Johnny Stephenson, a litigation partner in Alston & Bird’s Atlanta office, last week argued before a three-judge panel in the Southern District of New York on behalf of entrepreneur Paul Gardi, a victim of convicted Ponzi-scheme operator Marc Dreier. Dreier, who ran the 250-lawyer Dreier LLP, was sentenced to 20 years in prison for selling $700 million in fake promissory notes to hedge funds. A restitution order issued in September provides for a pro rata distribution of restitution funds among the 26 victims of Dreier’s fraud, including Gardi.
In his argument for restitution priority, however, Stephenson noted that Gardi should be treated differently from the sophisticated institutional investors who lost money in arms-length note purchase transactions in which Dreier acted as a counterparty, because unlike those institutional investors, who willingly risked capital in exchange for the expectation of substantial returns, Gardi never “knowingly or willingly entrusted” any money to Dreier; instead, Gardi was “an individual client to whom [Dreier] owed fiduciary duties as a lawyer" and Dreier "used his position of trust and confidence" to orchestrate a fraudulent settlement and then "steal $6.3 million in settlement proceeds payable to Gardi.” Dreier allegedly wired settlement funds intended for Gardi to his own accounts and then used those funds for his own purposes, including to make payments to certain institutional victims of his Ponzi scheme.
"In essence, Dreier used his law license, rather than a ski mask and a gun, to steal $6.3 million in settlement funds,” Stephenson argued. “The law is clear that neither Dreier nor Dreier LLP ever had legal or equitable title to the Stolen Settlement Funds. As a result, these funds cannot be considered” part of Dreier or his former firm’s estate. Stephenson requested that SDNY Judge Jed S. Rakoff, who has the Dreier criminal case, exercise his discretion under the Mandatory Victim Restitution Act to prioritize restitution payment to Gardi of the $6.3 million in stolen settlement funds.