April 22 (Bloomberg) -- A former broker, Kosta Kovachev, is in plea discussions after being charged with helping Marc Dreier, the accused New York law firm founder, defraud hedge funds of hundreds of millions of dollars.

“The parties are in discussions about a possible disposition,” Assistant U.S. Attorney Jonathan Streeter told a U.S. magistrate judge in New York today in a court appearance by Kovachev.

“We’re not committed to any course of action,” Paul Madden, Kovachev’s lawyer, added.

Dreier, who is free on bail, is accused of selling phony notes to hedge funds, including some notes purportedly issued by Sheldon Solow, a New York developer who was a client of Dreier’s law firm. Kovachev, who is also free on bail, was paid $215,000 by Dreier to impersonate executives at companies that Dreier claimed were selling the notes, prosecutors said.

Two hedge funds paid a total of $113 million for notes after hearing from Kovachev in late 2008, prosecutors said.

Kovachev today waived his right to be prosecuted by a formal indictment. The case was transferred to a District Court judge who will hold a hearing on May 18. Kovachev also pleaded not guilty to charges of conspiracy, wire fraud and securities fraud contained in a criminal information filed today in court.

Dreier’s scheme began in 2004 and unraveled in December when he was arrested in Toronto and charged with impersonating a lawyer at the Ontario Teachers’ Pension Plan, prosecutors said. Investors lost $400 million, the government said.

Dreier Court Appearance

Dreier will have a court appearance this afternoon. His lawyer, Gerald Shargel, has said his client will “likely” plead guilty at some point.

In a separate case, Kovachev in 2006 was ordered to pay $350,000 in a civil suit brought by the U.S. Securities and Exchange Commission accusing him and 11 others of defrauding more than 600 investors of more than $28 million in a Ponzi scheme. The SEC said that Kovachev and others sold unregistered securities structured as hotel timeshare rental interests.

The New York Times reported in July 2004 that Dreier said Kovachev, then head of a dissolved Florida company called Evergence Capital Partners, was a client of his law firm.

In a dispute between Solow and the developer Peter Kalikow, Solow and Dreier hired Evergence to place newspaper ads listing ex-creditors of Kalikow, the Times reported, citing a judge.

Dreier’s 250-lawyer law firm, Dreier LLP, has filed for bankruptcy and is being liquidated.

The criminal case is U.S. v. Kovachev, 08-mag-2676, U.S. District Court, Southern District of New York (Manhattan).

Editors: Charles Carter, Mary Romano

To contact the reporter on this story: David Glovin in U.S. District Court in New York at dglovin@bloomberg.net.

Last Updated: April 22, 2009 11:56 EDT