Dreier law firm in turmoil after founder's arrest

NEW YORK Wed Dec 10, 2008 12:59pm EST

NEW YORK Dec 10 (Reuters) - The arrest of high-profile New York lawyer Marc Dreier for investment fraud has "had a neutron bomb-like effect" on his 250-attorney firm, with lawyers quitting and the law practice overdue on its rent and other bills, according to court papers.

Dreier LLP also has discovered that millions of dollars appear to be missing from client escrow accounts, firm controller John Provenzano said in a sworn statement filed by the U.S. Securities and Exchange Commission, which is seeking to freeze the assets of Dreier and his firm.

Dreier is the only employee at the firm authorized to direct transfers in and out of these accounts, the controller wrote in the statement, filed on Monday.

Dreier faces both criminal and civil charges following his arrest late Sunday on accusations of perpetrating a $100 million real-estate investment fraud. His defense lawyer, Gerald Shargel, did not immediately respond to a request for comment on Wednesday.

Dreier is in federal custody in New York and has a bail hearing set for Thursday. He is the sole equity partner of Dreier LLP, a corporate law firm specializing in litigation, bankruptcy and employment law with headquarters on Manhattan's Park Avenue.

His legal problems emerged last week when Canadian police arrested him on charges of criminal impersonation. He was released on bail, only to be arrested again by U.S. authorities upon returning to New York.

"The news of Mr. Dreier's arrest has had a neutron bomb-like effect on Dreier LLP," according to a sworn statement filed on Monday from Vincent Pitta, a partner at Dreier affiliate Pitta & Dreier LLP. Pitta said Dreier had no day-to-day operating role at the affiliate, whose operations are "continuing unabated."

Because Dreier was his firm's only equity partner, "no one is in charge" there and premiums on health and malpractice insurance have not been paid, Pitta wrote.

In another sworn statement, Dreier LLP partner Joel Chernov wrote that the firm's December rent payment is now overdue and that many attorneys and staff have left the firm.

Dreier, a 30-year legal veteran and a graduate of Harvard Law School, is accused in a criminal complaint of enticing hedge funds into buying fake promissory notes for a real estate developer, and then creating an elaborate charade to convince them that the notes were real.

After his initial court appearance on Monday, his lawyer said that "this is a very complicated matter, and the facts are beyond reach of a sound bite." (Reporting by Martha Graybow; Editing by Brian Moss)

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