Disgraced attorney Marc Dreier swindled his victims out of nearly $400 million in a scheme involving the issuance of fraudulent promissory notes. Elliott International L.P. and Elliott Associates, L.P. (together, Elliott), were among Dreier’s largest victims, having purchased $100 million of fake notes in Dreier’s fraud. As part of that transaction, Dreier had granted Elliott a security interest in eighteen works of art by well-known artists such as Damien Hirst, Roy Lichtenstein, Mark Rothko and Andy Warhol (Artwork) in Dreier’s personal collection. Following his fraud conviction, certain of Dreier’s assets – including the Artwork – were forfeited to the U.S. government. Elliott sought to recover the Artwork on the ground that its security interest in the Artwork gave it priority over Dreier’s other victims seeking restitution from Dreier’s estate. Not surprisingly, those other victims objected. The U.S. District Court for the Southern District of New York (Court) recently ruled on whether Elliott was, in fact, entitled to the Artwork by virtue of the security interest that Dreier had granted. The Court’s decision is relevant both to hedge funds that hold security interests in connection with investments and to funds that seek restitution out of forfeited assets in the event of fraud. This article summarizes the facts of the dispute and the Court’s legal analysis. Dreier’s victims have also been sparring in bankruptcy court. See “Federal Judge Approves Settlement Agreements Arising out of Marc Dreier’s Criminal Fraud; Hedge Fund Victims ‘Squabble’ Over Proposed Recovery
,” Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010). One victim, Fortress Credit Corp., has tried unsuccessfully to recover from Dreier’s outside counsel. See “Dismissal of Fortress’ Complaint Against Dechert Illustrates the Limits of a Hedge Fund Manager’s Ability to Rely on a Legal Opinion Issued by a Law Firm of Which It Is Not a Client
,” Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011); and “Affiliates of Hedge Fund Manager Fortress Investment Group Sue Dechert Over Opinion Letter Endorsing Marc Dreier
,” Hedge Fund Law Report, Vol. 2, No. 52 (Dec. 30, 2009).