Three ex-Dewey & LeBoeuf executives and one former firm employee are escorted into Criminal Court for arraignment. From left, with hands folded: Stephen DiCarmine, Zachary Warren, Joel Sanders and Steven Davis.
Three ex-Dewey & LeBoeuf executives and one former firm employee are escorted into Criminal Court for arraignment. From left, with hands folded: Stephen DiCarmine, Zachary Warren, Joel Sanders and Steven Davis. (NYLJ/Rick Kopstein)

Following a nearly two-year investigation that began as Dewey & LeBoeuf spiraled toward death, its former chairman, Steven Davis; its former executive director, Stephen DiCarmine; and its ex–chief financial officer, Joel Sanders, were accused Thursday of “concocting and overseeing a massive effort to cook the books” at the firm.

“This is not a simple case of aggressive accounting, bad business judgment or poor management,” Manhattan District Attorney Cyrus Vance Jr. said during a Thursday morning press conference called to announce the indictments [PDF] [PDF] of Davis, DiCarmine, Sanders and Zachary Warren, who served as client relations manager for the firm in 2008 and 2009. Rather, Vance said, the evidence uncovered in the grand jury’s investigation shows “blatant accounting fraud and deceit perpetrated by all levels of the accounting department at the direction of the firm’s chairman and chief executives.”

The indictments charge Davis, 60, with 15 counts of first-degree grand larceny, one count of first-degree scheme to defraud, one count of securities fraud and 49 counts of first-degree falsifying business methods, all of which are felonies. Davis, who has insisted he did nothing wrong, also faces a misdemeanor count of fifth degree of conspiracy. The other defendants face similar charges, with DiCarmine, 57, charged with 46 counts of falsifying business records and Sanders, 55, charged with 88 counts of that crime. (The images embedded below are exhibits that accompany the criminal indictments.)

If convicted on all counts, Vance said, the three principal defendants face a minimum of one to three years in state prison and a maximum of 8 1/3 to 25 years.

Davis, DiCarmine and Sanders are also named in a parallel case brought by the Securities and Exchange Commission in connection with Dewey’s $150 million bond offering in 2010. Also targeted in the SEC’s civil complaint [PDF] are former Dewey finance director Frank Canellas and the firm’s former controller, Thomas Mullikin.

In addition to the four defendants charged in the criminal indictment, seven former employees who worked in Dewey’s accounting department have already pled guilty to charges “for their individual roles in the scheme,” Vance said. The names of those seven individuals remain under seal, he said.

The four criminal defendants all surrendered to authorities Thursday morning. At an arraignment Thursday in a downtown Manhattan courtroom, Davis, DiCarmine, Sanders and Warren—handcuffed and dressed like lawyers and law firm employees—pleaded not guilty before New York state court Judge Robert Stolz.

Assistant District Attorney Peirce Moser read the prearranged bail terms for each defendant: $200,000 for Warren (with a $10,000 required deposit) and $2 million each for Davis, DiCarmine and Sanders (with a $200,000 deposit).

Sanders and DiCarmine, residents of Florida, and Warren, who lives in Tennessee, handed over their passports and agreed not to leave the country. Davis, who lives in London with his spouse, is allowed to fly back home but is only allowed to travel between the United Kingdom and the United States.

Noting that he expects that “this case will take some time,” Stolz set the first hearing for April 21.

Reflecting on the firm’s history during the morning press conference, Vance called the 2007 combination of LeBoeuf, Lamb, Greene & MacRae and Dewey Ballantine that created Dewey & LeBoeuf “a troubled merger from the start.” For instance, Vance said, within a year of the tie-up, Dewey was already unable to meet covenants in its credit agreements that required the firm to have net income of $290 million, once depreciation expenses were factored in. Those charged in Thursday’s indictments, Vance said, were “anxious that if creditors learned Dewey failed to reach this covenant it could be disastrous for the firm.”

To stave off disaster, he said, “the defendants simply lied.”

During the press conference, Vance—flanked by a dozen representatives from his office, the Federal Bureau of Investigation, and the SEC—pointed to two of what he described as many examples of the allegedly fraudulent behavior outlined in the indictment. In the first, he said Dewey management had treated a $2.4 million write-off of business expenses from an American Express card that Sanders controlled as a client payment to help the firm meet its net income number in 2008. The following year, Vance said, a personal check for more than $1 million provided by a partner to cover his capital contribution was counted as firm income to falsely inflate Dewey’s revenue figure.

The pattern of deceit continued for years, Vance said, until “by March 2012, the scheme had collapsed in on itself.” The victims, he noted, were not just the firm’s lender banks and other larger creditors, but also the thousands of people who lost their jobs when the firm failed. “Many devoted their professional lives to the firm and are still struggling to find work in this tough economy,” Vance said.

Added FBI special agent in charge Richard Frankel: “At at time when everyone was feeling the crunch, the defendants used every trick in the book.”

Echoing the criminal charges brought by Vance’s office, the SEC complaint alleges that Davis, assisted by DiCarmine, Sanders, Canellas and Mullikin, falsified financial information that was provided to a group of bank lenders at the end of 2008 and to investors in the privately placed bond offering in 2010.

“Investors in Dewey & LeBoeuf’s bond offering were led to believe they were purchasing debt issued by a prestigious and successful law firm that had weathered the financial crisis and were poised for growth,” SEC enforcement director Andrew Ceresney said during Thursday’s press conference.

According to the 32-page complaint—which seeks disgorgement of any money the five men made as a result of the offering, as well as additional financial penalties—Canellas and Sanders hatched a scheme to change various entries in the firm’s annual financial accounting records in December 2008 in an effort to prevent Dewey’s main bank lenders from yanking the firm’s lines of credit. The SEC claims that Canellas and Sanders and the other three named in the complaint continued to cook the firm’s books in 2009, overstating the firm’s financial results for the year by $23 million.

Moreover, in April 2010, according to the complaint, the firm falsely asserted in the bond offering prospectus that it had not breached its debt covenants with its lenders when the opposite was true. The firm leaders continued to lie about Dewey’s financial condition in quarterly reports to investors, the SEC maintains.

The narrative outlined in the SEC complaint, which closely follows the one laid out in the criminal indictment, indicates that the deceptions about Dewey’s fiscal health began in late 2008. By then, according to the SEC, the firm had far less cash than it needed to avoid breaching those covenants, with revenues $200 million short and the firm’s net income $50 million off the required $290 million and more than $150 million below budget. (At the time, the firm reported to The American Lawyer that its profits were $310 million and revenues were $1.03 billion.)

Instead of reporting the shortfall to the banks, however, Canellas allegedly drafted a “Master Plan” in the form of a spreadsheet that listed the firm’s actual profits; the amount it needed to meet the banks’ minimum cash-flow requirements to its lenders; and a variety of itemized deductions—described as improper by the SEC—that, if made, would allow the firm to appear to be in compliance with the covenant requirements.

“So pervasive was the culture of financial chicanery at Dewey’s top levels that its highest-ranking officials—including the defendants—had no qualms about referring among themselves in various emails to ‘fake income,’ ‘accounting tricks,’ ‘cooking the books,’” and deceiving what they described as a “clueless auditor,” the complaint alleges.

Among the specific ledger alterations with which the SEC takes issue: changing the compensation paid to five income partners and counsel from the expense side to the equity side, thereby reducing expenses and increasing profits by $14.3 million. The defendants also reversed write-offs that had previously been deemed uncollectible in a move that added $3.8 million to the firm’s net profits. The SEC complaint also highlights the millions in American Express expenses that, as noted in the indictment, the firm wrote off year after year as “unfilled disbursements.” The firm also double-booked income from a Saudi Arabian partner, and improperly accounted for the cost of excess office space in London, adding another $5.2 million to the bottom line, among other misdeeds, the SEC alleges.

The complaint is replete with email messages in which the top Dewey leaders appear to be congratulating each other on a job well done. “Great job dude,” an unidentified collections manager, identified as “Manager A,” wrote in an email to Canellas after the itemized accounting changes were made at the end of December 2008. “We kicked ass! Time to get paid.”

In another email, Sanders, who now works at Florida law firm Greenspoon Marder, boasted to DiCarmine: “We came up with a big one: Reclass the disbursements,” the complaint alleges.

In yet another email cited in the SEC complaint, Sanders expresses concern about being hit with a pile of bills related to technology improvements at the firm in January 2009, writing to Dewey’s chief operating officer, who is not identified in the complaint, “I don’t want to cook the books anymore. We need to stop doing that.”

Despite Sanders’ professed misgivings, the SEC alleges that the improper accounting moves continued for the next two years until they ultimately spun out of control. In mid-2009, Canellas allegedly sent Sanders a list of suggested cost savings that included a $7.5 million reduction entitled “Accounting Tricks.” By the end of that year, the firm had missed its budgeted revenue by almost $100 million and its profit target by more than $60 million.

In December 2009, according to the complaint, Sanders emailed Davis and DiCarmine to say that collections were sluggish and that Dewey was again in danger of breaching its net income covenants, this time by $100 million—double the previous year’s shortfall. Unable to concoct enough fraudulent entries to keep the covenants intact, the firm was “forced to share some limited information with its banks about its financial woes,” the complaint states. The bank lenders agreed to lower the covenant requirements for 2009 from $290 million in profits to $246 million. Even with that relief, the firm still made about $23 million in fraudulent adjustments to pad its profits in 2009, the SEC asserts.

By the end of 2009, Dewey owed its lenders about $206 million, with about $118 million of that due to be paid off by the end of 2010. At the same time, the firm needed $240 million to pay its partners, but only had half that in cash as of the end of the year. It was at that point that Dewey sought to raise $125 million in the secured debt offering, circulating the allegedly fraudulent 2008 audited results and unaudited 2009 results as part of the prospectus. The value of the bond offering was increased to $150 million in March 2010. Roughly a dozen insurance companies wound up buying the notes.

Richard Shutran, a former Dewey executive committee member who reportedly took a lead role on the bond offering, is now an M&A partner with O’Melveny & Myers in New York. He did not immediately respond to a request for comment about the criminal and civil charges filed against his former colleagues.

(As the the bond offering was being prepared, Davis approved the extension of personal lines of credit by one of Dewey’s bank lenders to DiCarmine, Sanders and Canellas. Those lines of credit are the subject of a suit filed last December in which the Dewey estate seeks the repayment of $21.8 million in pay DiCarmine and Sanders received since 2008.)

By early 2011, the complaint states, Mullikin and Canellas were growing more and more concerned that the crude nature of the false American Express entries would attract scrutiny, with Mullikin writing to Canellas at one point: “I don’t see how we’ll get past the auditors another year.”

Through their attorneys, the three former Dewey leaders all denied the charges against them.

Davis’ criminal defense lawyer, Elkan Abramowitz of New York’s Morvillo Abramowitz Grand Iason & Anello, said in a statement that the “actions taken by Steven Davis when he was chairman of Dewey & LeBoeuf were taken in good faith in an effort to make the firm a success. The district attorney’s and SEC’s view of Mr. Davis’ conduct is simply wrong. A fair review of all the facts will demonstrate that Mr. Davis committed no crime and no fraud and always acted in service of the firm’s best interest.” The Am Law Daily reported in January that Davis had taken a job as a legal adviser to the United Arab Emirate of Ras al-Khaimah, but as of last week he resigned that post, Abramowitz said.

Bryan Cave partner Austin Campriello, who represents DiCarmine, said in his own statement: “Steve DiCarmine is not guilty. He did not commit any crimes. He did not cause the collapse of Dewey & LeBoeuf. Steve was a salaried employee, not a partner, who worked tirelessly for Dewey & LeBoeuf.” Campriello, a former Manhattan assistant district attorney and rackets bureau chief, continued: “This indictment is guilty of scapegoating. It spins some inartful emails into crimes. It also betrays a lack of understanding of some basic principles of law firm accounting. … Cases like this crumble when an innocent person gets to mount a defense in court. And that is what we will do.”

DiCarmine, an attorney by training, was paid $2 million per year and held the most powerful nonlegal role at Dewey. Until recently he had been studying fashion design in New York.

Ned Bassen, a Hughes Hubbard & Reed bankruptcy partner who represents Sanders along with Hughes Hubbard white-collar litigation chair Edward Little, says his client is being used as a “scapegoat” for the actions of Dewey’s partners. “We are totally confident that he will be acquitted,” Bassen said in an interview. “We think that what this is is a case of accounting adjustments that are being twisted around and alleged to be crimes, and Joel did not commit any crimes whatsoever.”

Sanders “continuously told the partners of the law firm not to spend money they didn’t have,” adds Bassen. “They continuously did not listen to him. Now they are blaming him.”

Greenspoon Marder’s executive committee issued the following statement with regard to the charges against Sanders: “During his tenure with Greenspoon Marder, Joel Sanders has demonstrated his honesty, integrity and dedication to the firm. He has proven to be a valuable asset and we have complete confidence in him. It is important that we judge people based upon firsthand knowledge and experience rather than allegations that have yet to be substantiated. We will continue to support Joel through this ordeal and look forward to a successful outcome.”

In a statement of his own, Warren’s attorney, Steven Hyman of McLaughlin & Stern, called his client “a young man with an impeccable background and character, with a bright future ahead of him.” The statement continued: “Dewey and LeBoeuf was his first job after college. He did nothing wrong. That he is charged in this case is a travesty.”

The criminal and civil cases come a little less than two years after the firm filed for Chapter 11 protection. The investigations into what role Davis and the other firm leaders may have played in the biggest law firm bankruptcy in U.S. history grew out of complaints taken to Vance’s office by former partners who felt they had been deceived.

Dewey’s bankruptcy has progressed swiftly since its May 2012 filing. A year ago, a federal bankruptcy court judge signed off on Dewey’s Chapter 11 liquidation plan, paving the way for creditors to be paid at least some of the hundreds of millions of dollars they are owed. That plan—which calls for secured creditors to be paid between 47 cents and 77 cents on the dollar and unsecured creditors to be paid between 5 cents and 14 cents per dollar—hinged on a settlement struck with 500 of the firm’s 700 former partners that brought in at least $70 million to the estate.

Since the plan’s approval last February, lawyers working for the Dewey trust have begun suing former partners who did not agree to settle. The trust has also sought the return of payments the firm made in its final few months of operation, when it was already insolvent, and has begun investigating possible suits against firms that hired Dewey partners for so-called unfinished business claims.

Last April, Davis struck an agreement with the estate to contribute $511,145 to help repay creditors. The deal, however, came with a provision that he only needs to pay 8 percent of his annual earnings toward the sum, and that whatever debt he still may owe in March 2019 will be erased. It was unclear Thursday what impact, if any, the new charges against Davis will have on the bankruptcy settlement. An attorney for the Dewey trust did not return a request for comment.

In an ironic twist, the criminal indictments were unsealed by a successor to Thomas Dewey, who—in addition to being a trustbusting Manhattan district attorney—was a name partner of the firm known as Dewey, Ballantine, Bushby, Palmer & Wood upon his arrival in 1955. That firm would go on to become Dewey Ballantine and, ultimately Dewey & LeBoeuf.

Asked to comment on his predecessor’s reputation in light of the charges against the former leaders of his namesake firm, Vance said Thursday: “Tom Dewey of course was a legendary district attorney. … What [he] stood for was fairness, nonpartisanship and integrity in every aspect of [his] operation and role as district attorney. I think this indictment and the simple recitation of the language indicates that those values had been moved away from considerably by the time the grand jury completed its work on the case.”

Am Law Daily reporter Brian Baxter and New York Law Journal reporter Christine Simmons contributed to this story.