At the end, when his longtime client had found out about the phony promissory notes and the auditor’s lawyer was threatening to turn him in, when the client escrow accounts had been plundered and the hedge funds had figured out the scam, when he had to come up with money for the hundreds of people he’d persuaded to work for him and there was nothing left to pay them with, when the houses in the Hamptons and the restaurant in Los Angeles and the condo in Anguilla and the yacht and the cars and the art collection were about to be exposed as mere props in the stage set of his life — when the inevitable had finally arrived — Marc Dreier was ready to give up.

On Dec. 2, when officials at the Ontario Teachers’ Pension Plan told Dreier that they’d reported him to the Toronto police for pretending to be a pension fund executive in an attempt to fleece yet another hedge fund, he could have tried to flee. Dreier had a private plane waiting for him at the Toronto airport. He had friends in Italy and Turkey, clients in Argentina and the Middle East. And he knew that in New York, everything was unraveling. For months he’d been on a desperate, manic tear, trying to keep the show going. But in Canada he knew it was over.

After Dreier returned to Manhattan and was charged with committing a $400 million fraud — the most brazen and spectacular deception in law firm history — people who knew him said that they were stunned. Lawyers at Dreier LLP, where Marc Dreier was the only equity partner, insisted there had been no signs that anything was awry. Dreier had been as dapper and confident as ever, flying around the world to meet with prospective clients. In fact, 2008 seemed to have been a banner year for both the man and the firm. The 58-year-old Dreier already had a name in New York, where he’d practiced for 30 years, but his splashy invasion of the Los Angeles market gave him a profile in California as well. He seemed to all the world to be nothing less than the extraordinarily successful head of a thriving firm. No one thought he was a con man.

Dreier has pleaded not guilty to prosecution charges, but the truth is that for at least the last four years, his professional life has been a sham. He was not the high-flying litigator or convention-busting law firm innovator he so badly wanted to be. Dreier had been dumped in 2006 by the most important client of his career — the billionaire real estate developer Sheldon Solow — after losing three big cases and racking up a couple of harsh judicial sanctions. His firm, despite its web of affiliations, its lavishly decorated offices and its spare-nothing approach to expenses, was not a firm at all. It was a collection of practices in which lawyers, all working on contract, rarely intersected with anyone outside of their small groups. His one-partner management model, which Dreier touted as revolutionary, was a failure. He had to borrow hundreds of thousands of dollars from a friend to renovate the Park Avenue office, and some of the $400 million he’s alleged to have stolen went, by Dreier’s own admission, “to cover millions of dollars in deficits incurred by [Dreier LLP and its affiliates] from operating expenses, capital expenditures, construction costs and security deposits.” It’s now clear that there was no legitimate way Marc Dreier could have afforded the extravagant life he lived.

What’s remarkable is that he fooled so many people for such a long time. At the firm there was talk of his prowess as an investor and about money he was said to have inherited from his father, who died in 2006. Mostly, though, there was faith in Dreier, who until last December, delivered on his promises to the lawyers who worked for him. He paid them what he was supposed to, when he was supposed to. Even when they look back, they say they had no reason not to believe in Dreier.

The only man who knew the truth — aside from a shadowy Serbian-born ally with a key card to Dreier’s office and a history of trouble at the Securities and Exchange Commission — was Marc Dreier. And in the end, when the Toronto police came for him, Dreier must have realized that he could no longer fool himself.

On Feb. 4, Manhattan Federal district court Judge Jed Rakoff agreed to release Dreier to home confinement under the surveillance of armed guards who will essentially turn his $12 million 58th Street duplex into a private jail. Rakoff called Dreier “a master of deceit and a doyen of dishonesty,” but decided that the guards — as well as a $10 million bond signed by Dreier’s 85-year-old mother and his intensely loyal 19-year-old son — would keep him from trying to flee.

Rakoff’s ruling came after a series of brutal hearings that exposed Dreier as a broken, friendless man. The most revealing of the sessions took place on the afternoon of Jan. 22, before U.S. magistrate Douglas Eaton. Dreier was escorted into the federal courthouse by U.S. marshals from the Metropolitan Correctional Center, where he had been locked up since federal agents arrested him at LaGuardia Airport on Dec. 7. The once-elegant Dreier, who prided himself on impeccable tailoring and a year-round tan, was wearing short-sleeved prison blues and slip-on sneakers — clothing that made him seem even smaller than he is. His eyes, though, were as fierce as ever, piercing blue under thick brows.

Dreier’s defense lawyer, Gerald Shargel, laid out before Eaton the bail terms that Rakoff would later accept. Eaton told Shargel he wanted to see some evidence that people who knew Dreier still had enough faith in him to sign a $20 million surety bond. “Mr. Dreier recently had friendships with dozens of multimillionaires,” Eaton said. “Who is willing to give us some reasonable assurance?”

The answer became painfully obvious at the hearing: No one, aside from his son and his mother, would vouch for Dreier. His sister had pledged to help pay $70,000 a month for armed guards, but Shargel said she and her husband would not co-sign the bond. Nor would Dreier’s brother, who’d been paid almost $1 million in the two years he worked at the California branch of Dreier’s firm; Shargel said the brother’s in-laws forbade him to help. Even Dreier’s onetime best friend, a Turkish hedge fund manager named Erinch Ozada — with whom he shared a now-frozen $10 million investment account and ownership of a $3 million condominium in the Caribbean — had abandoned him: At the Jan. 22 hearing prosecutors revealed that Ozada is cooperating with the government. “That’s a friend who’s no longer a friend,” Shargel said.

Dreier had nothing left, Shargel said. He had surrendered the black notebooks in which he tracked the $380 million he’s alleged to have stolen from hedge funds, revealing “in exquisite detail,” Shargel said, “where all of the money went.” Everything Dreier once had, Shargel said, was now in government hands.

But Eaton — like many people who once trusted Marc Dreier — could only focus on the astonishing crime Dreier is accused of committing. “His behavior was reckless, clever, and improvising,” the magistrate said. “That behavior, after he knew he was facing the prospect of criminal charges, is amazing.”

Dreier once seemed to be a perfectly ordinary big-firm lawyer. He grew up on the South Shore of Long Island, in an affluent area known as the Five Towns. His father, a Polish immigrant, owned a chain of movie theaters; the Dreiers were comfortable, but not rich. Dreier went to college at Yale and law school at Harvard, and began his legal career in the late 1970s at Rosenman, Colin, Freund, Lewis & Cohen, then a 90-lawyer litigation firm. According to two lawyers who knew him in those days, Dreier was well regarded at Rosenman. “He was a very smart, hard-working guy,” says one. “Funny, personable — part of the social mix.” Dreier was an exceptional writer, these lawyers say, but what most distinguished him was his ability to think on his feet. “He’s very quick,” says one. “Very smart.”

In the early 1980s, Dreier was named a partner at Rosenman. In 1987, he married a Rosenman associate named Elisa Peters. Their son, Spencer, was born in 1989, and their daughter, Jackie, three years later.

By then, Dreier had long since left Rosenman, part of an exodus of young partners. In 1989 he joined the New York office of Fulbright & Jaworski, which then had only a tiny litigation presence. Dreier would later make much of his title at Fulbright — co-head of litigation in New York — but the firm noted in a statement released after his arrest that at the time Dreier left Fulbright, in March 1995, there were only ten New York litigators.

Dreier kicked around for a few years after leaving Fulbright. He founded a precursor to Dreier LLP in 1996, but struggled to distinguish his practice.

Then, in 1998, he began working for a client who would have a profound effect on his ambitions and his prospects. Sheldon Solow, the son of a bricklayer-turned-developer in Queens, is a billionaire real estate mogul. Suave and silver-haired, he is a fearsome character in Manhattan real estate circles, not least because of his appetite for litigation. And in Marc Dreier, Solow found an enthusiastic confederate. Over eight years, Dreier handled about a dozen pieces of litigation for Solow, including three major cases. One — the last one, as it would turn out, before Solow stopped using Dreier in about 2006 — was a relatively straightforward, though unsuccessful, attempt by Solow to evict Bank of America Securities LLC from his flagship Manhattan building, 9 West 57th St., on the dubious grounds that one of the bank’s brokers had been accused of illegal trading. (Solow Realty & Development Co. referred a call for comment to a spokesman, who would only confirm that Dreier was once outside counsel for the company, which is now cooperating with prosecutors.)

Dreier’s preceding two big Solow cases were much less routine, and both showed that he was willing to skirt the ordinary rules of litigation on Solow’s behalf. In 2000 Solow launched a fierce battle for ownership of a $10 million oceanfront house in East Hampton. Peter Morton, co-founder of the Hard Rock Cafe restaurant chain, had signed a contract to purchase the home in a complicated deal with a doctor named Gary Feldstein. But before Feldstein and Morton completed the deal, Solow tried to break their contract and buy the place himself. Years of litigation followed. Every time Dreier and Solow were rebuffed in one court, they tried again in another, even when they’d been enjoined from doing so. Dreier filed suits in state courts in Manhattan and Suffolk County, in federal court in both the Eastern and Southern Districts of New York, in bankruptcy court in Florida, and in several corresponding appellate courts. “He had a certain glibness, this certainty that he could get away with that which other lawyers couldn’t,” says Feldstein’s lawyer, Kevin Smith of Stroock & Stroock & Lavan, whom Dreier named as a defendant in one of the suits. “He was like Gatsby without the charm.”

“Sheldon Solow said, ‘I want that house,’ and Dreier said, ‘I’m going to get it for Sheldon,’” adds Errol Margolin of Margolin & Pierce, who represented Morton in the litigation. Margolin says Dreier and Solow were very close, “like father and son,” and seemed to share contempt for their opponents, even as judge after judge ruled against them. “Everything [Dreier] did was over the line,” Margolin says. “He thought it was funny. He and Solow, they’d sit there in court, laughing.”

Solow never won possession of the house. In 2003 the 2nd U.S. Circuit Court of Appeals, citing their “extensive history of persistent, repetitive, and vexatious litigation,” ordered Solow and Dreier to pay double costs to Morton and Feldstein. Margolin estimates that in all, the litigation cost Solow $6 million in legal fees, much of it going to Dreier.

Dreier’s role in Solow’s feud with rival developer Peter Kalikow was even more bizarre. In February 2004, advertisements labeled “legal notices” ran in The New York Times and the New York Post. The ads informed “all unsecured creditors” in Kalikow’s 1994 Chapter 11 reorganization that they “might have additional rights of recovery” because of Kalikow’s failure “to make truthful disclosure.” Creditors were advised to contact a company called Evergence Capital Advisors, Inc., and many did: More than 50 calls and 18 faxes came in to the Evergence contact numbers.

For Kalikow the bogus notices were a costly embarrassment. He hired Manhattan criminal defense lawyer Stanley Arkin and his investigative agency, The Arkin Group, to find out who had placed them. Arkin Group investigators quickly discovered that Evergence was a defunct Florida corporation whose only officer was a man named Kosta Kovachev, a Belgrade-born, onetime Morgan Stanley broker facing SEC charges for his alleged participation in a $20 million Ponzi scheme. But the Evergence phone and fax numbers listed in the ad didn’t connect to the Florida company. Calls to the numbers went directly to telephone lines at 499 Park Ave. — the offices of Dreier LLP.

Arkin’s investigators eventually learned that Dreier had been the one who purchased the newspaper ads, using Evergence and Kovachev as a front. And after Manhattan federal bankruptcy court Judge Burton Lifland, who oversaw Kalikow’s bankruptcy, ordered Dreier to disclose his client’s identity, Kalikow’s lawyers confirmed their suspicion: Solow had hired Dreier to place the ads.

Lifland issued a scathing reprimand to Dreier and Solow, and ordered them to pay about $300,000 in sanctions to Kalikow. “The whole scheme was one of the most outrageous things I’ve ever seen committed in my 25 years of practice,” says Kalikow counsel Randy Mastro of Gibson, Dunn & Crutcher. “Until now. Dreier topped himself.”

Marc Dreier was always a show-off. Opposing counsel inevitably mention Dreier’s fine clothing and meticulous grooming, and his habit of traveling in a chauffeur-driven Mercedes, no matter if he was just blocks from his office. The Dreier LLP offices at 499 Park were famous for their opulence: a separate entrance in the lobby, marble everywhere you looked, and Dreier’s $40 million art collection — featuring showy pieces by such easy-to-identify artists as Andy Warhol and Roy Lichtenstein — hanging on the walls.

At some point in the last seven or eight years, though, Dreier’s push to impress accelerated. He and his wife separated in 2000, around the time that Dreier broke with a partner and started his own firm. That was also when he drew close to Solow. Whatever the precipitating event, Dreier began to behave with more urgency than he had before. In his personal life, he acquired more expensive trappings. He and his wife had owned a house in Westhampton; he bought a place in Quogue, and then the house next door. He bought the $18 million Seascape, outfitted it with a crew of 10, and docked it in New York and St. Martin. He dated beautiful women. An old friend paid a shiva call to Dreier’s East 58th St. apartment after his father’s death in 2006. “I walked in to the apartment and thought, ‘Wow,’” the friend says. “It was impressive.”

Dreier was also adding lawyers to his firm at an astonishing rate. From its core of about 10 lawyers in 2001, Dreier LLP jumped to about 50 in 2004, then 100 in 2006, and 175 in 2007. By the end of 2008, after a frantic yearlong acquisition spree in California that brought in highly regarded entertainment and corporate practices — and set them up in expensive offices in Santa Monica and Century City — the firm was up to 250 lawyers.

Dreier offered laterals an arrangement that seems to have been unique among law firms of any significant size. He was the lone equity partner of Dreier LLP, maintaining sole control over all financial information and decisions. “Partners” at the firm worked on two-year contracts. Some were guaranteed compensation that was a little less than what they’d been making at their former firms; rainmakers were often guaranteed more, sometimes more than $1 million. And if their billings met benchmarks they negotiated with Dreier, they’d also be paid bonuses. The system worked, Dreier told the lawyers who came to work for him, because he only brought in groups that were profitable, and because the firm’s idiosyncratic structure permitted attorneys to spend all their time practicing, not worrying about management.

“The model sounded right,” says one lateral. “It seemed like a great way to practice. You weren’t thinking about the bureaucracy, wasting time in meetings.” This lawyer says that when he looked around, the Dreier model appeared to be working. “People were getting paid,” he says. “People were busy.”

It didn’t seem to matter that there wasn’t much interaction between practice groups, inside the office or out. Dreier LLP had perhaps one partner lunch a year and one summer outing at Dreier’s house in Quogue. Partners also say they had little contact with Dreier himself. “He didn’t socialize with the partners,” says one. “He kept to himself.”

To this day, Dreier LLP partners don’t know if the firm was making money, but filings in Dreier’s criminal case and in the firm’s bankruptcy make it seem extremely unlikely. Dreier admitted in a statement that accompanied his Jan. 15 bail application that some of the $380 million he’s alleged to have stolen from hedge funds went to cover millions in law firm deficits. Creditors of the firm are owed more than $88 million; in late January the Dreier LLP bankruptcy trustee and two other creditors moved to place Dreier in personal bankruptcy.

But it’s not hard to understand how Dreier LLP lawyers believed the firm was a success. Dreier’s front was solidly constructed. Laterals kept joining — 75 lawyers in 2008 alone. He talked about global expansion, traveling with his friend Erinch Ozada, the hedge fund manager, to the United Arab Emirates and Qatar to discuss opening a Dreier LLP office in the Middle East. Right up until he was arrested, Dreier even continued to litigate in New York, as though he really were the prodigious rainmaker he purported to be.

In early November 2008, Thomas Manisero, a partner at Wilson Elser Moskowitz Edelman & Dicker, called Dreier. Manisero was counsel to an accounting firm — he won’t name his client but published reports have identified it as Berdon LLP, Solow Realty’s accountant. Manisero told Dreier that he had seen a forged audit report, written on his client’s letterhead, that had been used to try to dupe a hedge fund, reportedly Whippoorwill Associates, into buying bogus Solow Realty promissory notes. (Dreier allegedly claimed that Solow was looking to raise $500 million by selling short-term, high-interest notes.) With principals from Solow and the hedge fund also on the line, Manisero told Dreier that there were no such notes, and that he believed Dreier had forged the audit report. If Dreier couldn’t prove he hadn’t, Manisero said, he’d go to the police.

Dreier remained cool, though the call from Manisero was apparently his first hint that things were about to come crashing down. “That very first conversation, it was almost Lewis Carroll-esque-through the looking glass,” Manisero says. “He said, ‘I have to look into this.’ It was bizarre. He didn’t really answer my questions. I left the conversation saying, ‘That was strange.’”

But no more strange than the events that led up to Manisero’s call — or those that would follow it. For reasons that are still unknown, Dreier had become a desperate man in the last months of 2008. The government claims in its Jan. 29 indictment that Dreier had been fleecing hedge funds since 2004, but in late 2008, with help from Kosta Kovachev, he began to act with breathtaking recklessness.

On Oct. 15, the government alleges, Dreier showed up at the offices of Solow Realty, trailed closely by Kovachev. Dreier told Solow’s receptionist that they had a meeting with the company’s CEO, Steven Cherniak. Dreier waited in the reception area, then greeted two men whom he escorted to a conference room. Neither man was Cherniak, who later reportedly walked by the conference room and was surprised to see Dreier there. Instead, according to the government, the meeting was a brazen ploy to reassure the two men in the meeting-executives from an unidentified hedge fund-that the Solow notes that Dreier was peddling were legitimate. Fund managers, who had bought $115 million of the notes in 2006 or 2007, had demanded the meeting at Solow’s offices when they weren’t repaid on schedule. Dreier set it up, drafting Kovachev to pose as Solow’s controller. (Kovachev’s defense counsel, Andrew Rendeiro, did not return a call for comment.)

Dreier was also trying to sell notes to an unidentified Connecticut hedge fund in October 2008. The government alleges that Dreier sent the Connecticut fund’s managing director documents that he said were Solow’s audited financial statements, including the Berdon audit report that Manisero later confronted him about. The documents were convincing enough that the Connecticut hedge fund bought a forged $25 million note, purportedly signed by Cherniak, for $13.5 million.

An unidentified New York hedge fund needed more convincing. Dreier allegedly sent the New York fund the same phony documents that he’d given the Connecticut fund, but portfolio managers wanted more information. Dreier forwarded four e-mails that purported to be from other funds that had purchased Solow notes, as well as a Dreier LLP opinion letter vouching for the notes. That still wasn’t enough: A portfolio manager asked to speak directly to someone at Solow Realty. Dreier scheduled a conference call for Oct. 23, and supplied the portfolio manager with a Connecticut telephone number that he said was Solow Realty’s. It wasn’t. The telephone number Dreier provided, the government alleges, was actually for a conference room at Dreier LLP’s offices in Stamford. On the day of the conference call, Kovachev and Dreier took over the conference room. Kovachev allegedly got on the phone, and, pretending to be Solow CEO Cherniak, answered questions about the notes and Solow’s finances. The next day the hedge fund bought about $100 million in notes.

Both the Connecticut and New York hedge funds remained suspicious, however. They brought their doubts to Solow Realty and its audit firm, Manisero’s client. Throughout November, Dreier was confronted with evidence that he’d been found out. One hedge fund manager told Dreier that he’d called Solow Realty, and copied him on an e-mail to Solow about the notes. Manisero called and e-mailed several times, demanding more information and threatening to turn Dreier in. “I sensed mounting desperation,” says Manisero. (It’s not clear when Manisero went to prosecutors, but Dreier’s lawyer has said that Manisero appears to have taped his calls to Dreier at the government’s request.)

Dreier kept up appearances, but at his firm things were quietly beginning to slide. Without informing partners, he failed to pay health and malpractice insurance premiums and the firm’s December rent.

On Dec. 1 bankruptcy partner Norman Kinel informed Dreier and the firm’s controller that a final $38.5 escrow payment to a client called 360networks Corp. was due. The controller discovered that the firm’s escrow accounts contained only $19 million. The rest, which had been in the sole control of Dreier, was gone.

And so was Dreier. He was in Toronto on a last-ditch mission: an attempt to extract $40 million from the Fortress Investment Group LLC hedge fund. Dreier had allegedly told Fortress that he was selling notes for a Canadian pension fund. He also said the notes were guaranteed by a second pension fund, the Ontario Teachers’ Pension Plan. On Dec. 2, Dreier went to the Toronto offices of the teachers’ fund. According to an account in The Toronto Globe & Mail, Dreier had a brief meeting with a fund official, then asked to use a small conference room to make phone calls. He paced the reception area until a Fortress executive named Howard Steinberg arrived. Steinberg was expecting to meet with Michael Padfield, a senior pension plan lawyer, about the guarantee on the notes. Instead, he was buttonholed by Dreier, who was allegedly pretending to be Padfield. Dreier led Steinberg to the conference room and presented him with the phony guarantee agreement. When Steinberg seemed skeptical, Dreier left the meeting and the building.

Later that afternoon Dreier was arrested by Toronto police. He had a weekend of freedom on bail in Toronto, then flew home to New York to face arrest.

The reckoning was quick for Marc Dreier’s law firm. It disintegrated within weeks of his exposure, with lawyers and staff dispersing into a harsh legal market. Some have been lucky enough to find new firms; others founded their own small shops. If there was a silver lining to Dreier LLP’s odd culture, it’s that practice groups were autonomous, so client relationships were clearly defined. Unwinding the financial affairs of Dreier LLP will be a much more complicated affair.

Marc Dreier, meanwhile, was indicted on Jan. 29, charged with seven counts of conspiracy and fraud. On Feb. 2 he entered a plea of not guilty before Manhattan federal district court Judge Jed Rakoff. Even if he cooperates with prosecutors and pleads guilty, he faces a prison sentence of 30 years. Shargel declines to discuss his plans for Dreier’s defense, though his public comments suggest that he’s working on a plea deal.

If there’s any alternative for Dreier, it may lie in a comment that magistrate Eaton made at the Jan. 22 bail hearing. As he had at Dreier’s first bail hearing, Eaton was marveling at the audacity of Dreier’s Canadian jaunt. Eaton told Shargel, “These are really extraordinary facts. His behavior was reckless, clever, improvising. Frankly, it suggests a mental disorder.”

Was Marc Dreier actually crazy? Or just crazy like a fox?

Editor’s note: For more background on the Marc Dreier case, see The American Lawyer article “Marc Dreier: Shades of Things to Come.”