Sometimes there’s more to a news story than meets the eye. For example, recent indictments and guilty pleas involving former Dewey & LeBoeuf personnel focus on a handful of individuals who allegedly cooked the firm’s books for years prior to its implosion. The sordid details make for entertaining press conferences and great headlines.

But maybe a more interesting question is: who will be standing naked when the Manhattan DA finishes pulling the threads on that sweater? A careful look at Frank Canellas’ plea agreement suggests some surprising possibilities. But it takes a brief history of the Dewey bankruptcy proceeding to understand some of them. So bear with me.

Remember the PCP?

Back in October 2012, the Dewey & LeBoeuf bankruptcy judge approved a novel Partnership Contribution Plan. For a collective $71.5 million, participating former Dewey partners received releases of creditor claims totaling more than $500 million. That meant creditors could not seek to “clawback” additional amounts that partners received while the firm was insolvent.

When did the firm become insolvent? The PCP answered that question with a specific date, January 1, 2011. A progressive payment table determined each partner’s required contribution based on the amount the partner received from Dewey after that date. Partners who had received $400,000 or less paid back 10 percent of the total. From there, the percentage rose so that partners who had received $3 million or more paid 30 percent. (Former Chairman Steven Davis was not allowed to participate in the plan.)

Remember the 2010 bond offering?

The January 1, 2011 cutoff date was important because Dewey & LeBoeuf’s unusual $150 million bond offering closed in 2010. Under the PCP, any money that participating partners received that year — including proceeds from bond investors and funds from banks that refinanced the firm’s debt — remained off the potential clawback table.

A group of retired Dewey partners objected to the PCP, claiming that its terms favored former firm leaders.  Attorneys for the Dewey bankruptcy estate responded that they had retained an outside professional, Jonathan Mitchell of Zolfo Cooper, who had “controlled the development and promulgation of the PCP.” (Docket #482 at 10) Mitchell worked on the project with David Pauker of Goldin Associates.

Remember the court’s approval of the PCP?

Dewey’s bankruptcy judge overruled objections to the PCP and determined that the January 1, 2011 cutoff date was reasonable. In doing so, he relied in part on Mitchell and Pauker, who testified to the difficulty of efforts aimed at proving that the firm was insolvent earlier:

“Based on investigations of the Debtor’s finances by the Debtor’s professionals, Pauker and Mitchell testified that there was strong evidence to support the assertion that the Debtor was insolvent in 2012, but insolvency would be more difficult to prove for 2011, and even harder for 2010. Determining the exact insolvency date is both difficult and expensive because several complex tests are used, leading to extended expensive litigation as those tests can produce contradictory results.” (10/09/12 Mem. Op. at 23; transcript record citations omitted)

Of particular interest in light of Canellas’ recent guilty plea regarding his role in creating the firm’s financial statements, the court went on to observe: “Further complicating the issue, the firm had a clean audit opinion issued in 2010 and was able to refinance a significant portion of its debt,….” (Id.)

Now things get interesting

Flash forward to March 2014, when the Manhattan DA unseals Canellas’ plea agreement. In his accompanying statement, the former Dewey director of finance says that, far from clean, audit opinions for 2008, 2009, and 2010 were based on financial statements that he knew to be false.

Meanwhile, the Dewey bankruptcy attorneys who persuaded the court to approve the PCP gave way to a liquidating trustee. That trustee is asserting clawback claims against individual partners who refused to participate in the PCP. Those complaints allege that the firm was insolvent no later than January 1, 2009 and seek recovery based on that much earlier date.

Now what?

Here’s another way to look what has happened so far:

1. Lawyers for the Dewey bankruptcy estate presented the court with a plan whereby former Dewey partners returned a percentage of the amounts that they received after January 1, 2011 — but anything they received prior to that date became off limits to Dewey’s creditors. (The court-approved final confirmation plan estimated that general unsecured creditors with claims collectively approaching $300 million would eventually receive between 4 cents and 15 cents for every dollar that the firm owed them.)

2.  A group of objectors claimed that the PCP favored Dewey’s most wealthy and powerful former partners.

3. The court overruled that objection and approved the PCP with its January 1, 2011 cutoff date because, among other reasons, professional advisers to the Dewey estate testified that it was reasonable and the firm got what the court called a “clean” audit for 2010.

4. The Manhattan DA has now indicted four former Dewey employees — and obtained guilty pleas from seven others — for their roles in allegedly cooking the books in ways that, if true, would render the 2010 audit not so clean.

5.  One more thing. According to Canellas’ statement appended to his February 13, 2014 plea agreement, after Dewey filed its bankruptcy petition on May 28, 2012, he continued working for the firm’s wind down committee and, at the time he signed the statement, was still working for Dewey’s liquidating trustee. (The plea agreement required him to resign from that position.)

As you try to wrap your head around all of this, remember that “foolish consistency is the hobgoblin of little minds.” So think big and follow the money, if you can find it.

In my next post, I’ll discuss another aspect of the Canellas plea agreement that is likewise deeper than the current headlines — and far more troubling.