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 [7].
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 [8] 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 [9]