The Bizarre Fall of a Lawyer

In one of the most baffling fraud cases in years, a prominent New York securities lawyer has been accused of engaging in an elaborate scam against hedge funds.

The lawyer, Marc Dreier, the founder and sole owner of the 250-lawyer Park Avenue firm Dreier, was arrested in Toronto last week on charges that he impersonated a lawyer for the Ontario Teachers' Pension Plan. Dreier was released on bail on Friday and was arrested upon returning to New York on Sunday.

The lawyer is accused of selling $113 million in fake promissory notes to hedge funds and other private investment funds. According to the S.E.C. complaint, Dreier "created an elaborate charade designed to convince purchasers that the notes were genuine." The charade included phony financial statements, fake audit opinion letters and even dummy email addresses and telephone numbers.

"Our complaint alleges a stunning, brazen fraud that targeted some very sophisticated institutional investors," said Linda Chatman Thomsen, Director of the S.E.C.'s division of enforcement.

In October, Dreier told a Connecticut hedge fund that a New York real estate developer was selling promissory notes, federal prosecutors said. Dreier told the hedge fund that certain investors were anxious to sell the notes because of a need for cash in the financial crisis; Dreier, in his role as middleman, said that the notes could be sold to the hedge fund at a discount, prosecutors said. That fund sent $13.5 million to Dreier

Another hedge fund, this one based in New York, agreed to buy $100 billion of notes purportedly from the same developer. Dreier even set up a conference call with someone pretending to the C.E.O. of the developer, prosecutors said.

Dreier was in Toronto trying to sell more than $40 million of fake notes, prosecutors said. The case comes the same that Dreier was sued by Wachovia for defaulting on $12.6 million in loans. He has been charged with one count of securities fraud and one count of wire fraud. Each has a maximum penalty of 20 years in prison.

The criminal charges and the S.E.C. complaint almost certainly spell the end of a prominent securities law firm. And if Dreier is guilty, one has to wonder how a smart successful lawyer could think he could get away scamming hedge funds.

There is some tragedy here no doubt. Many questions remain.