Stephen DiCarmine, Zachary Warren, Joel Sanders and Steven Davis are led into Criminal Court.
Former Dewey & LeBoeuf attorneys and an employee enter Criminal Court for arraignment. From left with hands folded: Stephen DiCarmine, Zachary Warren, Joel Sanders and Steven Davis are led into court. (NYLJ/Rick Kopstein)

After a nearly two year investigation, the former leaders of Dewey & LeBoeuf, ex-chairman, Steven Davis; 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 press conference Thursday to announce the indictments of the leaders and of Zachary Warren, a client relations manager for the firm in 2008 and 2009.

Rather, Vance said, the grand jury investigation uncovered “blatant accounting fraud and deceit perpetrated by all levels of the accounting department at the direction of the firm’s chairman and chief executives.”

See more coverage of the Dewey indictments from The American Lawyer.

The indictments charge Davis 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 charged with 46 counts of falsifying business records and Sanders charged with 88 counts of that crime.

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.

See indictments for scheme to defraud and falsifying business records.

Manhattan District Attorney Cyrus R. Vance Jr. announces fraud charges against former leaders and an employee of Dewey & LeBoeuf. A parallel case was brought by the Securities and Exchange Commission. NYLJ/Rick Kopstein

Davis, 60, DiCarmine, 57, and Sanders, 55, 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 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 pleaded guilty “for their individual roles in the scheme,” Vance said. The names of those seven individuals are under seal.

The four criminal defendants pleaded not guilty at arraignment before Manhattan Supreme Court Justice Robert Stolz in the afternoon.

Davis, Sanders, DiCarmine and Warren walked into courtroom with their hands tied in front of them in handcuffs. They were later uncuffed by law enforcement.

Each sat next to their attorneys. Elkan Abramowitz of Morvillo Abramowitz Grand Iason & Anello appeared for Davis. Hughes Hubbard & Reed partners Edward Little and Ned Bassen appeared for Sanders.

Solo practitioner Michael Armstrong and McLaughlin & Stern partner Steven Hyman appeared for Warren. Bryan Cave partner Austin Campriello appeared for DiCarmine.

Assistant District Attorney Peirce Moser told Stolz there “are millions of documents” that need to be sorted through.

Stolz set a conference data for April 21 and said he expected “this case will take some time.”

Moser read the prearranged bail terms for each defendant: $200,000 for Warren (secured by a $10,000 deposit), and $2 million each for Davis, DiCarmine and Sanders (secured by a $200,000 deposit).

‘Master Plan’

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

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 allegedly fraudulent behavior. 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.

FBI special agent in charge Richard Frankel added, “At a 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 the 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 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 in the criminal indictment, indicates 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 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 by the SEC as improper—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.

Email Exchanges

Among the specific ledger alterations with which the SEC took 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 were previously deemed uncollectible in a move that added $3.8 million to Dewey’s net profits. The SEC complaint also highlighted 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 alleged.

The complaint was replete with email messages in which the top Dewey leaders appeared 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 is now the chief financial officer at Florida law firm Greenspoon Marder, boasted to DiCarmine: “We came up with a big one: Reclass the disbursements,” the complaint alleged.

In yet another email cited in the SEC complaint, Sanders expressed 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 alleged 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 stated. 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 asserted.

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 ended up buying the notes. (As the bond offering was being prepared, Davis approved extending personal lines of credit by one of Dewey’s bank lenders to DiCarmine, Sanders and Canellas. Those lines of credit were the subject of an explosive suit filed last Dec. 1 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 stated, 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.”

Preparing the Defense

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

Abramowitz, Davis’s attonrey, 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.

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. He is now studying fashion design in New York.

Sanders, Dewey’s former CFO, was hired in September 2012 to take the same job at Greenspoon Marder, a 140-lawyer Florida firm based in Fort Lauderdale.

Bassen, who represents Sanders along with Hughes Hubbard partner Edward Little, said, “We are totally confident that he will be acquitted. We think that what this is a case of accounting adjustments that are being twisted around and alleged to be crimes, and Joel did not commit any crimes whatsoever.”

Hyman said of his client, “Zach Warren is a young man with an impeccable background and character, with a bright future ahead of him. 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.

Adam Kaiser, a former Dewey partner now at Winston & Strawn, said the criminal charges “provide no solace at all.” As part of the partnership contribution plan in bankruptcy, Kaiser said, he had to pay $370,000 to the Dewey trustee “to convince them not to sue me, even though the firm owed me $600,000 in deferred compensation. It was the worst financial event of my life.”

“Nothing will comfort me for that loss, that chunk of my kids’ inheritance is gone,” Kaiser said. “It’s been a total disaster.”

Of the criminal indictments, Kaiser said, “Some people don’t want to see people get imprisoned. Some people were friends” with Davis. “Some people have known him for decades and while they’re mad at him and angry at him, they won’t want him to see him physically punished with incarceration.”

He said while he is angry at the firm’s leaders, “do I want to see Davis go to jail for five years? I’m not sure about that. I’d like to see them financially suffer. But do I want them getting beaten up in jail? I don’t know if I’d feel good about that.”

“I’ve always believed that Davis and DiCarmine and Sanders, as crazy as they were and as dishonest as they were, I always felt they believed the firm could survive. They were weak and they were stupid,” Kaiser said.

Of Davis, Kaiser said, “He’s not Bernie Madoff.”

Am Law Daily reporters Sara Randazzo, Brian Baxter and Julie Triedman and New York Law Journal reporter Christine Simmons contributed to this story.