Posted Mar 06, 2014 04:21 pm CST
The former chairman of the collapsed law firm of Dewey & LeBoeuf and three others are facing criminal charges in an alleged scheme to “cook the books.”
Charged with a scheme to defraud lenders are former Dewey chairman Steven Davis, former executive director Stephen DiCarmine, former chief financial officer Joel Sanders, and Zachary Warren, the firm’s client relations manager in 2008 and 2009, report the Am Law Daily and the New York Times DealBook blog. The 106-count indictment is here.
Warren is charged in the alleged scheme to defraud and with falsifying business records in a separate indictment (PDF). DiCarmine, DiCarmine and Sanders are accused in a scheme to defraud lenders and bond investors and also face multiple accusations of grand larceny and falsifying business records.
Manhattan District Attorney Cyrus Vance Jr. announced the indictment on Thursday. He said seven other people who worked at Dewey have already pleaded guilty in the alleged scheme, according to the DealBook account.
Prosecutors say the scheme began in 2008, soon after Dewey & LeBoeuf was formed from a merger of LeBoeuf, Lamb, Greene & MacRae and Dewey Ballantine. Because of problems caused by the financial crisis, Dewey couldn’t meet cash-flow requirements of its banks and made fraudulent accounting entries as part of a “master plan” to conceal the problems, prosecutors say. The alleged schemers concealed their fraud from law firm partners and auditors, the indictment says.
Among the fraudulent accounting adjustments alleged in the indictment are the concealment of $2.4 million in charges from an American Express card associated with Sanders that weren’t previously expensed or attributable to clients.
The scheme continued in 2010, prosecutors allege, when the firm firm made representations to refinance its debt with a $150 million private placement of securities with 13 insurance companies and a $100 million revolving line of credit with a syndicate of banks.
“By in or about March 2012,” the indictment says, “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 indictment cites alleged emails as evidence of the scheme. They include:
• Sanders, writing to DiCarmine about an accounting adjustment: “We came up with a big one. Reclass the disbursements.” DiCarmine allegedly responded, in substance: “You always do in the last hours. That’s why we get the extra 10 or 20% bonus. Tell [your wife], stick with me! We’ll buy a ski house next. Just need to keep the ship afloat.”
• Warren responding to an email about the master plan: “Hey man, I don’t know where you come up with some of this stuff, but you saved the day. It’s been a rough year but it’s been damn good. Nice work dude. Let’s get paid!”
• Sanders, writing to an employee about the loss of an accounting partner conducting Dewey’s audit: “Can you find another clueless auditor for next year?”
Meanwhile, the Securities and Exchange Commission sued Davis, DiCarmine and Sanders along with the firm’s former finance director, Francis Canellas, and former controller Thomas Mullikin, according to the Am Law Daily and Bloomberg News. The suit (PDF) claims “a bold and long-running accounting fraud” deceived investors in the 2010 bond offering.
“So pervasive was the culture of financial chicanery at Dewey’s top levels,” the SEC suit said, “that its highest ranking officials—including the defendants—had no qualms about referring among themselves in various emails to ‘fake income,’ ‘accounting tricks,’ ‘cooking the books,’ and deceiving what they described as a ‘clueless’ auditor.”
Elkan Abramowitz, who represents Davis, told the Times his client acted in “good faith in an effort to make the firm a success” and the charges are “simply wrong.” Austin Campriello, the lawyer for DiCarmine, told the newspaper his client “did not commit any crimes” and the DA’s office “spins some inartful emails into crimes.” Edward Little, who represents Sanders, said his client broke no laws and the charges reveal “a basic lack of understanding of financial accounting.”
Lawyer’s comment on behalf of DiCarmine corrected at 11:25 a.m.