Unusual Cases: NY Attorney Charged With Criminal And Civil Securities Fraud

Another attorney was charged with both criminal and civil securities fraud. Some commentators have raised questions about what seems to be an increasing trend toward prosecuting attorneys. While there may be legitimate questions regarding some of these cases, based on the pending court papers in the actions filed yesterday, this matter seems more like a TV movie, complete with phony documents, a staged phone call, restitution by the accused when confronted by one victim and ultimately a confession to the authorities.

The accused: The cases were brought against New York Attorney Marc S. Dreier, head of the Drier LLP law firm. The firm has 250 attorneys in offices located in Manhattan, Los Angeles, Stamford, and Pittsburgh. Mr. Dreier was arrested on securities fraud charges in New York following his return from Toronto where he had been arrested earlier this month in connection with another alleged scheme.

The charges: The U.S. Attorney’s Office for the Southern District of New York unsealed a criminal complaint against Mr. Dreier on Monday. That complaint contains one count of securities fraud and one count of wire fraud. At the same time, the SEC filed a civil fraud action against the attorney. SEC v. Dreier, Civil Action No. 08 Civ. 10617 (S.D.N.Y. Filed Dec. 8, 2008).

The allegations: The two complaints detail a multi-million dollar fraud scheme. According to the court documents, Mr. Dreier engaged in a scheme to sell bogus promissory notes supposedly issued by a New York based real estate development company. That company was a former client. Mr. Dreier offered the fraudulent notes to three hedge funds.

First, Mr. Dreier solicited Hedge Fund I. That Fund ultimately purchased two groups of discounted notes, one for $83.6 million and a second for $16.25 million. To induce the Fund to purchase the discounted notes, Mr. Dreier furnished the purchaser with bogus documentation regarding the transaction. He also staged a telephone call, supposedly with the CEO of the issuer. In fact Mr. Dreier had one of his henchmen on the line, not the issuer’s CEO according to the court documents.

Second, Mr. Dreiser solicited Hedge Fund II in an effort to sell more discounted, but bogus notes from the real estate company. The scheme worked again. Fund II paid $13.5 million for the notes.

Third, Mr. Dreiser solicited Hedge Fund III as part of a continuing scheme to sell even more bogus notes. Fund III however, decided to check out Mr. Dreiser. It telephoned the audit partner named in an audit opinion Mr. Dreiser furnished them. The audit partner was real. The opinion was not. The audit partner told Fund III that the opinion was false. When Fund III learned that the audit opinion was false, it refused to go through with the purchase of the notes.

Restitution: Hedge Fund II subsequently learned about the discovery by Fund III. At that point, Fund II demanded that Mr. Drier pay back its money. He did.

The Confession: According to the SEC’s complaint, Mr. Dreier confessed key aspects of the scheme apparently to the authorities including the fact that:

• The notes were fictitious;
• The notes were never issued by the developer;
• He was never authorized by his former client to market the notes;
• He fabricated documents to facilitate the transactions; and
• The financial statements and audit opinions he furnished potential investors were false.

The cases filed by the U.S. Attorney’s Office and the SEC are pending. It is unclear if charges were also filed in Toronto.

More Criminal Securities Cases

Criminal enforcement of the securities laws continues to be a focal point with new charges in the Refco debacle and a criminal case against the Mayor of Birmingham and two of his friends following an SEC enforcement action.

First, there are new criminal charges in the on-going Refco scandal. A superseding indictment was filed last week against attorney Joseph P. Collins. U.S. v. Collins, Case No. 1:07-cr-01170 (S.D.N.Y. Filed Dec. 18, 2007). The superseding indictment adds bank fraud charges to those pending against the former Mayer Brown partner.

The new charges claim that Mr. Collins assisted Refco’s management in concealing from a group of banks the existence of the infamous “round trip” loan transactions at the center of the debacle and more than $2 billion in guarantees provided by Refco to third parties in connection with those transactions. These actions were taken to secure more than $1 billion in lines of credit.

The superseding indictment contains fourteen counts: Count 1: conspiracy to commit securities fraud, wire fraud, bank fraud and money laundering; Count 2: securities fraud; Count 3: securities fraud; Counts 4-5: false filings with the SEC; Counts 6-9: Wire fraud; and Counts 10-14: Bank fraud.

The initial charges against Mr. Collins stem from his role as longtime outside counsel for Refco. Those charges claim that Mr. Collins was a key participant in a massive financial fraud which concealed the actual financial condition of Refco from investors, lenders and the public. In the “round trip” transactions, a company controlled by Philip Bennett, Refco’s former CEO, would allegedly lend funds to Refco over the end of a period and then borrow them back after the closing to conceal Refco’s huge debts. Mr. Collins and his team facilitated this scheme and the SEC has a related case pending against Mr. Collins, discussed here. SEC v. Collins, Case No. 07 CV 111343 (S.D.N.Y. Dec. 18, 2007).

Those who have pled guilty in the Refco scandal include: Phillip Bennett, its former CEO, sentenced to 10 years; Tone Grant, a former owner, sentenced to 10 years; Robert Trosten, former CFO, awaiting sentencing; and Santo Maggio, former EVP, awaiting sentencing.

Second, Birmingham, Alabama Mayor Larry Langford and two of his friends, William Blount and Albert LaPierre were named as defendants in a 101-count indictment last week, keyed to a kickback scheme for county securities business. That indictment contains counts of conspiracy, bribery and money laundering. U.S. v. Langford, Case No. 2:08-CR-00245 (N.D. Ala. Filed Dec. 1, 2008).

The charges in the indictment center on a scheme which took place between 2002 and 2006. In that scheme Mayor Langford is alleged to have used his position as president of the County Commission to generate $7.1 million in brokerage fees for Mr. Blount and his brokerage in connection with county financial transactions. Mr. Blount, as part of the scheme, is alleged to have paid over $219,000 to lobbyist LaPierre. Messrs. Blount and LaPierre in turn are alleged to have contributed over $235,000 in gifts and cash payoffs to the Mayor to secure the business.

Previously, the SEC brought a civil injunctive action against the Mayor and his two friends as discussed here. SEC v. Langford, Civil Action No. cv-08-0761-S (N.D. Ala. April 30, 2008). That action is the Commission’s first enforcement case involving security-based swaps. The swaps involved an agreement to exchange periodic interest rate payments on an amount of debt. The complaint also involved the sale of municipal bonds. As with the criminal indictment, the case centers on a kickback scheme for county financial business involving the Mayor and his two friends. Both the SEC civil and the criminal case are pending.