May 12 (Bloomberg) -- Marc Dreier, the New York law firm founder accused of defrauding hedge funds by selling $700 million in phony promissory notes, might face life in prison after pleading guilty to fraud charges.

Dreier, who turned 59 today, pleaded guilty in federal court in New York to charges of money laundering, conspiracy, securities fraud and wire fraud. Victims of Dreier’s Ponzi scheme lost more than $400 million, according to prosecutors.

“I engineered a scheme to issue and sell fictitious promissory notes purportedly issued by companies in the United States and Canada,” Dreier told U.S. District Judge Jed Rakoff, reading from a prepared text at yesterday’s hearing.

Dreier’s lawyer, Gerald Shargel, has said he will seek leniency for Dreier at his sentencing. Dreier has cooperated with court-appointed bankruptcy trustees to identify assets that can be used to pay victims and creditors, according to Shargel. Rakoff set a sentencing date of July 13.

Shargel said his client didn’t have a plea agreement with prosecutors. Dreier pleaded guilty to all eight counts against him. Prosecutors said that federal sentencing guidelines call for a life sentence, Rakoff told Dreier.

Dreier has been confined to his Manhattan luxury apartment, watched around the clock by armed guards paid for by friends and relatives, a condition of his $10 million bail. Dreier’s former firm, the 250-lawyer Dreier LLP, is being liquidated in U.S. Bankruptcy Court.

Bail Argument

Shargel urged Rakoff to permit Dreier to remain on bail, confined to his apartment, until sentencing, claiming his client has no money and doesn’t pose a risk of fleeing. Most of Dreier’s friends have abandoned him, Shargel said. And much of the money to pay for Dreier’s food in the last three months was taken from bar mitzvah gifts to his college-age son Spencer.

“One rarely encounters a less appealing beneficiary of bail,” said Rakoff. The judge allowed Dreier to remain confined in his apartment after finding there is “no likelihood that he will flee.”

Dreier’s guards are being paid for by his sister, an unnamed friend and Dreier’s 88-year-old mother, Shargel said.

The guards cost $70,000 per month for the first three months, said Philip Scala, chief executive officer of Pathfinder Consultants International, the company that is supplying them. Pathfinder has agreed to reduce the charges to $50,000 per month for the next 60 days, he said.

Dreier has signed an authorization permitting his guards to use lethal force to stop him if he tries to flee.

Arrest in Toronto

Dreier was arrested in Toronto on Dec. 2 and charged with impersonating a lawyer with the Ontario Teachers’ Pension Plan. He was released on bail and arrested again Dec. 7 when he returned to New York.

Prosecutors claimed Dreier sold more than 85 phony promissory notes to at least 13 hedge funds and three individuals from 2004 to 2008. Dreier falsely told investors many of the fake notes were issued by New York developer Sheldon Solow, a client of his firm.

A court-appointed receiver in the Dreier LLP bankruptcy reported that Dreier used the money to subsidize the money- losing firm, to pay off some of the victims of the scam and to buy luxuries for himself, including a 121-foot yacht, vacation homes in the Hamptons and a $39 million contemporary-art collection.

Laundered Money

The government claims he laundered the money through the accounts of the law firm, of which Dreier was the sole equity partner.

According to prosecutors, victims of the fraud included Amaranth Group Inc., Perella Weinberg Partners, Eton Park Capital Management LP, Concordia Advisors LLC, Novator, Meyer Ventures LLC, Blackstone Group LP’s GSO Capital Partners and Elliott Management Corp.

The case is U.S. v. Dreier, 09-cr-85, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in Manhattan federal court at rvanvoris@bloomberg.net.

Last Updated: May 12, 2009 09:27 EDT