Tag Archives: Manhattan District Attorney

DEWEY, THE D.A., AND SECRETS

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“There aren’t too many secrets in this case,” said Judge Robert Stoltz on December 5. He was referring to the Dewey & LeBoeuf trial over which he presided. The multi-year effort to convict Steven Davis, Stephen DiCarmine, and Joel Sanders produced a raft of acquittals on many charges and a hung jury on the more serious offenses.

Actually, there are two big secrets in the case, but no one is talking about them.

Secret #1: Why Zachary Warren?

Former Dewey chairman Steven H. Davis won’t face a retrial. Assistant DA Peirce Moser has offered him a deferred prosecution agreement. As reported, he will not have to admit guilt and can continue practicing law. When my kids were young, they would have called this a “do-over.”

Judge Stoltz’s reference to secrets was in response to Moser’s suggestion that the retrial of executive director DiCarmine and finance director Sanders should precede the first trial of former low-level staffer Zachary Warren. The longer Warren dangled in a world of uncertainty, the more leverage it would give Moser in his relentless pursuit of someone who never should have been indicted in the first place. Appropriately, the judge denied Moser’s request.

That leads to secret number one: Why is the Manhattan DA’s office squandering its scarce resources to pursue Zachary Warren at all?

I’ve written extensively about Warren’s plight. At age 24, he worked at Dewey & LeBoeuf for about a year from mid-2008 to mid-2009 as a client relations specialist. His principal job was to pester Dewey & LeBoeuf partners into making sure clients paid their bills.

Apparently, his mistake of a lifetime came on December 30, 2008. That’s when he accepted an invitation to join 29-year-old finance director Frank Canellas and 53-year-old chief financial officer Sanders for dinner at Del Frisco’s steakhouse. There he allegedly witnessed the creation of what the DA’s office called a master plan of accounting fraud. As his price for that free dinner, Warren would get indicted five years later.

When Zachary Warren left Dewey & LeBoeuf in June 2009, did anyone in the world think that the firm was unlikely to repay its bills, much less collapse — ever? No.

In 2010, was Warren even at the firm as others worked on the bond offering at the center of the DA’s case? No, he was a one-L at Georgetown.

Even if obtained, would a conviction of Warren result in anything positive for anyone inside or outside our justice system? No.

Warren’s indictment was a travesty. The jury’s rejection of the DA’s case against his superiors is reason alone to drop the effort to prosecute him.

Unsatisfying Answers

So why is Moser so determined to try Zach Warren? One possibility is that the same phenomena contributing to Dewey & LeBoeuf’s downfall infects the DA’s office: hubris, ego, lack of accountability for mistakes, and an unwillingness to admit errors that would prompt thoughtful individuals to change course. Maybe it’s a lawyer personality thing.

Another possibility is the public servant manifestation of greed: the DA wants to put a Dewey & Le Boeuf notch — any Dewey & LeBoeuf notch — on its convictions holster. After Cyrus Vance, Jr. personally announced the indictments in a circus-like press conference on March 6, 2014, Moser suffered unambiguous defeat. In fact, even the plea agreements that the DA’s office squeezed from former firm staffers who later testified at trial now look silly. Unfortunately, the resulting penalties aren’t silly for those who are stuck with them.

To put the DA’s pursuit of Zachary Warren in context consider this. According to published reports, assistant DA Peirce Moser has offered him a plea deal, too. But it is more onerous than the DA’s deferred prosecution agreement with Davis.

There is no just world in which that makes any sense.

Secret #2: Where is the Money?

Prosecutors told the jury that it would not see a “smoking gun.” That’s because the DA didn’t know how to look for or describe it. But the gun was there. It was pervasive, insidious, and hiding in plain sight. It was the environment that caused staffers to fear for their jobs if powerful partners weren’t happy. That meant making sure they received millions more than the firm had available to distribute, even if it came from bank credit lines and outside investors in the firm’s 2010 bond offering.

That leads to secret number two: Why didn’t the DA follow the money?

The public could have reasonably expected Vance to direct the power of his office toward the most egregious offenders and offenses. That didn’t happen. Sure, Davis had a major responsibility for the strategy that brought the firm down. But the executive committee consisted of top partners who were supposed to be fiduciaries in running the firm for the benefit of all partners and the institution. Likewise, as most of the firm’s so-called leaders walked away with millions — far more than Davis, DiCarimine, Sanders, or Warren received — bankruptcy creditors got between five and fifteen cents for every dollar the firm owed them.

In a November 2012 bankruptcy court filing, Davis himself teed up what should have been the central issue in any attempt to assign blame for the firm’s problems:

“While ‘greed’ is a theme…, the litigation that eventually ensues will address the question of whose greed.”

The DA’s office never pursued that question.

Just Rewards

Shortly after Vance’s March 2014 press conference, assistant district attorney Peirce Moser received a promotion. He became chief of the tax crimes unit. The DA’s office announced that Moser’s new position would not preclude him from continuing to run the Dewey & LeBoeuf case. Based on his prominence at the most recent court hearing, it’s still Moser’s case.

If no good deed goes unpunished, sometimes it seems that no bad deed goes unrewarded.

THE DEWEY TRIAL: TRUTH, JUSTICE, OR NEITHER?

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[NOTE: My recent post, “Cravath Gets It Right, Again,” was a BigLaw Pick of the Week.]

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“Not all the evidence that you hear and see will be riveting,” said Steve Pilnyak last Tuesday as he opened the prosecution’s case against three former leaders of the now-defunct Dewey & LeBoeuf. The judge warned jurors that they will probably be there past Labor Day. The antagonists will present dueling views of what the New York Times called “arcane accounting treatments and year-end adjustments” three years before Dewey’s collapse. As you read between the yawns, watch to see if the trial leaves the most important questions about the final days of a storied firm unanswered.

Victims?

The prosecution’s case requires victims. It settled on insurance companies who bought the firm’s bonds in 2010 and big banks that lent the firm money for years. We’ll see how that plays, but it’s difficult to imagine aggrieved parties that would generate less juror sympathy than insurers and Wall Street bankers. Then again, rich lawyers aren’t exactly the most desirable defendants, either.

The prosecution’s cooperating witnesses will take the stand to explain what it calls a “Master Plan” of accounting adjustments that are the centerpiece of the case. The battle of experts over those adjustments is more likely to induce sleep than courtroom fireworks.

Villains?

If you think former firm chairman Steven Davis and his two co-defendants, Stephen DiCarmine and Joel Sanders, are the only villains in this saga, you’re allowing the trees to obscure a view of the forest. In that respect, the trial will fail at its most fundamental level if it doesn’t address a central question in the search for justice among Dewey’s ruins: Who actually received — and kept — the hundreds of millions of dollars that entered the firm’s coffers as a result of the allegedly fraudulent bond offering and bank loans?

As the firm collapsed in early 2012, it drew down tens of millions of dollars from bank credit lines while simultaneously distributing millions to Dewey partners. As I’ve reported previously, during the five months from January to May 2012 alone, a mere 25 Dewey partners received a combined $21 million. Are they all defendants in the Manhattan District Attorney’s criminal case? Nope. Will we learn the identity of those 25 partners, as well was the others who received all of that borrowed money? I hope so.

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

It sounds like his answer to the question was yes.

Unwitting Accomplices?

With respect to the proceeds from Dewey’s $150 million bond offering, the picture is murkier, thanks to protective cover from the bankruptcy court. When Judge Martin Glenn approved a Partner Contribution Plan, he capped each participating partner’s potential financial obligation to Dewey’s creditors at a level so low that unsecured creditors had a likely a recovery of only 15 cents for every dollar the firm owed them. That was a pretty good deal for Dewey’s partners.

But here’s the more important point. As it approved that deal, the court did not require the firm to reveal who among Dewey’s partners received the $150 million bond money. In calculating each partner’s required contribution to the PCP, only distributions after January 1, 2011 counted. The PCP excluded consideration of any amounts that partners received in 2010, including the bond money. That meant they could keep all of it.

In light of the bankruptcy code‘s two-year “look back” period, that seemed to be a peculiar outcome. Under the “look back” rule, a debtor’s asset transfers to others within two years of its bankruptcy filing are subject to special scrutiny that is supposed to protect against fraudulent transfers.

Dewey filed for bankruptcy on May 28, 2012. The “look back” period would have extended all the way to May 28, 2010 — thereby including distributions of the bond proceeds to partners. Which partners received that money and how much did they get? We don’t know.

Connecting Dots

As the firm’s death spiral became apparent, a four-man office of the chairman — one of whom was Bienenstock — took the leadership reins from Steven Davis in March 2012. A month later, it fired him. In an October 12, 2012 Wall Street Journal interview, Bienenstock described himself as part of a team that, even before the firm filed for bankruptcy, came up with the idea that became the PCP. He called it an “insurance policy” for partners.

Taking Bienenstock’s “money is fungible” and “insurance policy” comments together leads to an intriguing hypothetical. Suppose that a major management objective during the firm’s final months was to protect distributions that top partners had received from the 2010 bond offering. Suppose further that in early 2012 some of those partners also received distributions that the firm’s bank loans made possible. Finally, suppose that those partners used their bank loan-funded distributions to make their contributions to the PCP — the “insurance policy” that absolved them of Dewey’s obligations to creditors.

When the complete story of Dewey gets told, the end game could be its climax. It could reveal that a relatively few partners at the top of the firm won; far more partners, associates, staff, and creditors lost.

Or maybe I’m wrong and the only villains in this sad saga are the three defendants currently on trial. But I don’t think so.

A DEWEY “FOOT SOLDIER”?

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Back in March, I wrote about Zachary Warren. In 2007, his first job out of college was client relations coordinator at Dewey & LeBoeuf. In July 2009, he left the firm to attend law school. Unfortunately, his brief tenure was sufficient, years later, for the Manhattan District Attorney to name him as one of four undifferentiated “Schemers” in a 106-count criminal indictment.

When he joined the firm, Warren was a generation younger than his fellow alleged “Schemers”: former chairman Steven Davis, former executive director Stephen DiCarmine, and former chief financial officer Joel Sanders. Understandably, Warren would prefer not to be tried with his co-defendants, so he has moved to sever his trial.

Timing is Everything

In its latest filing, the Manhattan District Attorney acknowledges that Warren “was not the mastermind of the Dewey fraud scheme.” However, the government’s objection to Warren’s motion adds, “[H]e certainly was a willing foot soldier.” We learn some other things from the filing, too.

For example, it turns out that Warren was the first “Schemer” to be indicted. In December 2013, the grand jury charged him alone with six counts of “Falsifying Business Records in the First Degree.” But Warren first learned of the charges two months later, when a broader indictment named him along with Davis, DiCarmine, and Sanders.

Presumably, the timing of Warren’s indictment related to the five-year statute of limitations governing the claims against him. The government relies heavily on a handful of December 2008 events to make the case.

December 2008

According to the District Attorney, on December 30, 2008, Warren had dinner with two of his superiors, Joel Sanders and then-Dewey finance director Frank Canellas. To satisfy its year-end bank loan covenants, Dewey needed another $50 million by the end of the following day. Allegedly, Sanders and Canellas had developed a contingency plan of potential financial adjustments that Warren helped to implement.

The District Attorney emphasizes Warren’s supposed sophistication regarding accounting issues. But that’s a far cry from proving his competence to challenge directives from superiors holding CPAs and MBAs. In fact, the propriety of whatever transpired on December 31, 2008 with respect to Dewey & LeBoeuf’s financial statements is likely to become the subject of battling expert accounting witnesses at trial. Dive into those weeds at your peril.

Motive?

As for the aftermath of the alleged New Year’s Eve scheme, the Manhattan District Attorney cites Warren’s “$115,000 in bonus compensation in 2009” as evidence of something sinister. The government claims that the amount exceeded bonuses paid to all but five other Dewey employees. At best, that argument is disingenuous.

Warren received his $75,000 bonus for 2008 in early 2009, as expected. When he left Dewey in July 2009, Sanders promised Warren a $40,000 bonus for his half-year of service, payable in the fall.

Three months later, Warren was at Georgetown Law and still waiting for his final bonus. He left messages for Sanders, who eventually wrote, “If you’re wondering about your bonus, I have you down to receive $40k right after our year end close.”

Warren replied, “I didn’t take out any student loans this semester because I was anticipating the bonus to be paid in the fall as we discussed before I left.” (For unknown reasons, the District Attorney’s brief italicizes for emphasis the last phrase — “as we discussed before I left.”) When Warren still hadn’t received the bonus In November, he tried again and, shortly thereafter, the firm sent him $20,000 — almost the entire net amount. He received the final installment of $1,400 in April 2010.

For the District Attorney, Warren’s requests of his former employer are proof of his ongoing involvement in the original scheme: “In September 2009, he began chasing down the additional bonus that defendant Sanders had promised him.”

Seriously?

 The Continuing Mystery

A fundamental question still begs for an answer: How does whatever happened in the presence of Zach Warren during December 2008 relate to the demise of a storied law firm in May 2012?

So far, it doesn’t. Unless the prosecution develops that connection, something will remain terribly wrong with this picture — and with the effort to put Zachary Warren in prison.

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.