New Charges in Dreier Case as Hearing Airs Forfeiture Issues
New York Law Journal
April 23, 2009
A former broker received $215,000 from law firm accounts to impersonate executives of a real estate development firm as Marc S. Dreier peddled tens of millions of dollars in phony promissory notes, the government charged Wednesday.
That accusation was made in a new criminal information filed in the Southern District against Kosta Kovachev, a former registered broker.
Also Wednesday, unsecured creditors of the now-defunct Dreier LLP, including former employees of the 250-lawyer firm, expressed their concern at an unusual hearing before three judges that they could be harmed by government forfeiture efforts against Dreier.
The creditors suggested that they should be regarded as "victims" of Dreier's fraud.
The initial criminal information filed against Kovachev in December charged him with a single count of conspiracy to commit wire fraud. The new information released Wednesday by Assistant U.S. Attorneys Raymond J. Lohier and Jonathan R. Streeter now charges Kovachev with conspiracy to commit securities fraud and wire fraud and substantive counts of both securities and wire fraud.
It also adds a forfeiture allegation seeking to obtain money parked by Kovachev in four different bank accounts.
Accompanied by his attorney, Paul J. Madden, Kovachev appeared briefly for arraignment on the new information Wednesday before Southern District Magistrate Judge Andrew J. Peck.
Kovachev waived indictment and entered a plea of not guilty. He is due back in court on May 18. Madden declined to comment when asked if his client is cooperating with the authorities.
The government alleges that Dreier drained the resources of his firm by selling, or trying to sell, more than $700 million in phony real estate development and pension plan notes over a four-year period. It claims that his victims sustained $400 million in losses.
A superceding indictment handed down in March said Dreier sold notes to at least 13 different funds and three individuals, an expansion on the initial indictment that had him defrauding three hedge funds with the help of Kovachev.
According to the new information, in early October Kovachev used his connections to introduce Dreier to an individual at a Connecticut hedge fund. The government claims Dreier told the fund it could invest in a $500 million "note program" by purchasing promissory notes at a discount from Solow Realty, a long-time client of Dreier LLP.
On Oct. 10, 2008, Kovachev allegedly received $15,000 from a Dreier LLP operating account. Five days later, Kovachev and Dreier walked into the offices of Solow Realty, where Dreier was a familiar face.
At Solow, Dreier allegedly met representatives of a New York hedge fund that had purchased $115 million in phony notes in 2006 and 2007 but were concerned about their investment.
Dreier allegedly ushered the representatives into a conference room, where he introduced Kovachev as a financial officer for Solow.
"Kovachev then discussed various financial records that purported to be records of the developer," the information states. "Those records were false and had not been prepared by or with the authorization of the developer."
According to the information, on Oct. 23, Kovachev was paid $25,000 by the law firm.
On the same day, the document states, Kovachev made a call from the Connecticut offices of Dreier LLP to a third hedge fund, also based in New York, to promote the sale of the fictitious Solow notes.
Dreier allegedly had sent the hedge fund documents he said were audited financial statements of the developer. When a representative of the hedge fund asked Dreier if he could speak to someone who actually had worked at Solow and ask about the financial statements, Dreier agreed to arrange a conference call with the chief executive officer of Solow -- a role that allegedly was played by Kovachev.
By late October or early November, the hedge fund had purchased in excess of $100 million of the notes, the government says. Also in late October, the Connecticut hedge fund purchased $13.5 million of the promissory notes.
According to the information, on Oct. 29, Dreier paid Kovachev $75,000, also from the law firm's operating account. The biggest payment, this one coming from a Dreier LLP attorney trust account, was made on Nov. 7 when Dreier paid Kovachev $100,000.
The case was assigned Wednesday to Judge Naomi Reice Buchwald.
Representatives of the unsecured creditors and the U.S. Attorney's Office met briefly Wednesday afternoon with Southern District Judge Jed S. Rakoff, who is presiding over United States v. Dreier, 09-cr-00085, the criminal case; Southern District Judge Miriam Goldman Cedarbaum, who is assigned to SEC v. Dreier, 08 Civ. 10617; and Southern District Chief Bankruptcy Judge Stuart M. Bernstein, who has been overseeing the Chapter 11 proceeding against Dreier LLP and Dreier's personal bankruptcy.
Gerald B. Lefcourt, representing the creditors, observed that the law firm creditors should be considered victims of Dreier's alleged fraud.
The government "confers victimhood on particular victims" of Dreier's alleged note fraud, even though it contends that the law firm is an "instrumentality of the crime," Lefcourt told the judges.
The government responded that Rakoff could at sentencing, apply the restitution statute to decide who was in fact a victim.
Some creditors, who were "unintended beneficiaries" of Dreier's fraud, were not "similarly situated" to buyers of bogus notes, said Assistant U.S. Attorney Sharon Cohen Levin. But she added she was "optimistic" that the government could work with the creditors to create "two pots of money" from which both creditors and crime victims could recover.
Lefcourt, in turn, questioned whether hedge funds and other note fraud victims, who wanted to "make a quick buck," were more deserving than the defunct law firm's creditors.
Rakoff took no action, instead asking the nearly 20 attorneys who attended the hearing if "we can start resolving any disputes that presently exist even if we do not know how much money is available."
Levin said the government would "take a stab" at coming to a "global agreement" and could start talking with other attorneys as early as next week.
Both Lefcourt and the Southern District U.S. Attorney's Office submitted letters to the court before the hearing laying out their view of the forfeiture issues.
Forfeiture, the most "cost effective tool for victim recovery," is particularly important in the case of Dreier, prosecutors wrote. For years, he used fraud victims' money to keep his ailing law firm "afloat," and the "victims' losses substantially exceed those of the creditors," the government argued in a 20-page memorandum.
The Dreier LLP bankruptcy does not stay the criminal forfeiture proceeding, and "the forfeiture proceeding is not subject to challenge by a bankruptcy trustee or creditors of the bankruptcy estate," according to the government's April 20 letter.
Lefcourt responded immediately prior to the hearing.
"The government has been unequivocal that the sole victims of Marc Dreier's criminal activities are those whose funds were directly stolen by Dreier in what is described as the various note frauds. It is they, and they alone, who have been anointed 'victims.' And, as the official victims, it is they, and they alone, who will be the recipients of restitution that will be paid from forfeited assets," Lefcourt said.
If convicted, either by trial or plea, Dreier will be required to forfeit to the government all property derived from the securities fraud and wire fraud offenses and all property involved in the money laundering offense.
But precluding unsecured creditors from sharing in forfeited funds is unfair for "a least two reasons," Lefcourt wrote. Not only has the government "cast an extremely wide net around" what assets can be forfeited, but it has reserved the right "to drain the bankrupt estate of any and all assets the Trustee recovers," he said.
To resolve the "impasse" between the government and unsecured creditors, Lefcourt suggested it would be "entirely sustainable" to consider as fraud victims the law firm's creditors.
In fact, creditors of the law firm, who merely offered goods and services "in what appeared to be entirely normal and routine contexts," could be regarded as "far more worthy victims" than hedge funds or investors, who blinded by their greed may have "engaged in the most minimal of due diligence."