DEWEY & LEBOEUF: CONNECTING MORE DOTS

[NOTE: August 8, 2014 at 5:00 pm EDT is the deadline for nominations to the ABA’s annual list of the “100 best websites by lawyers, for lawyers.” To nominate The Belly of the Beast, please click here.]

Two years ago, Dewey & LeBeouf filed for bankruptcy. Intriguing aspects of the firm’s unraveling are still emerging.

Recently, three of the firm’s former leaders, chairman Steven Davis, executive director Stephen DiCarmine, and chief financial officer Joel Sanders, filed an omnibus motion to dismiss the criminal charges against them. Such filings are not unusual. But their joint memorandum in support, along with DiCarmine’s separate supplemental brief, contain fascinating insights into the firm’s collapse. As the dots get added, it’s becoming easier to connect some of them.

Beyond the Scapegoats

Back in November 2012, former Dewey chairman Steven Davis hinted at the flaws in any narrative suggesting that he alone took the firm down. His filing in the Dewey bankruptcy proceeding promised another perspective:

“While ‘greed’ is a theme…, the litigation that eventually ensues will address the question of whose greed.” (Docket #654; emphasis in original)

The three co-defendants’ joint memorandum returns to that theme. It argues that the firm’s distress resulted from, among other things, “the voracious greed of some of the firm’s partners.” DiCarmine’s supplemental brief describes the greed of some former partners as “insatiable.”

The 2010 Bond Offering and 2012 Partner Contribution Plan

Some former Dewey partners might find the defendants’ recent filings uncomfortable. For example, much of the government’s case turns on the firm’s 2010 bond offering that brought in $150 million from outside investors. DiCarmine’s supplemental brief asks why, except for Davis, “the Executive Committee members who approved and authorized it have not been charged with any wrongdoing.”

Later, as the firm collapsed during the first five months of 2012, it drew down millions from bank credit lines while simultaneously distributing millions to Dewey partners. As I’ve reported previously, from January to May 2012, 25 Dewey partners received a combined $21 million.

The joint memorandum suggests that “if the grand jury presentation was fair and thorough, it demonstrates that drawdowns the firm made in 2012, prior to filing for bankruptcy, were made at the direction of several partners on the firm’s Operations Committee, and against the advice of Mr. Sanders, and despite the concerns of Mr. Davis and objections raised by Mr. DiCarmine.”

Shortly after those 2012 distributions occurred, Wall Street Journal reporters asked former Dewey partner Martin Bienenstock whether the firm used those bank credit lines to fund partner distributions. Bienenstock replied, “Look, money is fungible.”

He’s right. But that raises another question: Did some partners then use those eleventh-hour distributions of fungible dollars for their subsequent payments to the bankruptcy court-approved Partner Contribution Plan? The answer matters because the PCP capped each participating partner’s potential financial obligation to the Dewey estate. Unsecured creditors will recover an estimated 15 cents for every dollar the firm owed them.

There’s another twist. Dewey made its way through the bankruptcy proceeding without disclosing how partners shared those 2010 bond proceeds. In calculating each partner’s required contribution to the PCP, only partner distributions after January 1, 2011 counted. The PCP excluded consideration of any amounts that partners received in 2010.

Remember Zachary Warren?

The joint memorandum also counters the Manhattan District Attorney’s characterization of the accounting issues in the case as open and shut: “lf the grand jury had been properly instructed on these [accounting] standards, it would have concluded that the accounting methods were permissible,….”

Which takes us back to the curious case against Zachary Warren, a subject of several earlier posts. The charges against the former low-level Dewey staffer are predicated on an underlying violation of those accounting standards, too.

Warren has sought to sever his trial from that of his co-defendants, Davis, DiCarmine, and Sanders. Warren argues that plea agreements from witnesses who are cooperating with the government, notably Frank Canellas, demonstrate how thin the case against him is.

The Manhattan District Attorney responds that statements in the plea agreements are just the beginning: “[T]he purpose of the allocutions was to set forth facts implicating the witnesses in the crimes they committed; any part of them that inculpates the defendant is merely incidental.” (District Attorney’s letter to Hon. Robert Stolz, July 3, 2014) (App. I of Defendants Davis, DiCarmine, and Sanders Omnibus Memorandum in Support of Motion to Dismiss))

Really? Some career prosecutors might find it surprising to learn that when they get a defendant to “flip” and provide statements fingering a different target, the flipper’s statements are “merely incidental” insofar as they inculpate that target.

But the best line in the District Attorney’s surreply tries to connect Warren’s alleged December 2008 activities to Dewey’s collapse more than three years later: “[H]e was there to light the spark that fueled the scheme until its implosion in 2012.” (p. 6)

At least with respect to Zachary Warren, methinks the government doth protest too much. Meanwhile, his co-defendants are focusing on questions that cry out for answers.

 

 

DEWEY – PROSECUTING THE VICTIMS

[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.