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Marc S. Dreier, the founder of Dreier LLP, which grew from a handful of lawyers in 1996 to 238, was arraigned Monday before a magistrate judge in the Southern District of New York on federal charges of pawning off $113 million in bogus securities to two hedge funds. Separately, the Securities and Exchange Commission filed suit to recover the $113 million. Southern District Judge Miriam Goldman Cedarbaum, who will oversee the SEC’s action, said she will appoint Mark Pomerantz of Paul Weiss Rifkind Wharton & Garrison as receiver to protect Dreier’s assets. In another civil suit filed Monday in the Southern District, Wachovia Bank alleged the Dreier firm and Dreier had defaulted on a $9 million revolving credit note made in connection with a $14.5 million credit agreement and a term note in the amount of $5.5 million. In addition to seeking judgment on the loan documents, Wachovia is asking the court to enjoin the firm or any of its current, former or departing attorneys from disposing of any collateral belonging to the bank. Meanwhile, in the wake of Dreier’s arrest last week on an impersonation charge in Toronto, many lawyers were jumping ship. In his initial appearance Monday before Magistrate Judge Douglas Eaton, Dreier looked haggard and wore a collarless long sleeve shirt and blue jeans. His brow was furrowed and he blinked often. When Magistrate Judge Eaton asked if him if he understood his rights, Dreier quietly answered, “Yes.” His lawyer, Gerald L. Shargel, asked for a continuance until Thursday morning to discuss bail conditions. Shargel asked that his client, who pleaded not guilty, be held at Metropolitan Detention Center in Brooklyn rather than the Metropolitan Correctional Center in Manhattan. “He has had a very difficult couple of days,” Shargel said. Outside the courtroom,Shargel said, “This is a very complicated matter, and facts are beyond the reach of a simple sound bite.” Dreier “voluntarily surrendered in Canada, came back from Canada voluntarily and he is here to resolve these charges,” Shargel said. In reference to lawyers leaving the firm, Shargel said, “Given the reactions of the partners, I don’t think there is any firm to run.” The complaint unsealed in the Southern District Monday charged Dreier with one count each of securities and wire fraud. He faces a maximum sentence of 20 years in prison if convicted on either count. He also could be forced to pay a fine equal to twice the value of any illegal gains. The securities fraud count was based on Dreier’s “sale of fictitious notes that purported to have been issued by a real estate company” to a New York City-based hedge fund for $100 million. In a second bogus transaction, Dreier was accused of fraudulently selling fake securities to a Connecticut-based hedge fund for $13.5 million. The New York Times has reported that Solow Realty, a major developer, had complained to federal authorities that Dreier may have been selling bogus financial instruments, purportedly from Solow, to unsuspecting investors at hedge funds. The Dreier firm previously represented Solow Realty. The complaint also charges Dreier with attempting to sell $44.7 million in bogus instruments to the Fortress Investment Group, a transaction at the heart of his arrest last week in Toronto. The complaint accused Dreier of falsifying financial statements and other documents, including signed audit letters from an accounting firm, in connection with the two sales that were consummated. BOGUS DEALS In the complaint, federal investigator James J. Otten reported that Dreier had admitted in a surreptitiously recorded conversation that an audited financial statement from an accounting firm was fake. In the conversation, Dreier was recorded as saying that he was “ashamed” that both the underlying financial documents and the auditor’s letter were false. He also stated it was “very serious what happened here.” According to Otten, Dreier sold the bogus notes by telling various hedge funds that he represented both the initial investors and the real estate developer who was selling the promissory notes. He told the hedge funds that the financial meltdown was forcing the investors to sell the notes, telling a Connecticut hedge fund it could purchase them at a significant discount, according to the complaint. In the alleged $100 million sale, Dreier also is accused of arranging a conference call during the negotiations with the fund’s portfolio manager in which the developer’s chief executive officer supposedly participated, when in fact the developer’s real CEO told Otten that he did not issue any of the notes described and that his signatures on some of the notes were forged. JUMPING SHIP Meanwhile, several attorneys from Dreier’s intellectual property practice have left the firm and launched their own practice. In an interview, Seth Ostrow, former chair of the firm’s patent department, confirmed that he has teamed up with former Dreier partners Matthew L. Kaufman and Arianna Frankl to form Ostrow Kaufman & Frankl. In addition to Timothy J. Bechen, a former intellectual property associate at Dreier, who will join the new firm as a partner, Ostrow said he has outstanding offers to three other Dreier associates and counsel, whom he declined to identify. While Ostrow referred to Dreier’s current predicament as “disgusting,” he wished his former partners well and said he hopes “everyone lands on their feet.” “This presents a very exciting opportunity for us and we’re looking forward to the future,” he said of his new endeavor. Meanwhile, matrimonial, employment and bankruptcy lawyers also have fled the firm, one lawyer said. Dreier was arrested Sunday evening by federal agents at LaGuardia Airport as he disembarked from a plane from Toronto. He was accompanied by Shargel, who had spent the weekend with him in Canada. Shargel has represented numerous white-collar and organized crime defendants, including deceased Gambino family don, John Gotti. A source reported Monday that the New York City office of Dreier had been “locked down by federal agents for the past 24-hours.” A lawyer at the firm reported that Dreier, the firm’s sole equity partner, had spent “a fortune” on the firm’s New York and Santa Monica offices. The New York office, which is located at 499 Park Ave. at 60th Street, has its entrance on 60th Street with a private elevator to its offices, which are on at least seven floors, the lawyer said, adding “everything is top notch.” CANADA ARREST Dreier’s troubles first surfaced last Tuesday when Dreier was arrested in Toronto for impersonating a lawyer with the Ontario Teacher’s Pension Fund, Michael Padfield. The Toronto episode was one of three where Dreier was accused of selling bogus instruments. His arrest foiled the alleged attempt to make a deal with Fortress Investment Group, a New York asset management fund. According to The Wall Street Journal, Dreier represented that the teacher’s funds was involved in the deal when it was not. On Friday, Dreier pleaded not guilty to the impersonation charge and was released on $100,000 Canadian bail ($78,700 in U.S. dollars). Dreier, 58, a Yale College and Harvard Law graduate, was the former head of litigation in the New York office of Fulbright & Jaworski and, more recently, a partner at Rosenman & Colin. Founded in 1996, the New York-based firm that carries his name operates more like a corporation than a partnership, with Dreier, the sole equity partner, controlling expenses and liabilities. All other partners get guaranteed base compensation for two- or three-year periods and a bonus based on fees generated. Dreier LLP was one of several firms that hired refugees from Milberg Weiss after that firm was indicted. Mark Hamblett, Noeleen G. Walder and Nate Raymond contributed to this report.

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