Tag Archives: Dewey guilty pleas

DEWEY: 10 LESSONS LOST

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National news organizations began working on stories about the verdicts in the Dewey & LeBoeuf case long before the jury’s deliberations ended.

“What are the lessons?” several reporters asked me.

My initial inclination was to state the obvious: Until the jury renders its decision, who can say? But that would be an unfortunately limited way of viewing the tragedy that befell a once noble law firm. In fact, the trial obscured the most important lessons to be learned from the collapse of Dewey & LeBoeuf.

Lesson #1: You Are What You Eat

During the twelve months prior to the firms’ October 2007 merger, Dewey Ballantine hired 30 lateral partners; LeBoeuf Lamb hired 19. The combined firm continued that trend as Dewey & LeBoeuf became one of the top 10 firms in lateral recruiting. By 2011, 50 percent of the firm’s partners were post-2005 laterals into Dewey & LeBoeuf or its predecessors.

A partnership of relative strangers is not well-positioned to withstand adversity.

Lesson #2: Mind the Gap

To accomplish aggressive lateral hiring often means overpaying for talent and offering multi-year compensation promises. By 2012, Dewey & LeBoeuf’s ratio of highest-to-lowest paid equity partners was 20-to-1.

A lopsided, eat-what-you-kill partnership of haves and have-nots has difficulty adhering to a common mission.

Lesson #3: Not All Partners Are Partners

One corollary to a vast income gap within the equity ranks is the resulting partnership-within-a-partnership. As those at the top focus on the short-term interests of a select few, the long-run health of the institution suffers.

A partnership within a partnership can be a dangerous management structure.

Lesson #4: The Perils of Confirmation Bias

Firm leaders and their fellow partners are vulnerable to the same psychological tendencies that afflict us all. When former Dewey chairman Steven H. Davis held fast to his perennial view that better times were just around the corner, fellow partners wanted to believe him.

Magical thinking is not a business strategy.

Lesson #5: Short-termism Can Be Lethal

Short-term thinking dominates our society, even for people who view themselves as long-term strategists. At Dewey, the need to maximize current year partner profits and distribute cash to some partners overwhelmed any long-term vision that Davis sought to pursue.

In the not-so-long run, a firm can die.

Lesson #6: Behavior Follows Incentive Structures

Most firms hire lateral partners because they will add clients and billings. To prove their worth, laterals build client silos to prevent others from developing relationships with “their clients.” Similarly, there’s no incentive for partners in “eat-what-you-kill” firms to mentor young attorneys or facilitate the smooth intergenerational transition of client relationships.

Over time, the whole can become far less than the sum of its parts.

Lesson #7: Disaster Is Closer Than You Think

When the central feature of a firm’s culture is ever-increasing partner profits, even small dips become magnified. Incomes that are staggering to ordinary workers become insufficient to keep restless partners from finding a new place to work.

Death spirals accelerate.

Lesson #8: Underlings Beware

On cross-examination, some of the prosecution’s witnesses testified that at the time they made various accounting adjustments to Dewey’s books, they didn’t think they’d done anything wrong. But now they are parties to plea agreements that could produce prison time.

Deciding that something isn’t wrong is not always the same as determining that it’s right.

Lesson #9: Greed Governs

Who among the Dewey partners received the $150 million in bond proceeds from the firm’s 2010 bond offering? I posed that question a year ago and we still don’t know the answer. During the first five months of 2012 — as the firm was in its death throes — a small group of 25 partners received $21 million while the firm drew down its bank credit lines. Who masterminded that strategy?

In a November 2012 filing with the Dewey bankruptcy court, Steven Davis explained why Dewey collapsed: “While ‘greed’ is a theme…, the litigation that eventually ensues will address the question of whose greed.” (Docket #654) He was referring to some of his former partners who ignored the role that fortuity had played in creating their personal wealth.

Hubris is a powerfully destructive force.

Lesson #10: Superficial Differences Don’t Change Outcomes

For the three years that Dewey has been in the news, many big law firm leaders have been performing the task at which attorneys excel: distinguishing adverse precedent. In great detail, they explain all of the ways that their firms are nothing like Dewey. But they fail to consider the more significant ways in which their firms are similar.

A walk past the graveyard is easier when you whistle. Louder is better. Extremely loud and running is best.

DEWEY – PROSECUTING THE VICTIMS

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[NOTE: On Friday, April 11 at 9:00 am (PDT), I’ll be delivering the plenary address at the Annual NALP Education Conference in Seattle.

On Wednesday, April 16 at 5:00 pm (CDT), I’ll be discussing The Lawyer Bubble — A Profession in Crisis as part of the Chicago Bar Association Young Lawyers Section year-long focus on “The Future of the Legal Profession.”]

The trip from victim to perpetrator can be surprisingly short. Just ask some former Dewey & LeBoeuf employees who pled guilty for their roles in what the Manhattan District Attorney calls a massive financial fraud. Anyone as puzzled as I was by 29-year-old Zachary Warren’s perp walk last month will find recently unsealed guilty plea agreements in the case positively mind-boggling. In some ways, those agreements are also deeply disturbing, but not for the reasons you might think.

Warren, you may recall, was a 24-year-old former Dewey staffer when he allegedly had the misfortune of attending a New Year’s Eve day meeting in 2008 with two of his superiors. According to the grand jury indictment, they were among the “schemers” who developed a “Master Plan” of accounting fraud that persisted for years.

When Warren left Dewey in 2009 to attend law school, the firm was making hundreds of millions of dollars in profits, many individual partners enjoyed seven-figure paychecks, and no one foresaw the firm’s total collapse three years later. Nevertheless, last month Warren was indicted with three others who had held positions of responsibility right up to the firm’s ignominious end: former chairman Steven H. Davis, former executive director Stephen DiCarmine, and former chief financial officer Joel Sanders.

A fateful New Year’s Eve meeting

The indictment alleges that CFO Sanders was one of two people with Warren at their December 31 meeting. Now we’ve learned the identity of the other: Frank Canellas.

Canellas’ ascent in the firm had been meteoric. While finishing his bachelor’s degree at Pace University, he joined LeBoeuf, Lamb, Greene & MacRae in 2000 as a part-time accounting intern. Only seven years later, he became — at the tender age of 28 — director of finance for the newly formed Dewey & LeBoeuf. Thereafter, his compensation increased dramatically, rising to more than $600,000 annually by 2011.

In February 2014, Canellas copped a plea. He agreed to cooperate with prosecutors and plead guilty to a felony charge of grand larceny for his role in allegedly cooking Dewey’s books. In exchange, the DA will recommend a light sentence – only two-to-six years of jail time compared to the 15-year maximum penalty for the offense.

Using the boss to get underlings?

Presumably, one reason that the Manhattan DA squeezed Canellas was to help prove culpability at higher levels of the defunct firm, particularly CFO Sanders. But there is something more troubling here than the use of that standard prosecutorial tactic to get at the higher-ups. In his plea agreement statement, Canellas also implicates downstream employees who, he says, implemented the accounting adjustments that he and his bosses developed.

Ironically, in 2012, the people whom Canellas now fingers were among the hundreds of non-lawyers who suffered the most in the wake of Dewey & LeBoeuf’s spectacular implosion. When that was happening, observers properly regarded the firm’s low-level staffers generally as helpless victims. Now, for some of them, guilty pleas in exchange for recommendations of leniency give new meaning to the phrase “adding insult to injury.”

What’s the point?

Why go after the underlings at all? Does it really take a criminal prosecution coupled with the promise of a plea deal to assure the truthful testimony of pawns in a much larger game? With Canellas on the hook, wouldn’t a trial subpoena do the trick for those working under him?

The policy ramifications are even more profound. What message does the Manhattan DA send by flipping a cooperating superior to nail underlings for doing what the superior asked them to do? What does this approach mean for employees far down the food chain in a big law firm or any other organization? Even if you don’t have an accounting degree, should you now second-guess the bookkeeping directives that you receive from people who do? Then what? Complain to your local district attorney that you have concerns about your instructions? And why draw the line at accounting issues?

For any employee now worried about becoming the target of a subsequent criminal proceeding, other options make even less practical sense. As the economy crashed in 2008 and 2009, was it the low-level staffer’s duty to refuse a directive relating to the firm’s accounting procedures or any other issue that caused the staffer concern? To quit or get fired from a decent job and enter a collapsing labor market? To apply for work elsewhere, only to have a prospective new employer solicit a prior job reference and learn that the would-be hire is not a “team player”?

Losing sight of the mission

Unlike many senior partners at Dewey & LeBoeuf, the six relatively low-level staffers who did as Canellas directed (and have now pled guilty to resulting crimes) did not walk away with millions of dollars. Other than the jobs they held until the firm disintegrated, none benefitted financially from the alleged financial fraud.

The situation brings to mind a November 2012 court filing on behalf of Dewey’s former chairman, Steven H. Davis. Responding to the motion of the Dewey & LeBoeuf Official Committee of Unsecured Creditors for permission to sue Davis personally, Davis’s brief concluded: “While ‘greed’ is a theme of the Committee’s Motion, the litigation that eventually ensues will address the question of whose greed.” (Docket #654; emphasis in original)

The Manhattan DA’s investigative efforts could center on that question, too. So far, as indictments and plea deals get unsealed, the situation looks more like an unrestrained effort to secure notches on a conviction belt.

Perhaps it’s just too early to tell where the prosecution is headed. Then again, maybe vulnerable scapegoats make easier targets than the wealthy, high-powered lawyers who created and benefitted from the culture in which those scapegoats did their jobs.