Defense attorneys confer outside a Manhattan state courtroom before a hearing Friday on criminal charges against former Dewey & LeBoeuf leaders. From left: Elkan Abramowitz and Dana Delger, both from Morvillo Abramowitz Grand Iason & Anello; Kathryn Gebert, Anne Redcross and Austin Campriello, all from Bryan Cave; and Marc Weinstein and David Shanies from Hughes Hubbard & Reed. (NYLJ/Rick Kopstein)
Former leaders of Dewey & LeBoeuf, arguing to dismiss the criminal charges against them, said the firm collapsed partly because of “the voracious greed of some of the firm’s partners” and pointed to the firm’s executive committee for authorizing a deal that’s at the heart of the Manhattan District Attorney’s indictment.
“This is a scapegoat prosecution,” Stephen DiCarmine, Dewey’s former executive director, said in court papers filed Friday with Supreme Court Justice Robert Stolz.
DiCarmine, former chairman Steven Davis, former CFO Joel Sanders and ex-client relations manager Zachary Warren are accused of scheming to defraud and steal from the firm’s lenders, investors and others. They have pleaded not guilty.
Much of the indictment centers on Dewey refinancing its debt with a $100 million revolving line of credit with banks and a $150 million private placement of securities with insurance companies. Prosecutors allege Davis, DiCarmine and Sanders and others acting at their direction misrepresented Dewey’s financial condition to potential investors and lenders.
In their motions to dismiss, Sanders and DiCarmine pointed to the executive committee members, including one who helped negotiate the 2010 private placement. He is not named in the papers, but Richard Shutran, a former executive committee member, has previously been mentioned in press reports in connection with the deal.
In his court papers, DiCarmine said he was a contract employee who was in charge of operations, not finance, and oversaw recruiting, marketing and office space. He said he had no motive to steal for the benefit of the equity partners who owned the firm.
“The insatiable greed of some of those partners and the decision of some partners to jump ship when the going got rough were major causes of D&L’s collapse, not [my] actions,” DiCarmine argued.
He said there is a misperception that he ran the firm. “The ‘he had to know’ theory of culpability may be good enough for diverting cocktail party conversations at bar association events, but is not legally sufficient evidence to support an indictment,” he said.
DiCarmine and Sanders criticized statements by Dewey employees who have already pleaded guilty as simply hearsay. DiCarmine said statements by former budget director Ilya Alter and former finance director Francis Canellas were riddled with hearsay as to what DiCarmine purportedly said.
DiCarmine, who is represented by Bryan Cave partner Austin Campriello, said the private placement was not his idea and he did not authorize it—Dewey’s executive committee did. He and Sanders noted that other than Davis, no executive committee members have been charged.
“Curiously, the District Attorney apparently has given the entire executive committee, including the partner who represented D&L in the private placement transaction, a pass,” DiCarmine said.
He also said at least two firm lawyers, including one who was an executive committee member, participated in drafting and reviewing the documents that effectuated the private placement.
An attorney involved in the case confirmed to the New York Law Journal that Shutran is the executive committee member referred to by DiCarmine.
Shutran is now a partner in O’Melveny & Myers’ corporate practice. He did not return a call for comment.
DiCarmine also pointed to Canellas’ guilty plea statement, in which Canellas asserted that he, Sanders and DiCarmine decided that the so-called overhang, which consisted of back pay owed to partners, should not be disclosed in connection with the private placement. DiCarmine said the idea that he decided on behalf of the firm is “preposterous.”
He said evidence would show that a Dewey partner and executive committee member represented the firm in the private placement, and this partner knew about the overhang when he was performing these tasks—not only as a member of the executive and compensation committees, but also because money he was owed was part of the overhang.
“The evidence should show that this lawyer would have decided—perhaps alone, perhaps in conjunction with other executive committee members and other lawyers working on the deal—whether to disclose the overhang. This was his job and his responsibility,” DiCarmine said, apparently referring to Shutran. “And he had the authority to make that decision for the firm, not Steve DiCarmine.”
Claims of No Evidence
Sanders, represented by Edward Little and Marc Weinstein, partners of Hughes, Hubbard & Reed, made similar arguments.
Sanders said he “worked tirelessly to bring in money that was legitimately owed to the firm” and “struggled with partners who repeatedly failed to meet their projected collection targets” and with clients who didn’t make complete payments.
“Ultimately, those efforts were thwarted by the individual greed of some of [Dewey's] partners who abandoned the firm during a time when solidarity was necessary to keep it alive,” he said.
While noting the lack of prosecution against the executive committee, Sanders pointed to “a leading partner” in Dewey’s corporate department—familiar with private placements and disclosure rules and a member of its executive committee—who negotiated on Dewey’s behalf in the private placement transaction as having full access to the firm’s financial information.
“That partner was well aware of the firm’s financial position and was best situated to make any legal disclosures to the investors that he deemed necessary,” he said.
Sanders also said evidence also would show that other executive committee members had the authority to make final disclosures regarding the private placement.
Meanwhile, prosecutors have asserted that Davis, the ex-chairman, sat at the top of the fraud.
Davis, represented by Elkan Abramowitz of Morvillo Abramowitz Grand Iason & Anello, said the evidence against him amounts to little more than hearsay rumors and “spurious inference.”
Of the seven who have already pleaded guilty, Davis said, only Canellas spoke to any possible bad intent by Davis related to the accounting. But Canellas’ statements were largely inadmissible before the grand jury, and Davis argued that the evidence before the grand jury failed to demonstrate any evidence—circumstantial or otherwise—of an illicit agreement on his part to defraud anyone.
Prosecutors have alleged that Davis was nervous and sarcastic regarding a meeting with the firm’s outside auditors. But Davis said any evidence to that effect is not proof that he agreed to enter into a scheme to defraud.
Warren, in separate court papers, asked the judge to inspect the grand jury minutes, release them to the defense and dismiss the charges as legally insufficient. He said his role in connection with accounting entries was limited to being present at a meeting with Sanders and Canellas at which the adjustments may have been discussed.
Warren, represented by Zuckerman Spaeder partners Paul Shechtman and William Murphy, said the grand jury couldn’t have heard evidence that he made entries in the accounting software because he had no access to the system. He said Sanders and Canellas directed others to make the entries, not him.
Warren’s motion to sever his case from the others is still pending.
Defendants as ‘Scapegoats’
A joint dismissal motion by Davis, Sanders and DiCarmine said the investigation leading to the prosecution was instigated by “some disaffected partners” who sought to blame the financial troubles of the firm on management. Those partners ignored the fact the firm’s distress was caused by a combination of the Great Recession, “the voracious greed of some of the firm’s partners,” the decisions of several key partners to defect, and the publicity engendered by the District Attorney’s investigation that torpedoed an impending merger and Dewey’s ongoing negotiations with lenders to renew its credit facility.
“The court should not let the defendants in this case become the scapegoats for things these defendants did not do or approve,” the joint motion stated.
The three former leaders asked the court, upon inspection of the grand jury minutes, to dismiss counts of the indictment not supported by sufficient evidence, as well as release the minutes to them. In particular, the trio said the top count against Davis, DiCarmine and Sanders—first-degree grand larceny carrying mandatory prison time upon conviction—should be dismissed.
The three noted that, as part of the private placement, the firm received a total of $150 million from the investing bondholders in exchange for notes that obligated the firm to pay the principal back at certain set dates and interest at certain set intervals.
They said the first principal payment on the private placement notes was not due until April 16, 2013, which was after the law firm filed for bankruptcy and occurred more than two years after the firm obtained the money.
They said during those two years, every interest payment on the notes was made on time.
“Dismissal of the grand larceny counts is necessary because there could have been no evidence before the grand jury that when [Dewey] obtained the money via the private placement, any of these three defendants intended that the money would not be repaid with interest when due,” they said.
They also asked to dismiss the indictment’s 88 counts for falsifying business records because they said they did not intend to commit, aid or conceal another crime.
At its core, the trio said, the validity of the indictments rests on their knowledge of “complex, arcane and nuanced accounting rules, regulations and practices.”
“These defendants could not have committed grand larceny if they did not know that they were acting or did not intend to act wrongfully,” the defense motions said. “Nor could they have stolen money by false pretenses or falsified business records or engaged in a scheme to defraud by false or fraudulent pretenses if they did not know that representations or entries were false or fraudulent.”
The three said none of the three had an understanding of the complicated accounting rules and regulations at issue. None was a certified public accountant.