Correction, 5/4/12, 9:47 a.m. EDT: The original version of this story incorrectly identified Wells Fargo as one of the four banks to which Dewey & LeBoeuf owes a combined total of $75 million against a $100 million line of credit. The banks in question are Bank of America, Citi Private Bank, HSBC, and JPMorgan Chase & Co. The tenth and eleventh paragraphs of the story have been revised to include the correct information. We regret the error.

In the latest blow to the reeling Dewey & LeBoeuf, the Manhattan District Attorney’s Office has opened an investigation into “allegations of wrongdoing by our former chairman, Steven Davis,” and the firm has tapped two of its own lawyers to lead an internal probe, according to a memo authored by Dewey management and obtained by The Am Law Daily.

The unsigned, two-paragraph memo, sent by the firm’s office of the chairman to partners worldwide late Friday, states that Dewey leaders learned of the D.A.’s investigation earlier in the day and responded by asking partners Harvey Kurzweil and Seth Farber to act as counsel to the firm as it conducts its own inquiry.

The memo closes by saying, “In addition, we have been in contact with the District Attorney’s Office and have told the District Attorney’s Office that the Firm intends to cooperate with that Office’s investigation,” and telling partners to direct any questions to Kurzweil, Farber, or Dewey general counsel—and New York partner—Janis Meyer.

Sunday morning, Dewey’s global partners received a second memo, this one informing them of two developments: the end of the firm’s discussions about some type of merger with Greenberg Traurig, which that firm had never publicly said it was prepared to pursue, and Davis’s removal from the office of the chairman.

“Discussions with Greenberg Traurig have ended,” the memo states. “We are in discussions with other firms about a possible transaction and will consider those and other options for the firm moving forward.”

Greenberg CEO Richard Rosenbaum issued a statement of his own Sunday confirming the end of the talks. “Dewey is a firm we hold in high regard, with many fine lawyers, though we never considered a merger,” Rosenbaum said in the statement.

In reference to Davis, the Dewey memo issued Sunday states: “Totally unrelated to the ending of the Greenberg discussions, the Executive Committee has voted to terminate Steven Davis’s membership on the Office of the Chairman and the Executive Committee. The Executive Committee felt it was in the best interests of the firm to take this action. No inferences about the outcome of the DA’s or the firm’s investigation should be taken from this action.”

The memo closes by saying, “We would ask that you not believe rumors as reported by some in the press. The firm will continue as usual tomorrow as we work through these options and there will be no disruption in the work or service we provide to our clients. If you have any questions or concerns, please contact a member of the [Executive Committee] or Office of the Chairman.”

The bombshell revelation of a criminal probe came the same day that the embattled firm got a bit of good news: Its lenders have agreed to give Dewey an additional week to renegotiate a $100 million line of credit, according to two sources familiar with the firm’s financial situation. The deadline, which had been set for the end of April, has been pushed back until May 7, according to the two sources. (Reuters reported Sunday that before news of Davis’s ouster from the office of the chairman broke, it had been told by “a person close to the firm” that Dewey was on the verge of winning a 90- to 120-day extension from its bank lenders.)

Two members of the office of the chairman—business solutions and governance department chair Martin Bienenstock and global litigation chair Jeffrey Kessler—did not respond to The Am Law Daily’s requests for comment on the deadline extension. With the reprieve, says one source with knowledge of the firm’s finances, Dewey should have the funds necessary to meet its biweekly payroll. Without it, says this source, the lender banks could have impounded whatever cash was destined to meet the struggling firm’s payroll commitments.

All Kinds of Scrutiny

Dewey owes a combined total of $75 million against a $100 million line of credit extended to the firm by four banks: Bank of America, Citi Private Bank, HSBC, and JPMorgan Chase & Co. With JPMorgan Chase leading the negotiations, the banks have not yet decided whether to call in the loan, which would likely result in a bankruptcy filing by Dewey, or work out some other form of repayment or loan extension arrangement, according to three people familiar with the matter. Also looming: repayment of $150 million in bonds Dewey sold in 2010. The first payment related to that debt offering comes due next year.

Dewey’s New York headquarters have been “swarming” with consultants and bankers, one source knowledgeable about the firm’s finances says. “Bankers are doing due diligence, analyzing the firm’s inventory.”

Additional scrutiny of the firm’s operations will now come from Kurzweil, a veteran litigation partner who has been with Dewey and its predecessor Dewey Ballantine since 1969, and Farber, who joined the firm in 1996 from the U.S. attorney’s office in New York. Farber advised Deutsche Bank on a $534 million agreement with the Justice Department last year to settle allegations that the German financial services giant helped U.S. clients hide money from the IRS using fraudulent tax shelters, according to our previous reports.

For his part, Kurzweil has handled many delicate matters at Dewey over the years, including litigation between insurers and New York real estate mogul Larry Silverstein over the destruction of the World Trade Center in the terrorist attacks of September 11, 2001. Kurzweil was also part of a Dewey legal team representing the receiver for WexTrust Capital, a Chicago-based real estate investment firm that collapsed in August 2008 after the SEC accused two of its executives of running a $255 million Ponzi scheme.

The external and internal probes come roughly a month after The American Lawyer made significant revisions to Dewey’s financial results for the last two years as part of the magazine’s Am Law 100 reporting. The changes came after Dewey reported different revenue figures to Bloomberg than it initially had to The American Lawyer, prompting additional reporting.

Focus of Investigations?

It remained unclear Sunday precisely what status Davis, who was deposed as Dewey’s sole chairman last month amid the wave of partner departures and questions about the firm’s finances, holds at the firm. A Europe-based Dewey partner told The Am Law Daily earlier this week that Davis has not been seen in the firm’s depleted London office, where he was supposedly bound after being stripped of the chairmanship.

Two former Dewey partners described to The Am Law Daily something they think may lie at the heart of the criminal allegations now swirling around their former firm: its handling of a loan program with Barclays Bank arranged by Dewey to help partners fulfill their capital requirements to the firm. Under the terms of Dewey’s partnership agreement, these ex-partners say, the firm was to repay the loans on behalf of those who left, as a way of effectively repaying their capital.

These two partners say that quarterly statements sent by Dewey to them and other former partners throughout 2011 indicated the firm was making such payments. At the end of the year, though, these two former partners say, a third former partner contacted Barclays to check on how much was owed to the bank, only to be told that Dewey hadn’t made any payments in 2011. It was only in February of this year, the two ex-partners say, just as Dewey began to suffer its first wave of defections, that the firm caught up on the payments and made some ex-partners whole. (Dewey lost nearly 20 partners during the first two months of this year, a pace that has since accelerated.) Those payments notwithstanding, these former partners say they believe that the distribution of false statements about the status of their Barclays accounts could well constitute fraud of some kind. 

While one of the former partners says he is no fan of Davis, he adds that colleagues are worried about the toll that recent events are taking on the former chairman. All the same, this ex-partner says, “though he’s not the only one responsible for [what happened at Dewey], he certainly bears a degree of responsibility.”

Some former partners have spoken out in favor of Davis. In early April, John Altorelli, now with DLA Piper, told The Am Law Daily, “I thought he was great. I will tell you, he’s a solid guy who puts everyone’s interests above his own.” Altorelli, who could not be reached for additional comment Friday, also said “As a friend and supporter of Steve, I don’t have to agree with everything he’s done, but he didn’t do anything in his mind that was not right for the firm.”

At Least Five More Partners Bolt; Summer Program Cut

At last count, at least 77 partners have departed Dewey since January. Among the latest to leave: Los Angeles corporate partner and consumer financial services group cochair Gary Apfel, whose name was scrubbed from the firm’s Web site as of Friday. A Dewey spokesman confirmed that Apfel had left the firm, but information was not immediately available about where he had taken his practice. Over the weekend, the bios of five additional partners vanished from the Dewey Web site: New York–based compensation, benefits, and employment partner Howard Adler, Houston-based energy partner Charles Moore, Washington, D.C.–based tax partner Joseph Pari, New York–based corporate partner Linda Ransom, and corporate partner Marshall Stoddard, who split his time between the New York and Los Angeles offices. E-mails sent to Adler, Moore, Pari, and Stoddard yielded autoreply messages that said, “The person you are trying to reach is no longer with the firm.” There was no response to a similar e-mail sent to Ransom. Based on a review of the Dewey Web site, the firm’s partner head count as of Sunday stood at 257.

(Meanwhile, a week after The Am Law Daily reported on the uncertain plight of first-year associates due to start at Dewey this fall and second-year law students enrolled in the firm’s summer program, Dewey confirmed in an internal memo obtained by Above the Law that it has cancelled the summer program.)

What becomes of the remaining partners and the firm itself is largely now up to the banks, says one source knowledgeable about Dewey’s finances: “The bottom line is, the sooner the firm goes through bankruptcy or the sooner the banks demand payment, the better for the banks because collateral keeps on eroding. Billings have to be going down.”

Bienenstock and fellow bankruptcy specialist Bruce Bennett are reportedly working on a prepackaged bankruptcy as a first step toward some kind of merger with another firm. Earlier this week, one source familiar with the firm’s finances says, a member of management told people internally that a deal with Greenberg was indeed close at hand, but that Greenberg was only interested in picking between 50 and 60 partners. Prior to Rosenbaum’s Sunday statement, Greenberg had confirmed that it was considering adding an unspecified number of Dewey lawyers.

According to one recently departed partner in close contact with former colleagues still at Dewey, partners there were ambivalent about Greenberg, with most wanting to keep their options open. Says this former partner: “Right now everybody is trying to figure out what to do—do they even want to get an offer from Greenberg Traurig?”

At this point, it appears, that question may be moot.

Brian Baxter and Julie Triedman contributed reporting.