Dewey & LeBoeuf sign
(ALM/Maggie Soladay)

Former Dewey & LeBoeuf finance director Francis Canellas, a key witness in the long-running criminal case over the firm’s collapse, told a New York jury on Monday that the now-defunct firm failed to tell lenders about its struggles to pay vendors and partners in the years before its 2012 bankruptcy.

On the third day of direct questioning by Manhattan assistant district attorney Peirce Moser, Canellas returned to many of the same themes explored in his earlier testimony in a retrial against former Dewey CFO Joel Sanders and former executive director Stephen DiCarmine. Prosecutors accuse Sanders and DiCarmine of scheming to mislead the firm’s lenders and investors about its finances.

The retrial, which started in February, comes after the district attorney’s initial case against Dewey’s former executives ended in a mistrial in 2015.

Canellas, a cooperating witness in the government’s case, on Monday discussed Dewey’s financial woes in 2009 and 2010, and the impact they had on the firm’s finance department. He described a firm that had trouble paying its bills on time and was often unable to make payments that had been promised to partners or former partners at the firm. Canellas said that neither he nor anyone else at the firm told Dewey’s lenders about those troubles, including during an early 2010 negotiation to refinance the firm’s debt.

“The possibility of Dewey & LeBoeuf’s credit lines being terminated … was great,” Canellas said, discussing the end of 2009. “It was a very risky time at Dewey & LeBoeuf.”

As he had during earlier testimony last week, Canellas also described “false” accounting adjustments that he and others at the firm made with the aim of meeting requirements of a roughly $100 million revolving line of credit extended to Dewey by multiple banks. On March 10, Canellas had told jurors he discussed with Sanders improper accounting fixes in late 2008 meant to keep the firm from breaking the credit line’s minimum cash-flow requirements.

Canellas said on Monday that he made and discussed similar improper adjustments with Sanders in 2009 and 2010.

“I spoke to him about all year-end adjustments,” said Canellas.

Among those adjustments, Canellas described changing how some capital contributions from partners were treated within the firm’s accounting system. Prosecutors showed jurors a $1.08 million check from a former Dewey partner, Richard Climan, marked “capital contribution” in the check’s memo line. After the check came in, Canellas said, Sanders told him they should consider the money revenue. Canellas said that constituted an improper accounting treatment for a capital contribution.

Also on Monday, Canellas said that in 2009, Dewey’s finance department took improper steps to avoid breaching another requirement under the revolving loans—a “distribution covenant” that prevented the firm from paying partners more than its net income in any given year. 

Dewey’s finance team used accounting fixes to avoid breaching that requirement under the loans, said Canellas. Those included reclassifying payments to partners as a return of their capital contributions in the firm. Canellas said those adjustments allowed the firm to falsely report to its lenders that it had complied with the distribution covenant.

“Due to the adjustments, it was not accurate,” said Canellas.

Canellas is expected to continue his testimony on Thursday.