Witness Frank Canellas testifies on July 13, 2015 under direct examination by Manhattan Assistant District Attorney Peirce Moser. Joel Sanders and his attorney Andrew Frisch, are seated far right. Judge Robert Stolz presiding. (Illustration by Elizabeth Williams)
Francis Canellas, the finance director of now-defunct Dewey & LeBoeuf, testified Monday that he and Dewey’s former CFO met at the end of 2008 to craft a series of accounting adjustments that would make it appear that the firm could meet agreements with its lenders.
Canellas’ testimony has been hotly anticipated in the month-and-a-half-old criminal trial of the firm’s former executives, which resumed Monday after a weeklong break. New York state prosecutors accuse former Dewey chair Steven Davis, former executive director Stephen DiCarmine and former CFO Joel Sanders of misleading bank lenders and bond investors about the firm’s true finances in a fraudulent and ultimately unsuccessful effort to stave off collapse.
In prior witness accounts, Canellas, a cooperating witness in the state’s case, has emerged as a key potential link between the defendants and the firm’s finance administrators, seven of whom have pleaded guilty to falsifying accounting records. He testified Monday under direct examination by Manhattan assistant district attorney Peirce Moser.
On Monday morning, Canellas, 36, described for jurors Dewey’s financial struggles at the end of 2008, the first full year of operation after legacy firms LeBoeuf, Lamb, Greene and MacRae and Dewey Ballantine merged in 2007.
As 2008 drew to a close, Canellas said, it became clear that the firm would not meet a cash flow covenant with its banks. He testified that he first presented his concerns to Sanders, his direct supervisor, in an email in early November. As December wore on, Canellas said the prospect of breaching the covenant—and triggering a default on the firm’s loans—seemed more and more likely.
During that time, Canellas and Sanders discussed accounting adjustments that would either increase the firm’s revenue or decrease its expenses, Canellas testified.
“Some were legitimate, but not all were legitimate,” Canellas said.
On Dec. 30, 2008, it was clear that the firm was still about $50 million short of meeting its cash flow covenant of $278 million, Canellas testified. He requested a meeting with Sanders and Zachary Warren, the firm’s client relations manager, who is facing a separate criminal proceeding.
The trio had dinner at a midtown steakhouse, Del Frisco’s, and then continued their meeting back at Warren’s office later that evening, Canellas said. Canellas said Sanders wrote out ideas that he suggested on a flip board. As pages on the flip board filled up, they would be torn off and taped to the wall of Warren’s office, he said.
Canellas told the jury that they created an Excel spreadsheet called the “master plan,” which was saved on Warren’s computer. On Jan. 2, 2009, Warren sent the document to Canellas so he could print it out and bring it to Sanders, the witness testified. (Canellas said he doesn’t know what happened to the pages from the flip board.)
The spreadsheet included items such as “reapply disbursements as fees,” for $10.5 million, and “Reverse premium (One London Wall)” for $3.4 million, which presumably refers to adjustments made to fees associated with terminating the firm’s lease in London.
In testimony Monday afternoon, Canellas said that some of the adjustments included in the “master plan” were false, a fact he knew at the time. He said that he and Sanders discussed the risks associated with making these entries and came up with ways to explain the adjustments to auditors if necessary.
Unlike previous cooperating witnesses, Canellas said he often met directly with the defendants. At times, he interacted with Sanders multiple times a day, and by the end of 2011 and in early 2012, he spoke with Davis and DiCarmine two or three times a week, he said.
Canellas has pleaded guilty to grand larceny in the second degree, a felony, and agreed to cooperate with the Manhattan district attorney’s case against Dewey’s executives in exchange for a lighter sentence. The DA’s office has agreed to recommend a two-to-six-year sentence if he cooperates fully.
During much of his testimony, Canellas’ eyes alternated between Moser and the courtroom floor. He told the jury that he had been unable to find work since he began cooperating in the investigation and ceased advising Dewey & LeBoeuf’s bankruptcy trustee in February of 2014.
Canellas grew up in Brooklyn and attended Pace University, where his mother worked as an administrator, he said. While in school, he interned with LeBoeuf Lamb for $12 an hour. He took a job at the firm after he graduated because it was the highest-paying job he was offered and his mother was very sick with Lou Gehrig’s disease, he said.
Moser will resume his direct examination of Canellas on Tuesday.