Stephen DiCarmine, left, and Joel Sanders outside the courtroom during their 2015 trial (NYLJ/Rick Kopstein)
A key witness in a criminal case over the 2012 collapse of Dewey & LeBoeuf told a Manhattan jury March 10 that he facilitated improper accounting adjustments and took steps to hide them from auditors after discussing the adjustments with former Dewey CFO Joel Sanders.
In his second day on the stand in the retrial of criminal charges against Sanders and former Dewey executive director Stephen DiCarmine, former Dewey finance director Francis Canellas detailed various accounting adjustments he said the firm made in late 2008. He testified that intentional inaccuracies were included in a 2009 and 2010 balance sheet that the firm submitted to financial auditors at Ernst & Young.
Canellas, 37, is a cooperating witness in the Manhattan district attorney’s criminal case against DiCarmine and Sanders—whom prosecutors accuse of scheming to mislead investors and lenders about the firm’s finances.
Manhattan assistant district attorney Peirce Moser questioned Canellas March 10 about accounting adjustments that Dewey’s finance department allegedly made in late 2008 to help the firm meet cash-flow requirements under a pair of revolving credit lines worth about $100 million. Canellas said that, although he believed the adjustments were improper, he didn’t disclose them to auditors, or to Dewey’s lenders or investors.
“With the adjustments we had put on the books, we didn’t want a very thorough audit,” Canellas said.
On his first day on the stand on March 9, Canellas told the jury he had concerns toward the end of 2008 that the firm wouldn’t meet those cash-flow requirements, leading it to default on the revolving loans.
As his testimony under direct examination continued on March 10, he told jurors he met with Sanders and Zachary Warren—a former Dewey junior manager whose role included keeping track of collections from Dewey clients—in December 2008 to discuss how to address a roughly $53 million shortfall in the firm’s net income. The three men ultimately came up with several possible adjustments they could make to meet the cash-flow requirements under the loans, Canellas said.
“We had a meeting … to discuss additional adjustments to fill that hole,” said Canellas. “Our starting point was that $53 million shortfall.”
He said he took steps to implement some of the adjustments they had discussed. Some of the adjustments weren’t legitimate in his view, he said, and weren’t done on a “consistent, year-in-year-out” basis. Canellas also testified that he and Sanders discussed the risks of the firm’s financial auditors questioning the adjustments.
“We also discussed excuses we would tell … if those adjustments were detected,” said Canellas.
The retrial against DiCarmine and Sanders comes after a first case—which also targeted former Dewey chairman Steven Davis—ended in a mistrial. The second case involves far fewer counts against the former Dewey leaders. Davis and Warren, the former junior manager, who were both initially charged in connection with Dewey’s collapse, have since signed deferred prosecution agreements and no longer face trial.
Canellas’ testimony is expected to continue on Monday.