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