Ex-Leaders of Dewey Seek Stay of Clawback Lawsuit

Ex-Leaders of Dewey Seek Stay of Clawback Lawsuit ALM/Maggie Soladay

Defense attorneys for two ex-leaders of Dewey & LeBoeuf said in papers filed Friday that unless a trustee’s lawsuit against them is halted in bankruptcy court, they will be forced to depose prosecution witnesses from the criminal case against them.

Alan Jacobs, the liquidating trustee overseeing the defunct law firm Dewey & LeBoeuf, is seeking to recover more than $21.8 million from former CFO Joel Sanders and former executive director Stephen DiCarmine in a clawback lawsuit in Southern District Bankruptcy Court, Jacobs v. DiCarmine, 13-01765.

Earlier this month, Jacobs amended his complaint to add new claims for “actual intent” fraudulent transfers, incorporating details from the criminal indictment and the SEC complaint against former firm leaders, as well as the guilty pleas of seven former Dewey accounting employees.

Jacobs said the circumstances surrounding the firm’s payments to Sanders and DiCarmine reveal “several badges of fraud” and their employment contracts awarded them “exorbitant compensation and required, literally, nothing in return.”

Now Sanders and DiCarmine are asking for a stay of the entire clawback suit until the criminal case in Manhattan Supreme Court is resolved. Justice Robert Stolz (See Profile) is aiming for trial in the criminal case to begin in January 2015. Manhattan prosecutors said the trial could take four to six months.

DiCarmine’s attorneys said in their papers the incorporation of the criminal indictment and the SEC complaint in Jacobs’ lawsuit means that, unless it is stayed, DiCarmine will have to try those actions within the bankruptcy court case.

By incorporating the guilty pleas of the seven accounting employees, “the trustee ensures that they will be deposed” in the clawback suit, he said.

“It is impossible to unscramble the omelet the trustee has served” in his amended complaint, defense attorneys said.

DiCarmine likely would be compelled to assert his Fifth Amendment privilege in response to the amended complaint and at any depositions that may occur before the criminal trial, his attorneys said.

“That would be particularly unfair to him since it seems clear that the trustee cooperated with the [Manhattan D.A.'s] investigation that resulted in the criminal charges,” said DiCarmine’s attorneys, partners Mary Beth Buchanan and Austin Campriello and associate Kathryn Gebert of Bryan Cave.

Sanders’ attorney’s, Ned Bassen and Kathryn Coleman, partners of Hughes Hubbard & Reed, joined in the stay request.

Bankruptcy Judge Martin Glenn (See Profile) told the parties in a March hearing —before Jacobs filed his amended complaint—that he would not wait for the resolution of the criminal case in order to proceed with discovery in bankruptcy suits.

Southern District Judge Valerie Caproni, meanwhile, stayed the SEC case against Sanders, DiCarmine and other firm leaders while criminal charges are pending.

“We hope that Judge Glenn agrees with Judge Caproni and stays the matter for the reasons we’ve put forth and in the interest of justice,” Campriello said in a statement.

Sanders and DiCarmine also moved Friday to dismiss Jacobs’ amended suit. They contend the new allegations mostly relate to alleged wrongful conduct claims, which were released by the trustee and barred by a court order.

In May 2013, Glenn approved a $19 million settlement of mismanagement claims between Dewey’s trustee, former chairman Steven Davis and the firm’s liability insurer, XL Specialty Insurance Co.

DiCarmine and Sanders said the settlement agreement’s provisions release them from any liability from conduct claims because they are insureds under the XL policy.

Christopher Murray, a Diamond McCarthy partner representing the liquidating trustee, did not return a call for comment.

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