(Photo by Rick Kopstein)
Two years ago, Dewey & LeBoeuf 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, contains 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, 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.”
The three codefendants’ 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.”
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 October 2012 bankruptcy court-approved Partner Contribution Plan, in which participants agreed to pay a collective $71.5 million to shield themselves against creditor claims totaling more than $500 million? 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 the firm’s 2010 bond proceeds. In calculating each partner’s required contribution to the PCP, only partner distributions after Jan. 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 codefendants, Davis, DiCarmine and Sanders. Warren argues that plea agreements from witnesses who are cooperating with the government, notably former Dewey finance director Frank Canellas, demonstrate how thin the case against him is.
The Manhattan district attorney responds in his July 3 letter to Supreme Court Justice Robert Stolz that statements in the plea agreements are just the beginning: “The 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.” (App. I of the joint memorandum)
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: “He was there to light the spark that fueled the scheme until its implosion in 2012.”
At least with respect to Zachary Warren, methinks the government doth protest too much. Meanwhile, his codefendants are focusing on questions that cry out for answers.
Steven J. Harper is an adjunct professor at Northwestern University and author of “The Lawyer Bubble: A Profession in Crisis” (Basic Books, April 2013) and other books. He retired as a partner at Kirkland & Ellis in 2008 after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at http://thelawyerbubble.com/. A version of the column above was first published on The Belly of the Beast.