Scandalous fall of the White Collar Thief
An article on Marc Dreier, the once prominent
Manhattan attorney who was arrested for orchestrating a massive fraud scheme
that netted over 700 million dollars from hedge funds.
BY SAHIL DESAI | 3 mins read
Marc Dreier was born in New
York and graduated with a law degree from Harvard Law School. After working at
various Wall Street law firms, he left to pursue something independently and
later on he was experiencing modest success as a senior partner in the
medium-sized law firm Dreier, Baritz & Federman. Dreier's restlessness
drove the other partners away, leaving him in sole charge of the firm, which he
renamed Dreier LLP.
Dreier's ruse began at this time, when he decided to greatly
expand his law firm and create a firm where partners were paid big salaries but
were not required to be equity partners. He would retain sole control over the
firm and finances. But to do so, he would need a lot of money. To raise money for the expansion, as well as to fund a
lavish lifestyle, Dreier began to borrow money from hedge funds (A hedge fund is an investment
fund that pools capital from accredited investors or institutional investors and
invests in a variety of assets, often with complicated portfolio-construction
and risk management techniques.), issuing fake bonds from a corporation, Solow Realty,
run by one of his clients, Sheldon Solow. Dreier
borrowed $20 million from hedge fund in Connecticut with the promise of
repaying the money along with the interest.
To make
the scam seem convincing, Dreier constructed a fake balance sheet and offered
interest rates that were slightly above the market rate. Initially Dreier hoped
that the profits from his law firm would repay the loans, but with the
expansion costing more money than expected, and as he acquired a taste for the high
life, his firm began to turn into a traditional Ponzi scheme. (A Ponzi
scheme is a fraudulent investing scam promising high rates
of return with little risk to investors. The
scheme generates returns for early investors by acquiring new investors).
Things went well for Dreier. He continued his classic Ponzi
scheme, and over the next two years issued $200 million worth of notes, selling
them to hedge funds in Manhattan and Connecticut.
But
things changed in 2008. Due to the economic downturn, financial markets began
to weaken and many investors started demanding their money back. To cover these
payments, Dreier borrowed more money from hedge funds. Dreier also began impersonating executives and even paid a former client
named Kosta Kovachev $100,000 to impersonate the CEO of Solow Realty inside the
actual Solow offices.
The hedge
funds started to grow suspicious and he became the subject of US attorney’s
office investigation. Dreier was finally arrested after an attempt to sell yet another fake security to a hedge fund in
Manhattan, claiming it was being issued by the Ontario Teacher’s Pension Plan,
which ended in disaster when a receptionist at the fund called the police after
being felt suspicious. After Dreier's arrest in November 2008, his law firm was
wound up and he would eventually be sentenced to 20 years in prison. The sale
of the firm's assets, as well as of Dreier's property, cut losses from the
gross figure of more than $700m, but investors still ended up $400m out of
pocket.
Lesson for Investors
While Holi signifies the victory of good
over evil and burning down our ill-habits, review and introspection is
necessary. Many of the losses could have been avoided
had the funds done more due diligence, rather than taking Dreier at his word. Indeed, the trigger for the collapse came when a
hedge-fund analyst contacted Solow Realty directly.