As Marc S. Dreier was being arrested for attempting to defraud hedge funds of more than $100 million, some of the 10 affiliates of Dreier LLP were peeling off and others were trying to hold the firm together even as money for insurance and some operating expenses is frozen.
Declarations filed Monday by the Securities and Exchange Commission in connection with a civil case it brought against Dreier also indicated that some firm attorneys were concerned that escrow accounts, which Dreier controlled, had been depleted.
One named partner of an affiliated firm, Vincent Pitta of Pitta & Dreier, stated in a declaration that the firm could not meet its expenses. The reason, Pitta said, was that he and Dreier were the sole signatories to the firm's operating account, and Pitta had only limited authority to approve spending.
Premiums on health insurance and malpractice policies for the 13-member firm were not being paid and that coverage would soon lapse, Pitta reported.
"The news of Mr. Dreier's arrest has had a neutron bomb-like effect on Dreier LLP, although P&D firm operations are continuing unabated and we are vigorously representing our client's interests," Pitta said.
Pitta & Dreier, formed in 2005, concentrates on labor, employment and employee benefits issues. The firm is one of 10 affiliated entities over which Dreier shared control.
The affiliates paid their revenues into the accounts and Dreier, the sole equity partner, paid the affiliate's expenses, including fixed salaries and incentive compensation for "partners" or "principals."
The declarations were filed in support of the SEC's application to Southern District Judge Miriam Goldman Cedarbaum for a temporary restraining order, a preliminary injunction, an asset freeze and other relief.
In another declaration, Joel A. Chernov, a partner in Dreier LLP and its predecessor Dreier & Baritz, said the firm's December rent was overdue on its offices at 499 Park Ave., and that AT&T was set to terminate BlackBerry service.
Chernov said no one at the firm had the authority to pay unpaid invoices and "many" Dreier LLP attorneys and staff have left the firm.
"It is my understanding that they have taken certain files with them," Chernov said.
Pitta said he recommended to other partners that an inventory of all the firm's property be taken to "prevent unauthorized removal" but no one had done so because "in Mr. Dreier's absence no one is in charge of Dreier LLP or empowered to authorize the expenditure needed for an inventory to be taken."
The job of conducting an inventory and preserving the firm's assets will now fall to Mark Pomerantz, a partner at Paul Weiss Rifkind Wharton & Garrison who Judge Cedarbaum said she would appoint as a receiver in the SEC case.
Pitta said in his declaration that, since the firm was founded, he had written few checks on the operating account. Pitta can withdraw funds only to meet ordinary reimbursable client expenses, draw on a "marketing allowance" and take his firm's members base or bonus compensation that is past due.
ACCOUNTS DEPLETED
The SEC also on Monday filed declarations from firm controller John Provenzano and Dreier lawyer Norman N. Kinel.
Provenzano detailed how millions of dollars were missing from client accounts. He stated that he was aware since he took his position in August 2005 of the disbursement of between $30 million and $40 million in Dreier accounts to pay for works of art.
Dreier LLP maintained eight escrow accounts where client funds were commingled and eight other accounts for individual clients.
Provenzano stated, and Kinel confirmed, that Kinel e-mailed Dreier on Dec. 1 requesting disbursal of $38.5 million out of an escrow account on behalf of 360networks (USA) Inc., a client that had emerged from bankruptcy in 2002.
Dreier remains counsel for the official committee of unsecured creditors in connection with 360's Chapter 11 bankruptcy and Kinel asked for the money for distribution to unsecured creditors.
But Provenzano said in the document Monday that only $19 million remained in the accounts. He recounted that in phone conversations with other firm partners on Dec. 3 and Dec. 4 Dreier said that, had he not been in custody, he would have been able to return to New York and sell some of his art so the money could be returned.
On both days, Provenzano was asked by Dreier to transfer $8 million and then $10 million from the escrow accounts into Dreier's own accounts, but Provenzano refused to transfer the money.
Dreier made those calls from behind bars the day after he was arrested in Canada on a charge of impersonation, related to his dealings with the hedge funds.
Chernov and another Dreier lawyer, Steven R. Gursky, also received a call from Dreier on Dec. 4 from Canada.
"I understood from this conversation that Mr. Dreier was implicitly admitting that he had improperly used client escrow funds," Chernov declared in the SEC filings. "Mr. Gursky and I so informed the other partners in the firm later that day."
In addition to the SEC civil case, Dreier was arrested in the Southern District for allegedly committing single counts of securities fraud and wire fraud, but the investigation is continuing and more charges may follow. The fraud counts were the only ones listed in what was a bare-bones complaint by a Southern District criminal investigator seeking probable cause to arrest Dreier.
He made his initial appearance with defense attorney Gerald L. Shargel on Monday before Southern District Magistrate Judge Douglas Eaton.
Dreier is expected back in court this morning for a bail hearing on the criminal charges.
Raymond J. Lohier, deputy chief of the Southern District U.S. Attorney's securities and commodities fraud unit, and Assistant U.S. Attorney Jonathan R. Streeter are asking that Dreier be detained.
