UPDATE, 6/13/2012, 7 p.m. EDT: The sixth paragraph of this story has been updated to include a statement from Jeffrey Kessler.

In a bombshell lawsuit filed Tuesday in California state court, former Dewey & LeBoeuf partner Henry Bunsow is accusing multiple Dewey leaders—including longtime chairman Steven Davis—of committing fraud by lying about the true state of the now-bankrupt firm’s finances.

The 14-page lawsuit [PDF], filed in San Francisco Superior Court, claims that Davis and other former Dewey leaders engaged in a years-long pattern of deceit aimed at portraying the firm as stronger fiscally than it actually was in order to pursue a lateral hiring spree that the complaint likens to “running a Ponzi scheme.”

The suit comes less than a month after Dewey filed for Chapter 11 bankruptcy protection following a wave of partner defections and amid mounting questions about its financial condition.

Reached Wednesday, Bunsow, a patent litigator who now runs a San Francisco IP boutique with 10 other Dewey refugees, declined to comment. He is being represented by San Francisco law firm Lynch Gilardi & Grummer. His suit appears to be the first filed by a former Dewey partner accusing firm leaders of fraud. Separately, the Manhattan district attorney’s office launched a criminal investigation in late April into Davis’s stewardship of the firm. A spokeswoman for the district attorney’s office declined to comment on the status of the probe Wednesday. Davis has denied any wrongdoing.

Along with Davis, the other defendants named by Bunsow include former Dewey partner Jeffrey Kessler, a member of the firm’s office of the chairman in its final months; former executive committee member James Woods; former chief financial officer Joel Sanders; and former executive director Stephen DiCarmine. The suit seeks unspecified damages for claims including fraud and deceit, negligent misrepresentation, breach of fiduciary duties, and unjust enrichment.

Kessler, now at Winston & Strawn, said in a statement to The Am Law Daily that “the allegations in this lawsuit about me are outrageous, false, and without any merit,” and that “most of the allegations in this lawsuit are about others and alleged events in which I had no knowledge or involvement.”

DiCarmine declined to comment through his lawyer, Ned Bassen at Hughes Hubbard & Reed. Woods, now at Mayer Brown, did not immediately respond to a request for comment, nor did a lawyer for Sanders and a public relations contact for Davis.

From 2008 onward, the suit alleges, the defendants “concocted and participated in a scheme and conspiracy intended to misrepresent the financial performance of Dewey,” and “conspired to publicly and privately misrepresent the financial performance, history and stability of Dewey in order to attract successful partners from other law firms to join Dewey.”

Bunsow was one such recruit. He joined the firm in January 2011 from Howrey as that firm began what would be its own spiral toward dissolution. (Joining Bunsow in making the move to Dewey at the time were Denise De Mory and Brian Smith from Howrey, as well as Craig Allison from Dechert. All four are now name partners at the newly formed Bunsow De Mory Smith Allison in San Francisco.)

In wooing new partners, Dewey relied in large part on the financial numbers reported to The American Lawyer, according to the complaint. Earlier this year, The American Lawyer revised two years of Dewey financial data based on audited financial statements obtained by the magazine that showed Dewey significantly overstating what had been initially reported.

Bunsow says in his complaint that he relied on financial data provided to the magazine, as well as the firm’s promises that profits per equity partner were expected to reach $2 million in 2011, in deciding to join Dewey. What the firm’s leaders failed to tell him was that they in fact owed partners $300 million at the time “as a result of promises of compensation and bonuses awarded to select partners in prior years,” the complaint states. Bunsow received a guarantee of $5 million a year when he joined the firm, according to the suit, which also says he was underpaid by $3.6 million in 2011 and $1.65 million for the first few months of 2012. 

In the complaint, Bunsow also takes issue with the policy of taking capital contributions from partners, in the amount of 36 percent of estimated annual income, that they “never intended to return,” despite a firm policy to return capital in three yearly installments upon a partner’s departure. Bunsow says he was told to hand over $1.8 million in capital and that he could borrow the amount from Citibank, with the firm paying interest on the loan, if he was unable to put up the money himself. Bunsow says in the complaint that he did take out such a loan.

At the time this suggestion was made, however, Davis, Kessler, Sanders, and DiCarmine “knew that Dewey was in trouble financially and that [Bunsow] would lose the money that they were inducing him to borrow,” the suit alleges, adding that capital was not used to “run the Firm as an ongoing business” but rather to pay select partners.

(One partner Bunsow says did get his capital back was Davis, who, according to the complaint, withdrew his contribution upon being ousted as chairman.)

The true extent of the firm’s financial problems came to light at a January 27 meeting this year, the complaint notes, when Davis reported that the firm only had $280 million profit and revenues of $780 million, rather than the $340 million and $980 million reported to this publication. Davis also said at the time, according to the complaint, that $140 million of those 2011 profits had been used to pay off prior obligations.

On April 16, less than a month before Bunsow would leave the firm, partners were told that PricewaterhouseCoopers had reviewed compensation distributed by the firm in 2011 and 2012, finding that 83 percent of the firm’s profits “had been used by Defendants for fraudulent and improper payments to themselves and other privileged partners.”

In deciding to launch his own firm after leaving Dewey, Bunsow told sibling publication The Recorder that his group didn’t want to make a decision too quickly. “We did that last time with Dewey, and it did not turn out so well,” he said. “We will take our time until we either decide that we are or are not comfortable with another firm opportunity. If that takes a few months, so be it.”

A case management conference is scheduled for November 14.