(Photo by Maggie Soladay)
In pursuing their case against four men accused of engineering a massive accounting fraud that helped hasten Dewey & LeBoeuf’s collapse, prosecutors appear to have a powerful weapon at their disposal: email messages in which the alleged schemers and at least two unnamed colleagues use such potentially damaging terms as “fake income,” “accounting tricks,” “cooking the books” and “clueless auditor.”
As damning as that evidence may be, witnesses who took part in the email exchanges will need to testify about what it means and the circumstances under which it occurred if the four Dewey defendants are to be convicted at trial, say several former prosecutors now in private practice.
So who might those witnesses be?
The most likely candidates, according to the white-collar defense lawyers interviewed by The Am Law Daily, include any of the seven people from whom Manhattan District Attorney Cyrus Vance Jr. has already obtained guilty pleas in connection with his office’s Dewey investigation. The names of those individuals remain under seal.
Winnowing the field further, these experts note that two former high-level Dewey employees not named in the 106-count indictment against Steven Davis, Stephen DiCarmine, Joel Sanders and Zachary Warren [PDF] are identified in a parallel Securities and Exchange Commission civil complaint as being in the thick of the alleged accounting trickery at the heart of the criminal case: former finance director Frank Canellas and former controller Thomas Mullikin.
Indeed, the 32-page SEC complaint [PDF]—which is focused on the circumstances surrounding Dewey’s $150 million bond offering in 2010—states flatly: “Dewey’s accounting fraud was orchestrated by the firm’s senior-most finance professionals, most notably Joel Sanders (CFO), Frank Canellas (Director of Finance) and Thomas Mullikin (Controller).”
Elsewhere, the SEC complaint says, “Canellas and Sanders … hatched a scheme at the very end of 2008 to falsify numerous entries in Dewey’s books and records in order to increase the firm’s net profit.” After detailing a strategy to accomplish that goal in a spreadsheet, the SEC alleges, Canellas directed staffers, including Mullikin, “to carry out these fraudulent adjustments, and to devise other improper adjustments to artificially boost Dewey’s net profits.”
Canellas is identified as being on the receiving end of several of the potentially incriminating emails that are also cited in the criminal indictment, which identifies the recipient of those messages instead as “Employee C.” In one message quoted in the SEC complaint, “a distressed Canellas emailed Mullikin: ‘We are short on the covenant. I really need your help with some ideas. We need to hit it. Start thinking and let’s talk sometime this morning.’” (The covenant in question involved Dewey’s revenue obligations to its bank lenders.)
Mullikin, meanwhile, is captured in potentially incriminating correspondence of his own in the SEC complaint, which shows him repeatedly being asked for his expert opinion on how best to disguise improper accounting moves—and, in some instances, responding.
After allegedly being asked by Canellas in early 2009 how to convert a write-off tied to Sanders’ American Express bill into a pending billable matter, for example, the complaint says Mullikin answered, “That would be less visible.”
Michael Miller, a Steptoe & Johnson litigation partner, and Goodwin Procter litigation partner Derek Cohen, both of whom worked in the Manhattan district attorney’s office in the 1990s, say there are various reasons that prosecutors may have chosen not to pursue criminal charges against Canellas and Mullikin. Both, however, see one likely explanation.
“It usually means that this is somebody who’s made some sort of disposition with the government either to plead guilty to some charge or to cooperate and they are not being prosecuted,” Cohen says.
Miller agrees. “It says that someone’s made the decision that there doesn’t need to be a further criminal prosecution of these unnamed coconspirators,” he says, “because the prosecution has either decided that they’ve committed no crime, or that they did and other arrangements have been made.”
Miller says he would expect Mullikin and Canellas to play critical roles at trial. He adds that others not named in the indictment could also be called to testify—regardless of whether they have chosen to cooperate. Under New York state law, he and Cohen note, prosecutors have to show intent to deprive someone of their property to prove grand larceny. To do that, Cohen says, they “have to have insiders who can put all the email evidence into a proper context.”
SEC allegations aside, both Mullikin and Canellas certainly qualify as Dewey insiders.
Mullikin, 53, joined predecessor firm Dewey Ballantine as an accountant in 1993 from Cleary Gottlieb Steen & Hamilton, where he had held the same title for three years. A resident of Little Ferry, N.J., he holds a bachelor’s degree in accounting from Missouri State University, according to his LinkedIn biography.
Six months after allegedly writing the email expressing concern about fooling Dewey’s auditors again, Mullikin left the firm. He became controller at Paul, Weiss, Rifkind, Wharton & Garrison in July 2011. A firm spokeswoman said Monday that he is currently on administrative leave. His lawyer, Kenneth Kaplan at white-collar defense boutique Kaplan & Katzberg, declined to comment on the SEC charges beyond saying his client had only learned of them the day before they were filed last week.
As for the 34-year-old Canellas, he spent his entire career with the firm the SEC now accuses him of helping to destroy.
He worked as an $11-an-hour intern at predecessor firm LeBoeuf, Lamb, Greene and MacRae before coming on board as a staff accountant in September 2001 following his graduation that year from Pace University’s Lubin School of Business. From there, Canellas was promoted to partnership account manager and then controller before becoming the firm’s finance director in 2007. By the time Dewey collapsed in 2012, he was set to earn $400,000 in annual salary plus a $100,000 bonus.
According to a filing in the Dewey bankruptcy, a severance agreement executed in December 2009 guaranteed that Canellas would be paid $435,000 if the firm either dissolved or terminated him for a reason other than cause. That agreement was backed by a letter of credit issued by Citibank.
Canellas, who lives on Long Island, according to the SEC complaint, was among the only holdovers from the Dewey management team to stay on and help wind down the firm’s operations in the wake of the Chapter 11 filing. According to Dewey’s outside advisers, he played such an important role in ensuring that the bankruptcy proceeded in an orderly fashion—especially in helping to collect millions of dollars from the firm’s former partners to help repay creditors— that he deserved a $165,000 bonus for his efforts. (The bonus proposal was ultimately dropped in the face of stiff opposition from creditors and the U.S. bankruptcy trustee.)
The SEC complaint is not the only Dewey-related legal action in which Canellas is named. In a suit filed last April in federal district court in Manhattan, former Dewey partner L. Londell McMillan accuses Canellas, Davis, DiCarmine and Sanders of fraudulently inducing him to borrow money from Barclays Bank to cover his capital contribution to the firm. McMillan filed the complaint after Barclays sued him over that loan. Like his codefendants, Canellas—represented by Frankfurt Kurnit Klein & Selz partner Ronald Minkoff—has filed a motion to dismiss the suit. A decision in the matter is pending.
Frankfurt Kurnit litigation partner Brian Maas, who is representing Canellas in connection with the SEC case, declined to comment when contacted by The Am Law Daily.
Goodwin’s Cohen and Steptoe’s Miller say that the indictment suggests prosecutors ultimately plan to call the eight individuals identified only as employees A through G and N, as well as other Dewey staffers, as witnesses. One likely purpose of their testimony, the two lawyers say, would be to describe the firm’s normal accounting procedures and how far outside the boundaries the behavior described in the indictment went. Another would be to establish that Davis, DiCarmine, Sanders and Warren knew that what they were doing was wrong.
Vance and his team are also likely to be preparing a response to the likely defense argument that, as lawyers rather than bookkeepers, Davis and DiCarmine acted in good faith, because they were unfamiliar with accounting rules and therefore relied on the firm’s accounting and finance experts. Says Cohen: “We’d expect prosecutors to have people who participated in the fraud testify that they discussed that they were participating in fraud and that they all knew it.” ( Sibling publication the New York Law Journal examined possible defense strategies in a story published Monday.)
For his part, Miller notes that the number of people who may be called is probably pretty large.
“To commit a major crime like this, you need a good number of lower-level people to move money around, to make entries,” he says. “You can’t do this alone. They’ve probably been under pressure to cooperate.” Adds Miller: “My guess is Cyrus Vance’s team is going to call on people involved in day-to-day finance and accounting affairs at the firm to explain what went on.”
As to the possibility that defense lawyers will insist that their clients didn’t intend to commit fraud and were only trying to save the firm from an untimely death, Miller says such an argument is unlikely to succeed. As a prosecutor, “you have to prove the conduct, you have to prove the intent,” he says. “Motive is just the icing on the cake.”
Both he and Cohen say that the identities of those who have pled guilty aren’t likely to remain secret much longer, and could become public even before the first hearing in the case, which has been set for April 21. “It will have to become apparent to people charged with crimes early on,” Cohen says. “The public also has an interest in a transparent proceeding.”
Whether his name emerges at that point, Canellas was prophetic about one thing. A smoker, he was a common fixture outside Dewey’s midtown office building. Approached at one point as box-carrying employees exited the premises a few days before the firm filed for bankruptcy, Canellas was asked how long he planned to stick around.
“All the way to the end,” he said. “All the way to the end.”
Am Law Daily reporters Brian Baxter and Sara Randazzo contributed to this story.