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October 2013: An “Artful” Victory

October 2013

Quinn Emanuel recently secured a victory for one of its hedge fund clients, helping the client recover a substantial portion of a $100 million loss it suffered at the hands of convicted fraudster, Marc Dreier. From 2004 through 2008, Dreier, while heading a prominent New York law firm, perpetrated a Ponzi scheme and bilked investors out of hundreds of millions of dollars. Using forged signatures, imposters, and bogus legal opinions, Dreier convinced numerous prominent hedge funds and other investors to purchase notes that he claimed had been issued by a well known New York realty concern. The notes, however, were literally not worth the paper they were printed on, as they were entirely fake. When the fraud came to light, Dreier quickly pled guilty and was sent off to jail, where he is now serving 20 years.

The firm’s client was the last of Dreier’s victims and lost almost $100 million. Unlike the rest of the hedge funds Dreier defrauded, however, the firm’s client had the good sense to obtain a security agreement from Dreier, in which he pledged his valuable art collection—which includes works by Lichtenstein, Warhol, Rothko and others—as security for payment of the notes. After Dreier was convicted, however, the Government forfeited all of his assets, including his art, leaving the client’s ability to recover on its security interest in jeopardy.

Quinn Emanuel responded to the forfeiture by petitioning the Court to have the forfeiture of the art vacated to give effect to the client’s security interest. The firm then persuaded the government that, in the interests of justice, it should not oppose the petition. A group of Dreier’s other hedge fund victims, however, did oppose the petition, arguing that the security interest should be voided and the art returned to the government and liquidated for the benefit of all of Dreier’s victims. The so-called “Victim’s Group” argued that various circumstances—not least of which was Dreier’s unusual willingness to pledge his personal art to guarantee a purported client’s debt—should have put the client on notice that something was amiss, such that it could not claim to have taken its security interest as an innocent purchaser for value.

The Court, upon reading the Victim’s Group objection, decided that it could not be decided on the papers and held a full-day hearing in which Quinn Emanuel had to put its client’s business people on the stand to explain how and why they obtained the security interest and why that did not reflect a suspicion on their part of possible fraud. With the firm’s guidance, the witnesses detailed the entire process that led them to make the investment with Dreier and persuasively explained the business-related concerns that led them to seek the security interest in Dreier’s art. Among other things, they reminded the Court that their transaction with Dreier occurred at the height of the financial crisis, when credit markets were frozen and parties had to resort to unusual and even unprecedented means to make transactions work.

In a written decision, the Court completely accepted the testimony of Quinn Emanuel’s witnesses and all of the firm’s legal arguments in finding that the client acted reasonably and without reason to suspect that Dreier was engaged in fraud. The client recovered possession of the art and expects to recover a significant portion of the loss it suffered when the art is auctioned.