(Bloomberg) — Three former executives at Dewey & LeBoeuf LLP, once the No. 3 legal adviser to banks handling merger deals, were charged with a "blatant" $200 million fraud that spurred the largest law firm bankruptcy in history.
The three, including the chairman, executive director and chief financial officer, were accused of using accounting gimmicks similar to those that sent top executives at WorldCom Inc. and Tyco International Ltd. to prison a decade ago. Authorities cited e-mails in which the men referred to "fake income," "cooking the books" and "accounting tricks."
"Fraud is not an acceptable accounting practice," Manhattan District Attorney Cyrus R. Vance Jr. said today in announcing the charges. "The defendants are accused of concocting and overseeing a massive effort to cook the books" that "contributed to the collapse of a prestigious international law firm."
Dewey, which once had 1,300 lawyers in Manhattan and 3,000 internationally, filed for bankruptcy protection in May 2012, owing creditors $245 million. The New York-based firm, the product of a 2007 merger between Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, fell apart within weeks after ousting Chairman Steven Davis in April 2012 and watching virtually all its partners quit for competing firms.
Cooperators
Accused in a 106-count indictment are Davis; Stephen DiCarmine, the former executive director; and Joel Sanders, the ex-chief financial officer. Ex-client relations manager Zachary Warren was also arrested. Seven others, some of whom are cooperating with prosecutors, have pleaded guilty, Vance said. They weren't identified.
The Securities and Exchange Commission today sued Davis, DiCarmine, Sanders and two others, alleging a "bold and long- running accounting fraud."
The four criminal defendants, in handcuffs and suits, appeared in state Supreme Court in Manhattan and denied wrongdoing. Davis, DiCarmine and Sanders were freed on $2 million bail, Warren on $200,000.
The allegations concern "similar techniques to all the great cases where people have gone to jail," said Lynn Sarko, a securities lawyer at Seattle-based Keller Rohrback LLP, in a telephone interview. He's not involved in the case. "As a managing partner of a law firm, I'm sitting there going, 'Wow.' This is not business as usual."
Hid expenses
Lies to auditors, partners and the firm's own executive committee began in November 2008 as Dewey's cash flow slowed amid the financial crisis and continued until March 2012, according to the indictment.
The executives inflated revenue and hid expenses to comply with lending agreements and as part of a $150 million bond offering, prosecutors said. The defendants stole almost $200 million from 13 insurance companies and two financial firms, they said.
"Rather than speak openly with creditors about mounting debt and shrinking revenue, the defendants began deliberately manipulating the firm's financial statements," said Richard Frankel, who heads the FBI's criminal division in New York, in a statement. "They backdated checks, changed write-offs and even misappropriated loan payments as revenue. All in an elaborate attempt to cover up the increasingly dire situation."
Davis, 60, DiCarmine, 57, and Sanders, 55, face as many as 25 years in prison if convicted, Vance said. Warren, 29, faces as many as four years. Charges include grand larceny, a scheme to defraud, Martin Act securities fraud and falsifying records.
Cash flow
According to authorities, the firm in 2008 signed a credit agreement with four banks, requiring it to maintain an annual cash flow of $290 million. At year's end, they said, Sanders and the firm's finance director told Davis and DiCarmine that Dewey was in danger of violating the cash-flow requirements, threatening its credit and ability to operate.
Sanders and others then began scheming to falsify Dewey's books to inflate its revenue, according to authorities. Dewey cut expenses by mischaracterizing payments to salaried lawyers, reversing disbursements that had been written off, double- booking income, encouraging clients to backdate checks and delaying expenses, they said.
"I don't want to cook the books anymore," Sanders said in a Dec. 4, 2008 e-mail, according to the SEC. "We need to stop doing that."
