Dewey Leboeuf office at 1305 Avenue of the Americas (NYLJ/Rick Kopstein)
Bankruptcy attorneys representing two of the criminally charged former Dewey & LeBoeuf leaders lost a bid to stay discovery of a trustee and a creditor’s suit against their clients, as Southern District Bankruptcy Judge Martin Glenn made his intent clear Thursday.
“I’m not going to wait three years for a criminal case to be disposed of” while civil cases in the bankruptcy court sit, Glenn said. “It seems to me discovery should move forward.”
Glenn said he would not require Joel Sanders, Dewey’s former chief financial officer or Stephen DiCarmine, the former executive director, to be deposed for now, but he said they won’t “get a free pass” for document production.
The judge, however, approved a request by creditor ePlus to amend its complaint to reflect ” recent disclosures in criminal and civil proceedings arising from the failure of Dewey & LeBoeuf.”
Sanders and DiCarmine, along with the firm’s ex-chairman, Steven Davis, and former client relations manager Zachary Warren were indicted earlier this month by the Manhattan District Attorney for their role in an alleged scheme to defraud and steal from investors and others. The Securities and Exchange Commission has also filed a civil fraud complaint against Sanders, DiCarmine, Davis and two other former officials at Dewey.
Among the pending claims in bankruptcy court is a suit brought by Alan Jacobs, the liquidating trustee, last November. The suit seeks up to $21.8 million in compensation that the firm paid to DiCarmine and Sanders under their employment contracts, which the suit alleges were signed in August 2007 on the eve of the fatal merger combination that created Dewey & LeBoeuf.
The trustee’s suit said the contracts provided DiCarmine and Sanders with a fixed base salary, fixed bonuses, discretionary bonuses and trust payments. The amounts paid to DiCarmine and Sanders “were objectively unreasonable, if not arbitrary and capricious,” the suit claims.
At a bankruptcy hearing Thursday morning, Kathryn Coleman, a partner with Hughes Hubbard & Reed who represents Sanders, asked Glenn to stay discovery.
But the judge rejected her request and encouraged the parties to work together and coordinate a discovery schedule for document production.
Davis is not a defendant in the liquidating trustee’s suit. Last year, Glenn approved a $19.5 million settlement of mismanagement claims between the liquidating trustee, Davis, and Dewey’s professional liability insurer.
In addition to the trustee’s suit, Sanders and DiCarmine face claims brought by ePlus, an equipment leasing and finance company, which alleges the Dewey leaders filed “false and misleading financial statements” upon which ePlus relied when leasing equipment and related software and services worth more than $5 million.
In a letter to the judge, ePlus asked Glenn if it could amend its complaint “in light of the recent disclosures in criminal and civil proceedings.” The company said it would add background and allegations relating the “misrepresentations and communications” at issue in its own lawsuit.
Glenn allowed ePlus, represented by Richard Levy Jr., a partner at Pryor Cashman, to move forward with the amended complaint.
Coleman and Mary Beth Buchanan, a Bryan Cave partner appearing in bankruptcy court for DiCarmine, declined to comment, as did Levy. Christopher Murray, a Diamond McCarthy attorney representing the liquidating trustee, also declined comment.
Experts outside the Dewey bankruptcy observed that the criminal charges and the SEC complaint could benefit the bankruptcy trustee or creditors.
Bill Brandt, president of restructuring firm Development Specialists Inc., which was serving as an advisor early in the bankruptcy case but is no longer involved, said the criminal indictments might push back the date of insolvency, allowing the trustee to review earlier transactions for possible fraudulent conveyance actions and other suits.
The allegations and e-mails cited by government authorities in the criminal and the SEC complaints are “such a sea change in accepted fact that I think everybody will take a second look at all previous settlements,” he added.
Philip Touitou, a partner with Hinshaw & Culbertson who focuses on attorney liability matters and is not involved in the case, said that the criminal charges are going to provide “more information that [the trustee and creditors] will be able to consider and use in trying to augment the value of the estate.”