Usually our discussion of hedge fund frauds revolves around unscrupulous promoters who engage in some sort of fraudulent behavior against hedge fund investors. Most of the time the fraud is based on some sort of ponzi scheme. However, in the case reprinted below, the fraud was actually perpetuated against many hedge funds, including some funds with a significant amount of assets under management. Even more incredible is that the fraud was perpetuated by a hedge fund attorney with a very impressive background. While this is slightly different than hedge fund affinity fraud, it does show that frauds can be found on all scales and that hedge fund due diligence is important for both investors and hedge funds. It is important, maybe now more so than ever, that hedge funds conduct proper due diligence on their counterparties when engaging in private placements and off-exchange transactions. Please contact us if you have any questions on hedge fund due diligence.
SEC Charges Marc S. Dreier, New York Attorney, With Multimillion Dollar Fraud; Seeks Emergency Relief
On December 8, the Commission filed a civil injunctive action in United States District Court for the Southern District of New York alleging that New York attorney Marc S. Dreier engaged in an elaborate scheme, that violated the antifraud provisions of the federal securities laws and raised at least $113 million from the sale of bogus promissory notes. According to the Commission’s complaint, Dreier is the founder and managing partner of Dreier LLP, a 250-attorney law firm headquartered in Manhattan. Along with its complaint seeking a permanent injunction, disgorgement of Dreier’s ill-gotten gains, and civil monetary penalties, the Commission filed an application for an emergency court order to freeze Drier’s assets and appoint a temporary receiver.
The Commission’s complaint, filed in federal court in Manhattan, alleges that since at least October 2008, Dreier has been marketing fake promissory notes, including bogus notes of a New York-based real estate development company, to hedge funds and other private investment funds, and has closed at least three sales. According to the complaint, Dreier created an elaborate charade designed to convince purchasers that the notes were genuine. He allegedly distributed phony financial statements and audit opinion letters of a reputable accounting firm, and recruited confederates to play the parts of representatives of legitimate companies involved in the transactions, even creating dummy email addresses and telephone numbers.
According to the complaint, Dreier directed that two purchasers of the bogus notes wire payment to what appeared to be his law firm’s escrow account. At least one note purchaser discovered the fraud and demanded, and received, the return of its investment. Approximately $100 million in known proceeds from the sale of the bogus notes remains unaccounted for.
The SEC’s complaint alleges that, among other fake securities, Dreier has been offering fictitious promissory notes of a New York-based real estate development company (the “developer”), a former client of Dreier and his firm. Since at least October of this year, Dreier has approached at least three different investment funds with an offer to sell them, at a deep discount, various short-term, unsecured promissory notes supposedly issued by the developer. Two of the investment funds agreed to purchase the notes (one fund purchased notes in two separate transactions) and forwarded approximately $113 million to an account in the name of “Dreier LLP Attorney Trust Account” in payment. A third fund was offered the notes, but declined to participate.
As alleged in the complaint, all of the offers were accompanied by documents that Dreier subsequently admitted he knew were fabricated. Dreier offered the notes for sale even though he knew that the developer had never issued the notes, had not authorized Dreier to market them and indeed knew nothing of their existence or Dreier’s offers or sales.
The complaint further alleges that in marketing the notes, Dreier provided the hedge funds with fabricated documents including a “form” note and related agreements, “audited financial statements,” and purported audit letters, which bore the forged signature of the developer’s auditor, but which were printed on purported stationary of the developer’s auditing firm. Dreier did not tell representatives from the hedge funds that the notes were bogus, that the “audited financial statements” and audit opinion letters were fabricated, or that the developer had never issued the notes or authorized Dreier to market them, despite Dreier’s knowledge of these matters.
As alleged in the complaint, Dreier has admitted that:
- The notes were fictitious.
- The notes had never been issued by the developer.
- The developer had never authorized him to market the notes.
- He had fabricated documents evidencing that the notes had been issued by the developer to the original holder even though the original holder may never have purchased any notes issued by the developer. In that connection, he or his confederates forged the signature of the developer’s CEO.
- The developer’s financial statements and the audit reports were fabrications.
- He knew that the phony financial statements and audit reports had been distributed to the hedge funds without disclosure that they were false.
The Commission seeks emergency and preliminary relief, including the asset freeze, appointment of a receiver and temporary restraining order and preliminary injunction, as well as a final judgment permanently enjoining Dreier from committing future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, ordering him to pay civil penalties and disgorgement of ill-gotten gains with prejudgment interest, and provide an accounting.
According to the complaint, Dreier is 58 years old and resides in Manhattan, and is a former partner at two prestigious law firms and a graduate of Harvard Law School and Yale College. In addition to its offices in Manhattan, the complaint alleges that Dreier LLP has offices in Manhattan, Los Angeles, California, Stamford, Connecticut, and Pittsburgh, Pennsylvania, among other places. [SEC v. Marc S. Dreier, United States District Court for the Southern District of New York, Civil Action No. 08 Civ. 10617(MGC)] (LR-20823)