The Dreier Case: Where's All The Money?
12.10.08, 4:10 PM ET
The bizarre circumstances of Marc Dreier's arrests in Canada and New York in the last week, and accusations of a brazen $113 million fraud may ultimately take a backseat to a bigger question emerging from the saga: Where did all the money go?
At the time of Dreier's arrest in Toronto on Dec. 2, tens of millions of client funds were missing from escrow accounts at his prominent 238-attorney law firm, Dreier LLC, which counts several celebrities and sports stars as clients. Dreier even managed to transfer $10 million by telephone from escrow accounts to his personal account while sitting in a Canadian jail awaiting a bail hearing, court records say.
The prominent attorney's fall from grace has left the firm in dire circumstances. According to court documents filed Monday, it is four weeks behind on its malpractice insurance payments and hasn't paid December health insurance premiums or rent for its Park Avenue offices. AT&T canceled BlackBerry service for employees on Monday.
Dreier, the sole equity partner, is the only person authorized to make transfers from the escrow accounts and apparently the only one who can authorize the transfers to pay the bills. The court documents detail a firm in disarray, with no one in charge and nearly $40 million worth of art work left hanging on walls of nearly abandoned offices.
The Harvard- and Yale-educated litigator has, until now, led a high-octane career, with stints at Fulbright & Jaworski and Rosenman & Colin before founding his own firm in 1996. His personal life has been described as opulent, with homes in Manhattan and the Hamptons and a 120-foot yacht.
Prosecutors accuse Dreier of selling $113 million worth of fake notes to two hedge funds in an elaborate scheme. One of the funds was refunded its $13 million investment after it was tipped off to potential fraud.
Dreier allegedly fabricated the notes and supporting documents and even used elaborate ruses involving accomplices to convince potential investors. He also tricked employees of a New York real estate developer and an accounting firm into granting him access to office space to meet with investors.
As the alleged fraud was unraveling, Dreier firm employees noticed something else amiss. Significant funds were missing from escrow accounts--the firm had eight co-mingled accounts and eight separate accounts maintained for individual clients.
A court statement by a Dreier law partner says $37.5 million of $38 million attributed to a single client had been transferred from the firm's escrow accounts into an account controlled by Dreier, but the statement didn't give a time-frame for that transfer.
The tip-off about the missing funds was a request by a Dreier partner, Norman Kinel, to Dreier to disburse $38 million in client escrow funds for unsecured creditors of 360 Networks, a Seattle telecommunications firm that had been in bankruptcy in 2001 and 2002. The Dreier firm represents the unsecured creditors.
Kinel first requested the funds on Dec. 1, and on Dec. 2, when he realized the transfer hadn't been made, he twice requested the funds again. He learned of Dreier's arrest on Dec. 3 and, through a lawyer, contacted the Federal Bureau of Investigation and the U.S. attorney.
John Provenzano, the law firm's controller, said in the court documents that at the time of Kinel's request, the escrow accounts had only $19 million in them.
Even while Dreier sat in jail in Toronto awaiting his bail hearing, he was attempting to transfer funds out of the escrow, according to the court documents. He asked for $8 million on Dec. 3, which Provenzano says he denied. And he asked for $10 million on Dec. 4 by talking directly to the firm's bank after Provenzano denied him again.
Dreier was in contact with partners at the firm those two days, according to the court documents. Asked about the missing escrow funds for 360 Networks, Dreier is reported to have said he could have sold some of the art collection to return the money if he had been allowed to return to New York.
"I understood from his conversation that Mr. Dreier was implicitly admitting he had improperly used client escrow funds," says the court declaration by Joel Chernov, one of the partners at Dreier who was on that phone call.
Just over $3 million of client escrow funds have been returned to clients, but many more requests have been made for the rapidly diminishing pool. The Securities and Exchange Commission, which filed a civil fraud suit in conjunction with criminal charges filed against Dreier on Monday, asked the court to freeze Dreier's assets.
An accounting firm employee, cooperating with prosecutors, got Dreier on tape admitting to be "ashamed" of his role in fabricating the notes, according to the U.S. Attorney in Manhattan.
The case took an even more bizarre twist last week when Dreier was arrested for impersonating an employee of the Ontario Teachers Pension Plan. Canadian prosecutors say he was trying to convince Fortress Investment Group, another hedge fund, to invest $40 million or so in notes guaranteed by the pension fund. He allegedly impersonated the fund's senior counsel in its offices to meet with Fortress representatives.
Prosecutors haven't said whether they have located the $100 million that Dreier got from allegedly selling the fake notes.
Dreier was released on $100,000 cash bail (in Canadian dollars) in Canada on Friday and arrested by U.S. prosecutors on Sunday when he arrived at LaGuardia Airport. Dreier's lawyer, Gerald Shargel, was not immediately available to comment.