As part of the investigation into alleged criminal conduct that led to Dewey & LeBoeuf’s bankruptcy, the law firm’s former finance director quietly pleaded guilty to grand larceny in the second degree last month, according to documents unsealed Thursday.
Francis Canellas is one of the seven former Dewey employees whose cases were sealed when criminal charges were announced by the Manhattan District Attorney’s Office in early March against Dewey firm leaders. Canellas’ plea and cooperation agreement was released except for two redacted paragraphs.
In an exhibit attached to his Feb. 13 plea agreement, Canellas discussed how he worked with firm leaders, including former chairman Steven Davis, former executive director Stephen DiCarmine, former CFO Joel Sanders, former controller Thomas Mullikin and other insiders to make misleading statements to banks, investors or others.
“Sanders, Mullikin and I were the main contacts with individuals at JPMorgan, the placement agent on the private placement. Sanders, Mullikin and I, along with others, provided financial statements and other information to the banks and private placement investors that we knew to be false,” according to an exhibit in Canellas’ court papers.
In response, lawyers for the ex-Dewey leaders fired back.
Davis’ attorney, Elkan Abramowitz, a partner at Morvillo Abramowitz Grand Iason & Anello, said: “What he has to say about Davis is all conjecture and guessing and does not provide any direct evidence against him because there isn’t any evidence that Steven Davis committed any wrongdoing.”
“It is no surprise that a cooperating witness who has cut a deal is trying to implicate others. We look forward to the trial, when all the evidence comes out,” said Edward Little, a Hughes Hubbard & Reed partner who represents Sanders.
Canellas’ plea agreement statement is “obviously so carefully crafted by the prosecutors and the defendant to try to implicate others,” said Austin Campriello, a Bryan Cave partner who represents DiCarmine. Campriello called it “a very thin reed on which to build a case” against his client.
“Canellas’ purported understanding about what others may have known or thought or meant is not legal evidence against the others,” Campriello said. “Steve DiCarmine is not guilty and we look forward to that being proven at trial.”
The unsealing of Canellas’ case came after The New York Times moved to unseal all records relating to firm employees who have pleaded guilty. The district attorney agreed to unseal most records, with a few exceptions.
In Canellas’ case, Manhattan Supreme Court Justice Michael Obus (See Profile) ordered most records released on Thursday. Justice Robert Stolz (See Profile) could unseal the names of the others who have pleaded guilty soon.
The firm’s ex-leaders—Davis, DiCarmine and Sanders—and onetime client relations manager Zachary Warren have been criminally charged with taking part in a scheme to defraud and steal from investors and others. They have pleaded not guilty.
The Securities and Exchange Commission has also filed a civil fraud complaint against Davis, DiCarmine, Sanders, Canellas and Mullikin.
In an allocution attached to the plea agreement, Canellas said, in his role as finance director, he reported to Sanders, the CFO. After Dewey declared bankruptcy, he worked for the wind down committee.
As finance director, several people reported directly to him, including Mullikin, the firm’s controller; accounting manager Victoria Harrington; and David Rodriguez, the firm’s partner relations specialist.
Canellas said in late 2008, it became clear that Dewey might not comply with the cash flow covenant in the various credit agreements, but Sanders told him “that DiCarmine and Davis said we had to meet the covenants.”
Canellas said he and Sanders began discussing “accounting adjustments” that could be made. Based on Sanders’ recommendations, Canellas said, “it became clear to me the decision had been made to make inappropriate adjustments in order to meet the covenant.”
“Sanders and I considered how likely the various adjustments were to be caught by auditors and others. Sanders told me, in substance, that I had to be prepared with excuses to give the auditors if the adjustments were questioned, so that the firm could get through the audit,” he said in the allocution.
“We also discussed plausible rationales for the adjustments … and what we’d say if partners and others questioned the adjustments,” Canellas added.
At least one of the conversations took place in Warren’s presence, Canellas said.
It was his job to implement adjustments, which were primarily made by Mullikin or others in the accounting department, and by Dianne Cascino, who Canellas said was in charge of diaries and cash application.
He said Ilya Alter, another employee who has reportedly pleaded guilty and was the firm’s director of budgeting and planning, was also involved because several of the adjustments impacted the firm’s 2009 budget.
Later on, “Alter and Mullikin also helped come up with potential inappropriate adjustments,” Canellas said.
He claims that in 2009, Sanders would contact him several times a day to find out the status of adjustments and how close the firm was to meeting the net income required for covenant compliance.
“I also recall on one occasion that Sanders and DiCarmine were leaving the firm for dinner and stopped by my office to check on the status of the adjustments,” Canellas said. “We all knew that adjustments were being made to deceive our lenders and others into believing that the firm had met all of its covenants, when in fact it had not.”
Canellas’ also describes the type of “adjustments.” Some involved reversing amounts that had been expensed. Some amounts were inappropriately taken into revenue, and certain expenses were reclassified as partner compensation.
Canellas said he and others kept the firm’s auditors at Ernst & Young from discovering the adjustments by making false or misleading statements.
Canellas said he attended a meeting with Davis and Denise Pelli, an Ernst & Young partner, at the end of the 2010 audit cycle.
“I recall that Steve Davis was very nervous before the meeting, and I understood he was nervous because of the inappropriate accounting adjustments that had been made,” Canellas said.
During the meeting, Pelli told Davis that the firm’s accounting records were in good shape. After the meeting, Davis told Sanders in a sarcastic tone “that he was doing a great job and the firm’s books were in great shape,” Canellas said.
Dewey failed to meet its financial targets again in 2009.
Canellas said Sanders sought to amend the cash flow covenant and also to make adjustments similar to those in 2008 to even meet the reduced covenant.
“At various times throughout the life of the scheme, I would show Sanders adjustments that were planned, and he would tell me I needed to find more,” Canellas’ allocution said.
“I understood from conversations with Sanders that both DiCarmine and Davis were aware of inappropriate adjustments that were being made at year-end 2009,” Canellas said, and he again signed the firm’s covenant compliance certificate knowing it contained false information.
In April 2010, Dewey & LeBoeuf refinanced its debt by entering into a $100 million line of credit with three banks and by securing $150 million in a private placement with multiple insurance companies, Canellas’ plea agreement noted.
He said he and Sanders and Mullikin, along with others, provided false financial statements and other information to the banks and private placement investors.
Canellas said Sanders oversaw Mullikin’s and his interactions with the banks and investors, including what information they did and did not provide.
Canellas recalls a meeting he had with Sanders and DiCarmine, where Sanders questioned whether they should disclose the firm’s “overhang,” which was the “millions of dollars that the firm promised to pay partners from future years’ income to compensate them for prior years’ work.”
He said the disclosure would be detrimental to the firm’s chances of securing the line of credit and private placement investments, and they decided this information should be not disclosed.
The firm again failed to meet its income targets for 2010 and 2011, and “the firm’s accounting records were again falsified using many of the same sorts of adjustments that had been made in prior years”
Over the years, Canellas said, he instructed Cascino, Mullikin, Rodriguez, Harrington and others to make the adjustments.
Canellas said in one meeting in late 2011, he, Davis and Sanders discussed partner distributions, and later in the meeting, year-end adjustments.
He said after discussions with Sanders, in order to make it appear the firm was in compliance with a covenant, he instructed Cascino and Lourdes Rodriguez, the director of billing, to make adjustments he knew were false.
David Rodriguez, Lourdes Rodriguez and Cascino could not be reached for comment. Alter and his attorney, Benjamin Brafman, declined to comment.
Canellas’ lawyer, Brian Maas of Frankfurt Kurnit Klein & Selz, declined to comment, as did Kenneth Kaplan, a Kaplan & Katzberg partner representing Mullikin and William Murphy, a Zuckerman Spaeder partner representing Warren.
According to Canellas’ plea agreement, he will participate in ongoing investigations.
The agreement said the potential maximum sentence is incarceration of five to 15 years and the potential minimum sentence is unconditional discharge. But the prosecution said if Canellas fully complies with the agreement, it will recommend two to six years. No sentencing date has been set.
Julie Triedman, an American Lawyer reporter, contributed to this report.