A Manhattan bankruptcy judge has allowed a $137 million lawsuit filed by the trustee handling the bankruptcy estate of imprisoned ex-lawyer Marc S. Dreier against hedge fund Westford Asset Management, a net winner in Mr. Dreier’s Ponzi scheme, to go forward, though he has limited the scope of the recovery the trustee can seek.

In Gowan v. Westford Asset Management LLC, 10-5447, Southern District Bankruptcy Judge Stuart M. Bernstein said yesterday that Westford may have ignored “red flags” when it chose to buy promissory notes through Mr. Dreier. The notes were ostensibly issued by real estate developer Sheldon Solow, who in reality did not know Mr. Dreier was claiming to sell notes on his behalf. Mr. Dreier was arrested for the scheme in 2008.

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