Commingling Concerns in Dreier Mess

'Commingling' Concern Raised; Judge Authorizes Dreier Trustee
The New York Law Journal by Noeleen G. Walder and Daniel Wise - December 22, 2008

Southern District Chief Bankruptcy Judge Stuart M. Bernstein authorized the appointment of a trustee for the Dreier LLP Chapter 11 proceeding at an emergency hearing on Friday. Judge Bernstein acted after being warned by receiver Mark F. Pomerantz that there was "a huge amount of commingling" between the assets of the firm and its founder, Marc S. Dreier and sole equity partner, who is being held in jail without bail on allegations of a $380 million scam. Mr. Pomerantz, a partner at Paul, Weiss, Rifkind, Wharton & Garrison and former assistant U.S. attorney in the Southern District of New York, participated in the hearing via telephone. Judge Bernstein also authorized the expenditure of $666,000 to buy time until the trustee is in place, which is expected in about a week. The payments included $214,000 to keep the firm's malpractice insurance policy in place through at least Feb. 2 and $107,000 in wages for the 17 Dreier employees - two of whom are partners - who remain to wind down the firm's affairs. Judge Bernstein repeatedly expressed concern that matters be handled as economically as possible. For instance, he several times questioned whether, instead of paying to keep the former firm's health insurance afloat, a new policy could be purchased for remaining employees.

As of last week, the firm had about $1.1 million in its operating account, according to a lawyer for Wachovia Bank, which is suing to recover a $15 million loan. About 25 persons attended the hour-long hearing which proceeded smoothly with no opposition to the four motions brought by counsel for Mr. Pomerantz, who had been appointed as a receiver to stand in Mr. Dreier's stead in a civil recovery proceeding brought by the Securities and Exchange Commission. Among the spectators were Timothy Joseph McAuliffe Jr., a litigation associate who worked at Dreier for four years and caught the tail end of the proceedings. Mr. McAuliffe, whose wife is 8 1/2 months pregnant, said he attended the hearing to see if his insurance premiums would be paid by the firm. Under the terms agreed to at today's hearing, the trustee's receiver has authority to use up to $160,000 to keep the entire firm's health insurance policy in effect, unless a cheaper policy can be found to insure the skeleton crew of 17 remaining employees. Meanwhile, Mr. McAuliffe said that he makes ends meet by doing contract legal work and is looking for a job that offers health insurance, which he said can cost as much as $4,000 per month for a family. "Know anybody that wants to hire a securities arbitrator?," Mr. McAuliffe asked as he dashed home to spend time with his kids.

Mr. Dreier was arrested in New York on Dec. 7 on charges of securities and wire fraud for selling more than $100 million in fraudulent notes to three hedge funds. Prosecutors have said that the total amount involved in the fraud is at least $380 million. With lawyers fleeing the firm and the disclosure that as much as $38.5 million in escrow money is missing, Mr. Pomerantz filed a bankruptcy petition last Monday. But Brian S. Hermann, one of the Paul Weiss lawyers representing Mr. Pomerantz, said in reviewing its list of clients, Paul Weiss had discovered a potential for conflict because it and Dreier have many of the same clients. Further, Mr. Hermann said that if Mr. Dreier does not voluntarily file for personal bankruptcy, Paul Weiss would seek to force him to take that step. Gerald Shargel, Mr. Dreier criminal attorney, has suggested that Mr. Dreier has no plans to file for personal bankruptcy. Gregory Sipes, an attorney with the U.S. Trustee's Office, said that his office already had received resumes from potential appointees and was reviewing them. The new trustee will replace Mr. Pomerantz in overseeing the bankruptcy proceeding. Mr. Pomerantz will remain as the receiver in the SEC proceeding pending in the Southern District.

The SEC proceeding is not stayed by the Chapter 11 filing, but, as a practical matter, it is not likely to proceed until the criminal cases against Mr. Dreier is concluded because he would likely invoke the Fifth Amendment if questioned about the whereabouts of his assets, bankruptcy experts said. Concerns about Mr. Dreier's assets were also raised by Steven J. Reisman, who on Friday was appointed to investigate the disappearance of as much as $38.5 million from an escrow account being held by Mr. Dreier in a bankruptcy case where the firm had represented a creditors committee. Mr. Reisman, a partner at Curtis, Mallet-Prevost, Colt & Mosle, expressed concern that some of the $600,000 reported to have been in the firm's operating account when the Chapter 11 petition was filed last Monday may have come from the firm's escrow accounts. Referring to the Dreier firm's assets, Mr. Reisman said, "there doesn't seem to be a lot of money and every dollar is meaningful." Wachovia's lawyer, Joseph Lubertazzi, Jr., a partner at McCarter & English, agreed to the expenditures requested by Mr. Pomerantz as long as Judge Bernstein would agree to expand the lien the bank had to protect its loan. Judge Bernstein agreed that the bank needed the added protection. Steven J. Shimshak, a Paul Weiss partner, also representing Mr. Pomerantz, said that the firm had filed what looked to be a liquidation as a Chapter 11 reorganization to allow Dreier's 10 affiliate firms some measure of protection as long as they were free of any Dreier assets. "We don't want to stand in the way" of allowing partners in the affiliated entities to move on with their lives, he said at the close of the hearing. Daniel.Wise@incisivemedia.com, Noeleen.Walder@incisivemedia.com