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How A Bankrupt Mega Law Firm Cooked Its Books For Four Years

Tyler Durden's picture




 

Two years ago, the mega law firm Dewey and LeBeouf shocked the legal world when it announced, out of the blue, it would be filing for bankruptcy following an exodus of employees as the money had run out. However, as usually happens in cases like these, it was not just gross incompetence that was at fault: one must usually add major act criminality to explain such a rapid fall from grace. Such was the case in the Dewey bankruptcy too.

Moments ago former top executives from bankrupt U.S. law firm Dewey & LeBoeuf were criminally charged for "cooking the books" at the once prestigious firm and defrauding investors and lenders.

Charges were announced against former Dewey chairman Steven Davis, 60, former executive director Stephen DiCarmine, 57, and former chief financial officer Joel Sanders, 55 as initially reported by Reuters.

In a parallel filing, the SEC filed a related civil lawsuit against Davis, DiCarmine, Sanders and two former Dewey finance officials, finance director Frank Canellas and former controller Thomas Mullikin. The SEC complaint accused the former executives of defrauding investors by misleading them about Dewey's finances in marketing materials for a $150 million bond offering in 2010.

According to the regulator, the Dewey officials "orchestrated and executed a bold and long-running accounting fraud intended to conceal the firm's precarious financial condition".

This was announced by Manhattan District Attorney Cyrus Vance Jr at a press conference earlier today. Vance has been investigating Dewey's collapse since April 2012, when some Dewey & LeBoeuf partners asked him to examine "financial irregularities" at the firm.

Naturally, the former lawyers refuse to admit anything. WSJ adds quotes Elkan Abramowitz, a lawyer for Mr. Davis, said: “We believe strongly that no crime was committed by Steve Davis at all.” He added: “He always had the best interests of the firm at heart… the [criminal] indictment deals with accounting issues that are susceptible to different interpretations. We committed no crime, committed no fraud.”

Austin Campriello, a lawyer for Mr. DiCarmine said his client “did not commit any crimes” and “did not cause the collapse” of the firm. “It is very easy for a prosecutor to bring an indictment,” he said. “But cases like this crumble when an innocent person gets to mount a defense in court.  And that is what we will do.”

Ned Bassen, a lawyer for Mr. Sanders, said: “We are completely confident that we are going to win this case.” Mr. Sanders “is absolutely innocent. He consistently cautioned the partners of the law firm not to be spending money they did not have. They consistently did not listen to him, and these very same people look to blame him instead of taking responsibility.

Maybe, but probably not. In the meantime, reading through the indictment, here is how a law firm - and here we can only assume Dewey is hardly alone - can cook the books for 4 years thinking it can get away with it.

* * *

The Fraudulent Methods

By or about the end of 2008, the Schemers had created a document they called the “Master Plan” that described certain fraudulent accounting adjustments that the Schemers decided to pursue as part of the Scheme. From in or about the end of 2008 until the Firm’s bankruptcy in 2012, the Schemers input numerous of these and other fraudulent adjustments, and engaged in other fraudulent conduct, most of which made it appear that the Firm had either increased revenue, decreased expenses, or limited distributions to partners. Some of these fraudulent adjustments and acts were:

a. Reversing disbursement write-offs – From 2008 through 2011, the Schemers improperly reversed millions of dollars of write-offs of client disbursements that the Firm had no intention or reasonable expectation of collecting.

b. Reclassifying disbursement payments – From 2008 through 2011, the Schemers improperly reclassified millions of dollars of payments that had been applied to client disbursements during the year and applied the payments instead to outstanding fee amounts.

c. Reclassifying Of Counsel payments – From 2008 through 2011, the Schemers reclassified millions of dollars of compensation to Of Counsel lawyers as equity partner compensation. Historically, Of Counsel compensation had been treated as an expense in the Firm’s financial statements.

d. Reversing credit card write-offs – In 2008 the Firm initially properly wrote off more than $2.4 million in charges from an American Express card associated with  defendant SANDERS that had not previously been expensed and were not chargeable to clients. For year-end 2008, the Schemers fraudulently reversed this write-off and hid the amount in the Firm’s books as an unbilled client disbursement receivable. Each subsequent year, the Schemers initially wrote this amount off, but then reversed the write-off at year-end. The amount remained on the Firm’s books as an unbilled client disbursement receivable at the time of the bankruptcy.

e. Reclassifying salaried partner expenses – In 2008, the Schemers improperly reclassified as equity partner compensation millions of dollars in compensation paid to, and amortization of benefits related to, two salaried, non-equity partners. Similar amounts had previously been treated as expenses on the Firm’s financial statements, so the reclassification had the effect of reducing Firm expenses. This change in treatment was neither disclosed to the Firm’s auditors nor disclosed on the Firm’s audited financial statements. In later years, the compensation paid to these two salaried partners was classified as equity partner compensation.

f. Seeking backdated checks – During at least two year-ends from 2008 through 2011, the Schemers sought backdated checks from clients to post to the prior year. At the end of each of the Scheme years the Schemers engaged in efforts to hide the date on which checks were received by the Firm. These efforts minimized the risk that the Firm’s auditors would discover that December checks received in January, including backdated checks, were being posted to the prior year.

g. Applying partner capital as fee revenue – For year-end 2009, more than $1 million that had been contributed by a partner to satisfy his capital requirement was applied as a fee payment for the client of a different partner. This amount was backed out of fees and applied to the partner’s capital account during 2010, but for year-end 2010 it was again applied as a fee payment for the same client. h. Applying loan repayments as revenue – In 2008, pursuant to defendant DAVIS’s authorization, the Firm took on $2.4 million in bank loans that benefitted defendants DICARMINE and SANDERS. In early 2012, defendants DICARMINE and SANDERS repaid the Firm the final $1.2 million owed under the loans but structured the transaction so the loan repayment would increase the Firm’s revenue for 2011.

Bottom line:

By in or about March 2012, the Scheme had collapsed in on itself. For years, the Schemers had been fraudulently claiming revenue that the Firm did not have and pushing expenses and financial obligations off into the future. The Firm could no longer pay partners enough to prevent their departure, and the Schemers could no longer fool the Firm’s lenders, investors, and others. The Firm declared bankruptcy; thousands lost their jobs; and the Firm’s creditors were left owed hundreds of millions of dollars.

Indictment link

 

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Thu, 03/06/2014 - 12:38 | 4517090 starman
starman's picture

Dewey and Le beouf?! is this a April 1st joke?

Thu, 03/06/2014 - 12:40 | 4517104 observer007
observer007's picture

No April joke:

22 Billion Dollars found: Photos of a Mexican drug lord's home after being raided

 

The money  and valuables found in this one house alone, would be enough to pay for  health insurance for every man woman and child in the USA for 12  years!

 

All photos here:

http://homment.com/drug-lord-home

Thu, 03/06/2014 - 12:42 | 4517113 Smegley Wanxalot
Smegley Wanxalot's picture

22 billion would pay for about 3 days.  Maybe less given all the meds your average dumbass gringo is addicted to.

Thu, 03/06/2014 - 12:54 | 4517167 FL_Conservative
FL_Conservative's picture

"By in or about March 2012, the Scheme had collapsed in on itself. For years, the Schemers had been fraudulently claiming revenue that the Firm did not have and pushing expenses and financial obligations off into the future. The Firm could no longer pay partners enough to prevent their departure, and the Schemers could no longer fool the Firm’s lenders, investors, and others. The Firm declared bankruptcy; thousands lost their jobs; and the Firm’s creditors were left owed hundreds of millions of dollars."

 

The US Government has been doing this for years. When (if ever) will they be held accountable for fraud and theft against US citizens?

Thu, 03/06/2014 - 13:08 | 4517233 y3maxx
y3maxx's picture

...Dewey Cheat'em and How...

Thu, 03/06/2014 - 13:17 | 4517282 Never One Roach
Never One Roach's picture

‘taint it a shame the way they hound innocent lawyers….

 

…cough, cough…..choke, choke….

Thu, 03/06/2014 - 13:22 | 4517304 TruthHunter
TruthHunter's picture

Website of the law firm: http://www.dewey-cheatham-howe.com/

This story reminds me of the joke:

What do you call 40 lawyers going off a cliff in a bus?

A good beginning.

Can we dream that every crooked law firm overreaches into bankruptcy?

Thu, 03/06/2014 - 13:26 | 4517334 Rafferty
Rafferty's picture

How can a  mega law firm go bust given the fees those parasites charge?

Thu, 03/06/2014 - 22:41 | 4519848 StychoKiller
StychoKiller's picture

Mr. McCawber explained it well in "David Copperfield"

Thu, 03/06/2014 - 14:23 | 4517697 Dollarmedes
Dollarmedes's picture

I keep seeing the revisions (mostly all one way) to BLS statistics and think, "maybe someone should audit them."

Thu, 03/06/2014 - 12:42 | 4517114 Freddie
Freddie's picture

The Mexican drug cartels own Congress and the White hut.  Bush, Clinton, Bush, Obama = all friends of who?   Who is pushing for open borders and amnesty?

Thu, 03/06/2014 - 12:46 | 4517134 Grande Tetons
Grande Tetons's picture

Could probably find 22 Trillion in Casa de Rothschild.  Good thing they are not criminals. 

Thu, 03/06/2014 - 13:05 | 4517226 paulwyre
paulwyre's picture

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Fri, 03/07/2014 - 11:27 | 4521186 TheRedScourge
TheRedScourge's picture

Faker than shit. What kind of sane human being who distrusts the government would willingly hold that many fiat dollars?

Thu, 03/06/2014 - 13:02 | 4517186 williambanzai7
williambanzai7's picture

“He always had the best interests of the firm at heart… "

Where have we heard this before?

Thu, 03/06/2014 - 13:03 | 4517214 AlaricBalth
AlaricBalth's picture

Excellent as usual.

During the mid-1980s dairy farmers decided there was too much cheap milk at the supermarket. So the government bought and slaughtered 1.6 million cows. How come the government never does anything like this with lawyers?

- P.J. O'Rourke

Thu, 03/06/2014 - 13:14 | 4517262 Skateboarder
Skateboarder's picture

Client Receivable Propellers... that's quality stuff dr. banz.

Thu, 03/06/2014 - 12:38 | 4517092 LawsofPhysics
LawsofPhysics's picture

Meh, unless there are real consequences for these corrupt fuckers, nothing changes.

Thu, 03/06/2014 - 12:44 | 4517121 Divided States ...
Divided States of America's picture

I agree with you Laws...but honestly for us somewhat less clueless simpletons, what can we do to stop this?

Looks like the banker suicides took a hiatus this week...or MSM just isnt reporting any REAL EVENTS anymore.

Thu, 03/06/2014 - 12:57 | 4517176 NoDebt
NoDebt's picture

There is no way to stop fraud like this.  That's why the punishment when caught is so important.  It needs to be so onerous as to give others pause before they decide to do similar.

These guys are NOT TBTF bankers.  They are not Senators or Administration Officials.  Believe me, they have a serious legal colonoscopy headed their way.  Their friends will NOT help them in this situation.

Thu, 03/06/2014 - 12:57 | 4517180 Skateboarder
Skateboarder's picture

It takes more work to be a dishonest greedy bastard.

Fri, 03/07/2014 - 11:33 | 4521211 TheRedScourge
TheRedScourge's picture

Not anymore.

Thu, 03/06/2014 - 12:44 | 4517124 Winston Churchill
Winston Churchill's picture

Lawyers following the precedent of mark to model.

Got to be a defense in there somewhere.

Thu, 03/06/2014 - 12:50 | 4517146 john39
john39's picture

accepted custom and practice in the industry... aka, everyone is doing it.

Thu, 03/06/2014 - 12:39 | 4517098 Screwtape III
Screwtape III's picture

Better known as Dewey Cheatem and Howe.

Thu, 03/06/2014 - 12:41 | 4517108 Winston Churchill
Winston Churchill's picture

Sue, Grabbit and Runn.

Thu, 03/06/2014 - 12:42 | 4517111 Divided States ...
Divided States of America's picture

Dewey or Jewey?

Thu, 03/06/2014 - 12:46 | 4517131 fonzannoon
fonzannoon's picture

It's crazy you have Italians and Jews all mixed up in this thing. I can see how it would get confusing.

http://www.youtube.com/watch?v=i8jZz_QawBg

Thu, 03/06/2014 - 12:51 | 4517154 john39
john39's picture

look at the U.S. Supreme Court...  made up entirely of Jews and Catholics...  not that there is anything necessarily wrong with that... but, it certainly seems unusual...

Thu, 03/06/2014 - 12:59 | 4517190 Divided States ...
Divided States of America's picture

Trust me the Catholics are useless...they dont hold any power whatsoever, the Jews do. The Catholic representation are there as fillers for the masses to witness. Like yesterday most of us got some ashes placed on our foreheads and I am sure people are staring at you like "That idiot got some dirt on his face!"

Thu, 03/06/2014 - 13:31 | 4517362 Rafferty
Rafferty's picture

Like Teddy Kennedy was the clueless goyishe front for the 1965 Immigration Act.....the original cause of most of America's current problems.

Thu, 03/06/2014 - 13:07 | 4517230 Ghordius
Ghordius's picture

Catholics? nearly 80 million of them in the US, 25% of the pop. yet your supreme judges have to be appointed by a sitting president and approved by congress, right? I know i-dog and others find this very suspicious, but perhaps the litmus-tests were more important than exact religious denomination, at the time of each appointment

Thu, 03/06/2014 - 13:27 | 4517336 TruthHunter
TruthHunter's picture

look at the U.S. Supreme Court...  made up entirely of Jews and Catholics...

The weird part is Justice Thomas became Catholic after joining the court.

Was this part of some kind of "Deal"? < /tinfoil hat>

Thu, 03/06/2014 - 12:39 | 4517099 fonzannoon
fonzannoon's picture

"Austin Campriello, a lawyer for Mr. DiCarmine said Heeey Ba Fongoul Wasamatta? My client ain't gonna pay no penality...capisce?"

Thu, 03/06/2014 - 13:00 | 4517193 NoDebt
NoDebt's picture

.... these two youts.

.... what the heck is a 'yout'?

 

Fri, 03/07/2014 - 11:37 | 4521227 TheRedScourge
TheRedScourge's picture

fine...the two defendants.

Thu, 03/06/2014 - 12:42 | 4517110 Itchy and Scratchy
Itchy and Scratchy's picture

Crooked lawyers????? Say it ain't so!!!!!

Thu, 03/06/2014 - 12:57 | 4517179 0b1knob
0b1knob's picture

What next priest child molesters?   Criminal police?  oh wait....

Thu, 03/06/2014 - 12:44 | 4517119 Smegley Wanxalot
Smegley Wanxalot's picture

Dewey, LeBeouf'em, and Howe.

Thu, 03/06/2014 - 12:50 | 4517145 texas sandman
texas sandman's picture

So, they used fraudulent numbers to hide their insolvency.   This is different from your average TBTF bank in what way exactly????

Thu, 03/06/2014 - 12:50 | 4517149 monad
monad's picture

Lawyers prosecuting lawyers. Sure. Right. Yup.

Thu, 03/06/2014 - 13:17 | 4517280 KickIce
KickIce's picture

Hard to argue a recovery when lawyera can't make it in system set-up by lawyers for lawyers.

Thu, 03/06/2014 - 12:52 | 4517153 Dr. Engali
Dr. Engali's picture

This is nothing that isn't being done at every bankrupt firm in this mark to fantasy bankrupt country. Just a little tweet to the accounting rules and everything appears great.

Thu, 03/06/2014 - 12:52 | 4517158 Saratoga
Saratoga's picture

The cooking of the books doesn't bother me as much as the fact that the firm couldn't generate enough income to sustain itself.

Thu, 03/06/2014 - 12:53 | 4517162 youngman
youngman's picture

no tears here...its what lawyers do..cheat people out of their money

Thu, 03/06/2014 - 13:20 | 4517294 KickIce
KickIce's picture

One of my favorite jokes:

What's the difference in an attorney and a prostitute?

The prostitute stops screwing you when you're dead.

Thu, 03/06/2014 - 12:57 | 4517175 Mi Naem
Mi Naem's picture

"Dewey and LeBeouf"

Sounds pornographic.  Apparently it is, now. 

Maybe it will become a verb: They Dewey and LeBeouf'ed themselves. 

Thu, 03/06/2014 - 12:58 | 4517183 Atlantis Consigliore
Atlantis Consigliore's picture

Monica? monica, go down like a lawyer Monica, 

law?  its depends what meaning of is IS/

now whats that phone no, of rent a Senator?

LOL....

 

Thu, 03/06/2014 - 13:02 | 4517204 Seasmoke
Seasmoke's picture

I AM NOT FAMOUS.

Thu, 03/06/2014 - 13:04 | 4517219 atomicwasted
atomicwasted's picture

(d) is the most damning and the one that a jury will convict on.  The others (with the possible exception of (g), which looks ponzi) will just make the jury's eyes glaze over.

Thu, 03/06/2014 - 13:10 | 4517246 Colonel Klink
Colonel Klink's picture

Quick just rename the company just like GMAC, or Arthur Andersen has done.

How about Rapem, Robbem, and Flee, esq

Thu, 03/06/2014 - 13:15 | 4517269 grady8
grady8's picture

Cooking the books is standaed practice. What is amazing about this is their failure to pay off the right people.

Thu, 03/06/2014 - 13:15 | 4517270 NoTTD
NoTTD's picture

Gee, it's unlike for Dewey et al that they weren't quite big enough not to fail or be prosecuted.   

Thu, 03/06/2014 - 13:22 | 4517285 Hongcha
Hongcha's picture

Here is a very good way even a small pile of snakes can make some $$:

Charge clients for costs then fail to pass through the payment to pay the copiers, court reporters, and expert witnesses.

As a vendor, the more decent you are as a human being the more they will fuck you.

"Greatness or brightness conferreth not excellence" as John Milton said; but smaller does not mean better.

Thu, 03/06/2014 - 13:28 | 4517342 Downtoolong
Downtoolong's picture

As they were so willing to fraudulently interpret and manipulate accounting rules to this extent, imagine what they must have been doing to the law in the cases they were involved in.

Thu, 03/06/2014 - 13:55 | 4517498 Toolshed
Toolshed's picture

Gosh, if only they were bankers instead of lawyers, they would have nothing to worry about.

Thu, 03/06/2014 - 13:56 | 4517500 waterhorse
waterhorse's picture

Wouldn't it be great to see Covington & Burling BITE THE DUST?

Thu, 03/06/2014 - 14:00 | 4517537 kragsquest
kragsquest's picture

WHAT MUST BE UNDERSTOOD IS THAT LIBERTARIANISM WOULD HAVE BEEN QUITE USELESS IN PREVENTING THIS GRIM TURN OF EVENTS!!  PERSONALLY I WOULD NOT WANT TO BE WORKING FOR SUCH A COMPANY EVEN IF PAID SIX FIGURES!!!  AS THIS TITANIC SINKS, THERE WILL BE A HUGE SUCKING SOUND YOU DON'T WANT TO BE ANYWHERE NEAR!!!  I WONDER WHICH POLITICAL SIDE WAS FAVORED BY THIS ENRON LIKE COMPANY???

Thu, 03/06/2014 - 15:00 | 4517910 Blankenstein
Blankenstein's picture

Stephen Dicarmine sounds like a good guy...

2. Crime, organized and otherwise: DiCarmine, whom Stewart describes as Davis’s e-mail-snooping hatchet man at Dewey & LeBoeuf, has a colorful family back story. DiCarmine’s cousin, with whom he was close as a child, turns out to be Vincent (Vinny Gorgeous) Basciano, a senior figure in the Bonanno crime family who has been convicted of murder and other crimes, Stewart reports. In 2011, as the law firm melodrama unfolded, Basciano faced a death-penalty hearing. DiCarmine took the stand to declare, “My cousin Vinny is loved by his family.” The jury sentenced Basciano to life in prison.

 

http://www.businessweek.com/articles/2013-10-11/big-law-with-gays-and-th...

 

From a comment on the Above the Law website:

"He's a closeted, insecure, pathological liar, who would push you out the door or in front of a bus in a nano-second if he thought it would gain him the good graces of his "flavor of the month" partner."

http://abovethelaw.com/2012/06/dewey-have-stephen-dicarmine-as-a-bankrup...

And many more comments like this one posted on this story and others about the firm, Davis and Dicarmine at Above the Law.  Seems like Dicarmine was well liked by former employees.   /s

Thu, 03/06/2014 - 15:05 | 4517966 SmittyinLA
SmittyinLA's picture

I noticed they (SEC, DOJ) didn't mention the "insurance companies" defrauded. 

I smell public employee pension money loss

Thu, 03/06/2014 - 15:15 | 4518034 Itchy and Scratchy
Itchy and Scratchy's picture

If they've been cookin' for 4 years they cud all be chefs now!

Thu, 03/06/2014 - 15:42 | 4518188 Mr Giggles
Mr Giggles's picture

I always use, Chattum, Cheatum & Runn. Far more respectable than Shotgunn, Bastard & Dribble.

Thu, 03/06/2014 - 17:45 | 4518777 tony bonn
tony bonn's picture

justice is throwing some small fry under the bus but i hope that they get slammed if guillty...the real stories are at jpm, mf global, db, bank of england and other crime rings proving that crime pays.

Thu, 03/06/2014 - 20:05 | 4519277 Muppet
Muppet's picture

Right now, these detailed findings are being circulated within every large law firm in the country with only one comment added....

 

"?"

 

Fri, 03/07/2014 - 17:43 | 4522980 AKL
AKL's picture

This story is linked by the NY Times at http://boss.blogs.nytimes.com/2014/03/07/today-in-small-business-is-it-t... -- but they misspelled your last name!

Tony Lima

Do NOT follow this link or you will be banned from the site!