https://dealbook.nytimes.com/2014/03/06/former-top-leaders-of-dewey-leboeuf-are-indicted/
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Four men, who were
charged by New York prosecutors on Thursday with orchestrating a nearly
four-year scheme to manipulate the firm’s books to keep it afloat during
the financial crisis, talked openly in emails about “fake income,”
“accounting tricks” and their ability to fool the firm’s “clueless
auditor,” the prosecutors said.
The messages were included in a 106-count indictment
against Steven Davis, Dewey’s former chairman; Stephen DiCarmine, the
firm’s former executive director; Joel Sanders, the former chief
financial officer; and Zachary Warren, a former client relations
manager. They were charged with larceny and securities fraud. One of the
men even used the phrase “cooking the books” to describe what they were
doing to mislead the firm’s lenders and creditors in setting the stage
for a $150 million debt offering that was supposed to solve the firm’s
financial woes, according to the messages.
Related Links
Document: Indictment and S.E.C. Complaint
It is the kind of rogue language that one might expect to find in emails unearthed during a corporate fraud case from the Enron
era, but not at a law firm that carried the name of Thomas Dewey, the
former governor of New York, who began his legal career by prosecuting
organized crime. The indictment is an unusual coda to the collapse of a
firm that was created by the 2007 merger of Dewey Ballantine and
LeBoeuf, Lamb, Greene & MacRae, and that filed for bankruptcy in May
2012.
“Those at the top of
the firm directed employees to hide the firm’s true financial condition
from creditors, investors, auditors and even partners of the firm,” the
Manhattan district attorney, Cyrus R. Vance Jr., said at a news conference announcing the indictment.
The case is also
surprising in that it stems partly from a revolt within the firm itself.
Lawyers at Dewey ousted Mr. Davis, an architect of the merger, as
chairman just as the firm was preparing to file for bankruptcy. Soon
afterward, several of them went to Mr. Vance, urging him to investigate Mr. Davis and his administrative team.
Through their lawyers, all of the men denied the charges.
The indictment paints a
portrait of a law firm being run like a criminal enterprise. Mr. Vance
said his office had already secured guilty pleas from seven other people
who once worked for Dewey. A person briefed on the investigation said
several were cooperating with the two-year-old investigation.
“I can’t say whether
this is the Enron” of the legal world, Mr. Vance said. “Clearly this is
the largest law firm bankruptcy that we know of in history.”
At its peak, the
combined firm had 26 offices around the globe and employed more than
1,300 lawyers. The $550 million in claims against the firm’s estate made
it the largest bankruptcy filing by a law firm on record.
The bankruptcy
revealed that while Dewey was a brand-name operation, it failed to
generate sufficient revenue to pay the big contracts of its star lawyers
and meet its expensive overhead. The firm struggled to keep up with
loan payments during the worst of the financial crisis.
But the indictment and a parallel civil complaint filed by the Securities and Exchange Commission surprised even some who had worked at Dewey.
“If the allegations
are true, then once again we see a cover-up giving rise to a crime, when
the same people had the option of speaking up and being heroes for
helping to solve a sympathetic debt problem at the height of the Great
Recession,” said Martin Bienenstock, a former Dewey lawyer and now
chairman of the bankruptcy and restructuring practice at Proskauer Rose.
Roy D. Simon, a professor at the Hofstra University
School of Law, who specializes in legal ethics, said it was ironic that
far too many lawyers at Dewey were “uncurious about the management of
their firm,” until it was too late.
Prosecutors contend
that the accounting games at Dewey began in November 2008, not long
after the merger was completed, and continued until March 7, 2012, a
little before Dewey filed for bankruptcy two months later. The firm
found it could not meet provisions in bank loans that required it to
meet certain cash-flow projections. To make it appear as though Dewey
was meeting those conditions, the top executives schemed to make a
series of fraudulent accounting entries that either increased revenue,
decreased expenses or appeared to rein in distribution payments to
partners, prosecutors said.
The authorities said the accounting scheme was laid out in a document called the “Master Plan.”
Mr. Davis and his team
had hoped that the firm’s revenue would eventually increase as the
economy recovered. But by the end of 2009, Dewey owed its bank lenders
about $206 million, needed to make payments totaling $240 million to its
partners, yet had just $119 million in cash.
The S.E.C. case
centers on a 2010 private debt offering in which Dewey raised $150
million from 13 insurers and an additional $100 million from a line of
credit placed with several large banks. The firm used the offering to
refinance its existing credit lines and buy itself more time.
But the S.E.C. and prosecutors contend the offering document for the debt deal misrepresented the firm’s financial situation.
The S.E.C. complaint
charged Mr. Davis, Mr. DiCarmine and Mr. Sanders with making material
misrepresentations. The commission charged two other former top
executives — Frank Canellas, the director of finance, and Thomas
Mullikin, the controller. Mr. Warren was not named as a defendant in the
S.E.C. suit.
If the case goes to
trial, defense lawyers are expected to attack the prosecution’s reliance
on emails. Legal experts said that email evidence was strongest when
coupled with testimony from a cooperating witness who can bolster what
is in writing.
That said, the emails in the indictment and S.E.C. complaint appear powerful on their face.
In an exchange in
December 2008 among Mr. Davis, Mr. Sanders and Mr. DiCarmine, the men
discuss the need to come up with $50 million to meet a loan provision.
Mr. Davis responds “ugh” in one message. The answer to problems, the
indictment suggests, was to devise the “Master Plan” for fudging the
firm’s accounting entries.
In another exchange in June 2009, Mr. Sanders and Mr. Canellas joke about the law firm’s outside auditor,
who was fired by his company for reasons unrelated to his auditing
assignments. Mr. Sanders remarks to Mr. Canellas, “Can you find another
clueless auditor for next year?” Mr. Canellas responded: “That’s the
plan. Worked perfect this year.”
Even agents with the Federal Bureau of Investigation,
which worked with Mr. Vance’s office, were surprised by the brazenness
with which Mr. Davis and his team discussed their plan in emails, a
person briefed on the investigation said.
Elkan Abramowitz, the
lawyer for Mr. Davis, 60, said that his client acted in “good faith in
an effort to make the firm a success” and that the charges were “simply
wrong.”
Edward Little, the
lawyer for Mr. Sanders, 55, said that his client broke no laws and that
“despite what the district attorney’s office apparently believes, the
public does not need a scapegoat every time a financial disaster is
reported in the media.”
Austin Campriello, the
lawyer for Mr. DiCarmine, 57, said that his client “did not commit any
crimes” and that the district attorney’s office “spins some inartful
emails into crimes.”
Of the indictments,
Mr. Warren’s was most surprising, partly because he is just 29 and was a
rather low-level employee. Steven Hyman, the lawyer for Mr. Warren,
said that Dewey was his client’s first job after college and that the
charges were a “travesty” because “he did nothing wrong.”
William Alden and Floyd Norris contributed reporting
Correction: March 8, 2014
An earlier version of this article misstated the size of the firm’s staff. At its peak, the firm employed 1,300 lawyers; that was not the size of its overall staff.
An earlier version of this article misstated the size of the firm’s staff. At its peak, the firm employed 1,300 lawyers; that was not the size of its overall staff.
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