NEW YORK (Reuters) — Less than a month
after writing that he did not want to "cook the books anymore," but
facing a deadline to show lenders that Dewey & LeBoeuf had enough
cash, the law firm's top finance executive emailed a colleague that
he "came up with a big one," according to investigators.
"You always do in the last hours," the law firm's executive director
Stephen DiCarmine replied to the December 29, 2008 email from chief
financial officer Joel Sanders, according to investigators. "That's
why we get the extra 10 or 20% bonus."
The communications and other evidence are the basis of criminal and
civil charges announced in New York on Thursday in which the law
firm's former leaders are accused of accounting gimmicks and fraud
to cheat banks and investors in a failed attempt to keep their
prestigious law firm alive.
Dewey & LeBoeuf once had as many as 1,400 lawyers, before going
bankrupt in May 2012. Its collapse is the largest of a U.S. law
firm, costing thousands of jobs and hundreds of millions of dollars
of estimated losses for banks, lenders and investors.
The 106-count indictment from Manhattan District Attorney Cyrus
Vance Jr. charges former Dewey & LeBoeuf chairman Steven Davis, 60,
DiCarmine, 57, and Sanders, 55, with several dozen felonies each,
including grand larceny, securities fraud and falsifying business
records.
Former client relations manager Zachary Warren, 29, was also
criminally charged with helping to start the fraud and cover up its
early stages.
All four men pleaded not guilty on Thursday in Manhattan criminal
court, which they entered in handcuffs. Davis was carrying a
paperback book while DiCarmine and Sanders, who live in Florida,
appeared to have suntans.
Davis lives in London, England, and agreed to travel restrictions.
Bail was set on Thursday at $2 million for Davis, DiCarmine and
Sanders, and $200,000 for Warren.
Manhattan Assistant District Attorney Peirce Moser told State
Supreme Court Justice Robert Stolz that the men "acted out of a
shocking mix of greed and hubris."
Separately, the U.S. Securities and Exchange Commission filed a
civil fraud lawsuit against five former Dewey & LeBoeuf officials:
Davis, DiCarmine, Sanders, finance director Frank Canellas, 34, and
controller Thomas Mullikin, 43, for cheating 13 insurers in a $150
million bond offering in 2010.
At a press conference, Vance said Dewey's finance department ran a
"blatant accounting fraud and deceit" at the direction of the firm's
top management, and that officials gave false information to the law
firm's auditor, Ernst & Young. Ernst & Young spokeswoman Amy Call
Well declined to comment.
Vance said this went on even as Davis was authorizing "generous"
salaries and bonuses for top lieutenants, while many other law firm
employees were seeing their pay go down.
Seven people, whose names have not been publicly disclosed, have
already pleaded guilty in the case, and the investigation is
continuing, Vance said.
DEFENSE LAWYERS SEE SCAPEGOATING
Dewey & LeBoeuf was formed in a 2007 merger of two New York law
firms, Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae.
Prosecutors said the evidence shows attempts to head off the firm's
possible collapse, as it found itself unable to cut costs fast
enough to combat a plunge in revenue and mounting debt following the
financial crisis.
Many of the problems arose from the big pay packages that had been
guaranteed to dozens of partners, to a degree atypical in the legal
industry.
These payouts often went to partners who did not produce enough
revenue to justify them, spurring resentment and eventually mass
defections from partners who were missing out.
The "Dewey" in the firm's name was Thomas Dewey, the former New York
governor and Republican presidential candidate.
Separately, the U.S. Securities and Exchange Commission filed civil
fraud charges (read the complaint
http://static.reuters.com/resources/media/
editorial/20140306/SECcomplaint-3-6-14.pdf) against Davis,
DiCarmine, Sanders and two other former Dewey officials, finance
director Frank Canellas, 34, and controller Thomas Mullikin, 43,
saying they misled investors in a 2010 bond offering.
Elkan Abramowitz, a lawyer for Davis, said his client's actions as
chairman "were taken in good faith in an effort to make the firm a
success."
DiCarmine's and Sanders' respective lawyers, Austin Campriello and
Edward Little, said the charges reflect a bid by prosecutors to find
a "scapegoat" for the law firm's collapse.
Warren's lawyer, Steve Hyman, declined to comment.
Lawyers for Canellas and Mullikin did not immediately respond to
requests for comment.
'WE NEED TO HIDE THIS'
Investigators said the fraud began in late 2008, when Dewey
executives began misrepresenting the law firm's compliance with cash
flow and other loan covenants.
Prosecutors accused Davis, DiCarmine and Sanders of covering their
tracks by misclassifying revenue and expenses to make Dewey's books
look better, and trying to backdate checks.
The men were also accused by Vance of having stolen nearly $200
million from 13 insurers and two financial institutions.
Evidence included a note from Sanders to two employees after he had
learned in 2011 that Dewey did not write off millions of dollars of
a troubled client's receivables.
"We need to hide this actually writing it off," Sanders allegedly
wrote, according to Vance.
The SEC case focuses on the regulator's allegations that investors
were misled about Dewey's finances in marketing materials for the
2010 bond offering, which it said was conducted "to alleviate the
burden of its crushing debt."
Among its evidence was a schedule of proposed cost cuts that was
labeled "Accounting Tricks," and DiCarmine's hopes for a larger
bonus.
"We'll buy a ski house next. Just need to keep the ship afloat,"
DiCarmine wrote to Sanders, according to the SEC.
Dewey's lenders have included JPMorgan Chase & Co, Citigroup Inc's
private banking unit, Bank of America Corp and HSBC Holdings Plc.
"Investors were led to believe they were purchasing bonds issued by
a prestigious law firm that had weathered the financial crisis and
was poised for growth," SEC enforcement chief Andrew Ceresney said.
He called the bond sale "a desperate grasp for cash."
The SEC is seeking civil fines and to recoup illegal gains.
The cases are New York v. Davis et al, New York State Supreme Court,
New York County, and SEC v. Davis et al, U.S. District Court,
Southern District of New York, No. 14-1528.
(Additional reporting by Dena Aubin;
editing by Grant McCool)
