More brazen than Madoff? (pg. 3)

"The story was that he was using these funds as a liquidity vehicle to acquire properties," says the president of one hedge fund that bought some. Why not just borrow from a bank at 6%? "The answer was that Solow was very secretive," the fund officer explains. "He didn't want any mortgages on his properties, and he didn't want to answer to anybody."

Didn't the portfolio managers ever ask to speak directly to someone at Solow? Yes, they did, the indictment explains. So Dreier would furnish them with phone numbers where they could purportedly reach Solow's CEO or controller. The numbers actually rang up accomplices of Dreier's, however, whom Dreier paid to impersonate the Solow agents. In some instances, the government alleges, that accomplice was Kosta Kovachev, the alleged Ponzi scheme defendant who had acted as Dreier's accomplice in the phony legal-notice caper. (In April 2005, Kovachev, represented by Dreier, signed a consent decree in the Ponzi scheme case, agreeing to pay $350,000 in fines and disgorgement but admitting no wrongdoing. But Kovachev never coughed up the money, and a court-appointed receiver who tried to collect it could never locate him.)

After Dreier is alleged to have become a criminal, his firm began expanding exponentially, possibly driven by a desperate need for cash. To keep from being caught, Dreier now had to come up with money to make fat quarterly interest payments on the phony Solow notes, while also conjuring a way to pay the principal when it came due. Between 2005 and 2008 Dreier's firm more than quadrupled in size, climbing from 60 lawyers to 260. (With staff, it employed about 560 at its peak.) It eventually leased 11 floors at 499 Park - Dreier also leased the right to hoist a Dreier LLP flag on a flagpole out front - while annexing practice groups in four other cities and forging "affiliate" relationships with seven law firms and two consulting firms.

In order to lure new attorneys, Dreier was often offering far more than he was paying to longtime Dreier partners. While most who'd joined in the early days were making $300,000 to $600,000 annually, according to bankruptcy court records, several newer recruits were guaranteed more than $1 million before bonuses, while at least one was pulling down $1.9 million. Two attorneys from a practice group Dreier unsuccessfully wooed during this period tell Fortune they were offered money that was "way over market."

Outwardly, Dreier's lifestyle betrayed no scintilla of financial distress. On the contrary, its lavishness prompted attorneys at his firm to speculate that maybe Dreier came from money. His dazzling art collection, rotating through his law offices and homes, came to include 12 Warhols, seven Hirsts, six Hockneys, three Matisses, a Picasso, and 235 others. One of his seven Ellsworth Kellys - "Purple/Red/Gray/Orange," an 18-foot-long lithograph - was displayed in the firm's lobby entrance and became its de facto emblem. It inspired the firm's elegant but annoying website, where the painting's four color fields incessantly floated across the screen, obscuring text. (At Dreier LLP's New York office, the stark, modernist aesthetic was enforced by the banishment of all room numbers and nameplates from the walls; attorneys needed floor plans to find one another.)

Dreier LLP attorneys and spouses were invited each year to a summer outing at Dreier's splendid country estate in Quogue, N.Y., and the firm's 2007 Christmas party was held at the Waldorf Astoria. Dreier's inner circle got to go to additional events too. "If you were charming, brought in money, were attractive, whatever," explains one attorney, he'd invite you onto his yacht to celebrate his birthday or to exclusive parties. Dreier now sported a perpetual deep tan and was often accompanied by beautiful young women - sometimes more than one at a time.

He was also spending more time with celebrities. "He was a groupie," one lawyer explains, shrugging. In 2006 he started co-hosting, with New York Giants defensive end Michael Strahan, an annual celebrity golf tournament to benefit charity. On the weekend of the tournament he'd rent out a trendy, 12,000-square-foot Midtown restaurant called Tao, dominated by a 16-foot Buddha suspended above a reflecting pool stocked with carp. There, about 400 invitees were treated to private performances by Bon Jovi, Diana Ross, or Alicia Keys.

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How exactly did Dreier juggle all these commitments - the huge debts falling due, the art acquisitions, the frenetic attorney hirings, the manic partying, the accelerating pace of the larcenies? Relying upon court filings by the bankruptcy trustee, prosecutors, and the SEC, it is possible to reconstruct a partial answer. The chronicle reads like a cross between Crime and Punishment and a door-slamming Feydeau farce.

In 2008, according to prosecutors, Dreier faced the prospect of somehow paying back more than $115 million in phony Solow notes he had sold to one hedge fund, which, judging from bankruptcy records, must have been GSO Capital Partners, acquired that March by Blackstone Group. (A spokesperson for Blackstone declined to comment.) In addition, he had outstanding obligations to an assortment of other hedge fund families, including Fortress, conservatively totaling more than $65 million, and bringing his minimum total debt on the notes to at least $180 million, plus debt service of another $20 million annually. That total was close to twice the firm's gross revenue for the year, before paying salaries, rent, or overhead.

Despite the looming catastrophe, Dreier's expenditures do not evince much belt-tightening. During the first five months of 2008, for instance, he spent more than $16 million on new art purchases.

In May, Dreier hosted a birthday party on his yacht. One guest was Marc Kasowitz, leader of another young Manhattan law firm, Kasowitz Benson Torres & Friedman.

"I don't want to use the word 'obsessed,'" says one Dreier lawyer, "but Marc [Dreier] was definitely competitive with Kasowitz ... Many people's position was that he was very envious of Kasowitz because Kasowitz's firm was kind of what Dreier wanted his to be." The 230-lawyer Kasowitz Benson, formed in 1993, was a true Manhattan powerhouse, with average profits per partner of nearly $2 million in 2007, according to The American Lawyer magazine. (Kasowitz declined to comment.)

Kasowitz had been Dreier's younger colleague when they were both hotshot young litigators at Rosenman, and the two had tomcatted around together before either was married. According to one source, in 1994 when Dreier was becoming unhappy at Fulbright, he approached Kasowitz Benson about the possibility of joining the young firm but was rebuffed.

Two months after his birthday party, prosecutors allege, Dreier started selling a new flavor of forged note. These were supposedly issued by the Ontario Teachers Pension Plan (OTPP) and backed by BCE, the parent company of Bell Canada. In July he allegedly sold $52 million of these and apparently used the proceeds to pay back $28 million in Solow notes to two other funds, according to bankruptcy records.

In September - the month when Fannie Mae and Freddie Mac were seized, Lehman Brothers went bankrupt, AIG got its first bailout, and Merrill Lynch and Wachovia both agreed to be sold - Dreier gave big raises to six partners, hired a seventh, and gave salary reductions to none. He also threw a party to celebrate the completion of a $1.5 million renovation of the firm's Stamford offices; each guest got a high-end, rabbit-shaped, DREIER LLP - emblazoned corkscrew as a gift.

That same month Dreier fell behind on his obligations to one fund (probably GSO), according to prosecutors. The fund demanded to meet with Solow representatives at Solow's offices. His back against the wall, Dreier set up the meeting while, of course, saying nothing to Solow. (By this time, Dreier's relationship with Solow had soured, and his work for him had dried up.)

On Oct. 15, Dreier, Kovachev, and the unhappy fund representatives all showed up unannounced at Solow's offices on the 45th floor of the building Solow owns at 9 W. 57th St. Dreier told the receptionist that Solow CEO Steven Cherniak was expecting them and persuaded her to let them in. They sat down in a conference room, where Kovachev pretended to be Solow's controller, according to the indictment. While the meeting was under way the real Steve Cherniak happened to walk down the corridor. He recognized Dreier through the glass wall of the conference room but didn't interrupt.

Later that month Dreier sold close to $100 million in new Solow notes to two new hedge fund buyers, enabling him to pay back the last $60 million owed to GSO. A few days after the sales, though, an officer with a third prospective buyer placed a cold call to the outside auditor whose name had been forged on the fake Solow financial statements. That was all it took - all it ever would have taken - for the scheme to come apart like a slipknot. Prosecutors were tipped off by both Solow and the prospective buyer.

Solow's outside auditing firm soon had Dreier on the phone. At the request of prosecutors, the conversations were secretly recorded. Dreier admitted that the Solow notes were fabricated, that he was "ashamed" of his role, and that it was "very serious, what's happened here," according to government filings. Still, Dreier tried to persuade the firm to work out a "settlement" rather than notify authorities.

NEXT: More brazen than Madoff? (pg. 4)

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