO.OO Shea & Gould 77O7 O5/31/88 1O,OOO.OO Gerry Gilbert Company 7466 O6/O1/88 5O,OOO.OO Ben Barnes, Esq. 7465 O6/1O/88 1,OOO,OOO.OO Towers 7726 O6/24/88 1O,OOO.OO Parker, Chapin, Flattau & Klipi 7719 O4/13/88 932.OO Mid-State Financial Corp. 772O O7/O1/88 58,732.6O Rodman & Renshaw 77O8 O7/2O/88 26,296.65 Manett Phelps Rothenberg & Evans 39. As a result of the lack of documentation the financial statements of the Companies could not be verified. -12- cin .A WV Ic:Il IA4 CI17-b7.-A:V EFTA00612529  40. The checks were issued primarily for the benefit of Hoffenberg or the Controlling Companies and not for the benefit of the Companies. 41. Among the checks benefiting Roffenberg individually are checks payable to American Express for personal expenses and to Wellesley College for, upon information and belief, tuition for a Hoffenberg relative. 42. Among the checks that benefited the Controlling Companies were checks payable to United Air Fleet and EAF for an amount in excess of $522,000. To conceal the nature of these transactions, Hoffenberg directed that these checks be recorded on the books of the Companies as "travel expenses, airline miscellaneous or broker deposits." Subsequently Hoffenberg directed that these checks be recorded as management fees. In fact, the checks were issued to pay for the rental of a private airplane and its maintenance costs which were the obligations of the Towers Organization and Towers World Airways Inc., affiliates of the Controlling Companies. On information and belief, Towers Financial guaranteed the rental obligations on a lease between Towers World Airways Inc. and EAF Aircraft Sales, Inc. 43. Other disbursements included a series of checks payable to Jeff Epstein or Jeff Epstein & Co. totaling $215,000. At different times Hoffenberg claimed that the expenditures were for broker's fees on investment advice associated with an investment in the capital stock of Emery Air Freight ("Emery"). Within a period of shortly over six months the Companies lost —13— bin') ew It' ll 'VI rin- L7 :l :u EFTA00612530  .. • approximately $2 million on the Emery investment. 44. Although often requested to provide the vouchers supporting the issuance of the above described checks, Roffenberg refused and continues to refuse to provide same. Improper Investments 45. The Illinois Insurance Code and regulations issued thereunder set forth the requirements for purchasing and selling securities and the manner of and location for holding same. The procedure for the making of loans is also set forth therein. Specifically: (a) 111. Rev. Stat. Ch. 73, 1 137.12a(c), precludes an insurance company from investing an amount in excess of 10% of its capital and surplus in the common stock of any one corporation. (b) Ill. Rev. Stat. Ch. 73, 1 736.1 (1987), requires that directors must authorize or ratify investments or loans; (c) Ill. Rev. Stat. Ch. 73, V 745 (1987), requires that books, records, accounts and vouchers must be prepared so that the company's financial condition and financial statements may be readily verified. Further, securities must be kept within the state; (d) Ill. Rev. Stat. Ch. 73, ¶ 752 (1987), requires that vouchers be maintained for disbursements in excess of $100; (e) Ill. Admin. Code tit. 50, $ 904.10 (1987), requires that securities be registered, issued to, and carried in the name of the insurance company; (f) Ill. Admin. Code tit. 50, S 904.20 (1967), requires that the transfer or sale of securities be approved by the Board of Directors and have at least two authorized signatures; -14- Gin•A WV 7P:11 ILI ur7-br-v:v EFTA00612531  (g) Ill. Admin. Code tit. 50, 5 904.30 (1987), requires at least two authorized signatures on checks in excess of $5,000. 46. In violation of these laws, Hoffenberg, for the benefit of the Controlling Companies, transferred all of the bonds of Associated and United Fire, valued in excess of $2.5 million, to brokerage accounts in the State of New York. These transfers were completed by Hoffenberg alone, without the requisite documentation and approvals. While the bonds remained under Hoffenberg's control in the brokerage accounts, the interest earned on the bonds was used for the benefit of Hoffenberg' and the Controlling Companies and the Companies were deprived of the interest. 47. The individual defendants permitted the above described bonds to be placed in margin accounts, permitting those acting on behalf of Associated and United Fire to.borrow from the brokerage firms in violation of Illinois law. 46. on January 21, 1988, Towers Financial contributed $1.8 million to the capital of United Fire in satisfaction of the requirement imposed by the Director when he approved the acquisition of the Diversified capital stock by Towers Financial. On the same date, Hoffenberg, as the sole signator, wrote a check from a United Fire account in the identical amount to Merrill, Lynch, Pierce, Fenner and Smith, Inc. The funds were then transferred to an account in the name of United Fire Insurance Company with the brokerage firm of Guinan and Company, Inc. in the State of New York, contrary to law. Within the -15- amn%; wv 7C:I I IVJ C11)7_4,7...fly EFTA00612532  following five days, 531,300 shares of Emery were acquired in the account at a cost in excess of $4,000,000. Contrary to law, the individual defendants failed to prepare any documentation authorizing the purchase. To acquire the shares of Emery Air Freight, an amount in excess of $2,000,000 was borrowed from Guinan and Company, inc. 49. The $4 million investment in Emery stock, contrary to law, exceeded 10% of the capital and surplus of United Fire which at the time of the purchase was negative according to regulatory accounting practices. 50. The individual defendants used the bonds owned by Associated and United Fire as collateral for additional purchases of Emery stock on margin. The individual defendants failed to prepare the requisite documentation authorizing the transactions. 51. To conceal the wrongful acquisitions of Emery stock and the resulting loans, the individual defendants, without approval of the Companies' Boards of Directors and contrary to law, caused the stock to be transferred between accounts in the following brokerage houses in the State of New York: Rodman and Renshaw, Inc.; Kuhns Brothers and Laidlaw, Inc.; McKinley Allsopp Inc.; Guinan and Company, Inc.; Ernst & Company; Bear Sterns and Company, Inc.; Edward A. Viner and company, Inc. and Fahnestock and Company, Inc. The securities were held in the name of United Fire, Associated, Tower Financial-Associated Life Insurance Company and/or Tower Financial-United Fire Insurance Company. -16- /In •J WV 'r• I1 liJ EFTA00612533  52. Only $1.8 million of the investment was recorded on the books of United Fire. The margin loan was never recorded. In a further effort to conceal the improper use of the $1.8 million invested in Emery Stock, Hoffenberg advised the Chief Financial Officer of United Fire that the $1.8 million was invested in a money market account. 53. On information and belief, the purchase of the Emery stock was part of a plan by Hoffenberg and the Controlling Companies to acquire control of Emery. 54. Within approximately six months of the initial purchase, the individual defendants authorized the sale of all of the Emery stock at a loss. Hoffenberg and Brater have advised the Companies that substantially all of the $1.8 million used for the Emery investment was lost together with the interest earned on the Associated and United Fire bonds. 55. Contrary to law, the purchase and sales of Emery stock were not authorized by the Boards of Directors of the Companies or any duly authorized committee of the Boards of Directors. 56. Contrary to law, the loans utilized to acquire Emery stock were not authorized by the Boards of Directors of the Companies. similarly, the Emery stock was neither registered in the name of the Companies nor located within the state. 57. The investment in Emery stock is departure from traditional insurance company investment practices. The investment was made by the individual defendants with reckless disregard for the risk factors associated with the investment and -17- 01f1'..! WY 7c:Ii 1M4 EFTA00612534  without regard to the need for investment earnings required by an insurance company to pay underwriting losses. 58. After the Conservation Order was entered, approximately $95,000 remained in a brokerage account with Ernst & Company ("Ernst") in the name of Associated. Rosoff fraudulently notified Ernst that the funds in the account were the property of Towers Diversified and directed Ernst not to deliver the funds to the Director, the duly appointed Conservator of Associated. Ernst, following Rosoff's direction, has refused to turnover to the Director the balance of the account. 59. In October 1988, $56,830.53 was in an account maintained in the name of Associated with McKinley Allsopp, Inc. A check in the aforesaid amount was made payable to Associated by Broadcourt Capital Corp., the firm through which McKinley Allsopp, Inc. cleared its transactions. The check was mailed to Associated to the attention of Hoffenberg at the offices of the Controlling Companies. The funds were never delivered to the Conservator for Associated and, on information and belief, the check was fraudulently converted to the use of one of the Controlling Companies. Funds Transferred to Affiliates 60. The Illinois Insurance Code provides standards for transactions between insurance companies, their affiliates and entities employed to provide management services. Specifically: (a) Ill. Rev. Stat. Ch. 73, I 639 (1987), prohibits payment of dividends and other -18- cin .1 mw 7c. rl TVJ EFTA00612535  distributions without sufficient surplus; (b) Ill. Rev. Stat. Ch. 73, 1736.2 (1987), prohibits investments or loans to entities in which any officer or director has a financial interest; (c) Ill. Rev. Stat. Ch. 73, I 743.20 (1987), provides that material transactions with affiliated companies be fair and reasonable, the books and accounts of the affiliate be maintained to clearly and accurately disclose the nature of the transactions, and transactions with affiliates must be reasonable in relation to surplus; (d) Ill. Rev. Stat. Ch. 73, I 743.20(a) (1987), requires that the Director be notified prior to distribution of dividends or any other transaction which might render the company's surplus unreasonable; (e) Ill. Rev. Stat. Ch. 73, 1 753.1 (1987) requires all management contracts and service agreements be filed with the Department of Insurance; (f) ill. Admin. Code tit. 50, $ 904.30 (1987) requires at least two authorized signatures on checks in excess of 55,000. 61. On June 1, 1988, Hoffenberg, as the sole signator, fraudulently issued a Diversified check in the amount of $1,000,000 to "Towers." Said check cleared through the bank account of Diversified. None of the officers of the Companies are aware of the purpose for the check. Hoffenberg failed to provide a voucher or other documentation for the check. Hoffenberg has refused and continues to refuse to provide information regarding the purpose of the check and refused and -19- n7n 'qv 7c:I i INJ C117_47-N;1? EFTA00612536  continues to refuse to identify the entity that cashed the check. There is no legitimate business purpose for said check. 62. On March 15, 1988, Hoffenberg, as the sole signator, fraudulently issued a Diversified check in the amount of $100,00O on an account in the name of Diversified to TFC Management, an affiliate of Towers Financial. The check cleared Diversified's bank. Hoffenberg refused and continues to refuse to provide a voucher or other documentation for the check. Hoffenberg refused and continues to refuse to provide an explanation for the transfer of $100,000. 63. Payments to "Towers" and TFC Management are not proper dividends because (a) they were not approved by the Directors of the Companies; (b) they were not approved by the Director; and (c) the Companies lacked sufficient surplus to pay dividends. 64. The payments to "Towers" and TFC Management were not proper payments of management fees since contracts for management services between the Companies and "Towers" and TFC Management were not approved by the Director. 65. The nature of the transactions involving the payments to "Towers" and TFC Management cannot be determined. The payments were neither fair and reasonable nor reasonable in relationship to surplus. -20- 17A A WY 7C:11 Ivi cirr-t7_1Jw EFTA00612537  COUNT I Claim For Fraud Against Hoffenberg And The Controlling Companies 66. The Director realleges and incorporates by reference Paragraphs 1 through 65 inclusive as though fully set forth herein. 67. With the intent to derive the use, enjoyment and profits from the Companies and with the intent to injure the Companies, Hoffenberg devised a fraudulent scheme wherein he could, under the guise of acting for the Companies, acquire the assets of the Companies for his own personal gain or use, or the gain or use of Towers Financial or Towers Diversified. 68. /n order to accomplish this fraudulent scheme, while acting in his capacity as Chairman of Towers Financial, Towers Diversified, Diversified, Associated and United Fire, Ho£fenberg caused Towers Financial and Towers Diversified to gain control of the Companies. At the time of gaining control over the Companies, Hoffenberg represented to the Department of Insurance and the Companies that the Controlling Companies would infuse surplus into United Fire, thereby rehabilitating the ailing Companies. 69. Hoffenberg concealed his actual intentions of not infusing surplus into United Fire but converting the assets of the Companies to himself for his own personal gain or use or to Towers Financial or Towers Diversified for their gain or use. 70. The Department of Insurance reasonably relied on Hoffenberg's representation that he would infuse capital into —21- 770 J WV 7c.' i iai ctn-_;-_41v EFTA00612538  United Fire. 71. In order to accomplish this scheme, Hoffenberg transferred securities and cash valued in excess of $6 million from the Companies, resulting in their insolvency and causing them to be placed in conservation and/or liquidation. These transfers were accomplished by improperly removing the Companies' bonds from the State of Illinois and either transferring funds to the Controlling Companies or their affiliates or using the funds for the benefit of Hoffenberg or the Controlling Companies. 72. Hoffenberg made these transfers and issued checks knowing that the funds were not being used on behalf of the Companies, intending to transfer the funds to himself for his own personal gain or use, or to Towers Financial or Towers Diversified for their gain or use. 73. The Companies reasonably relied on the assurance of Hoffenberg that he was acting in the best interests of the Companies. 74. In an effort to conceal the fraud, Hoffenberg hid and refused to identify where securities and funds were transferred and concealed the purposes of the transfers of funds and securities. 75. By concealing their intent not to infuse the necessary surplus into United Fire, Hoffenberg and the Controlling Companies fraudulently obtained the approval of the Director for the acquisition of the Diversified stock and the continued operation of the Companies and the depletion of their assets. -22- rni cr:Ti .cio^_r_nw EFTA00612539  76. By mailing fraudulent financial statements which Bof£enb