The collapse of Dewey & LeBoeuf sent shockwaves through the law business, but the indictment of senior members of the law firm which has provided the biggest law firm bankruptcy in history, is worth considering.
The timeline below is from the grand jury indictment, (see the link below for the indictment) unsealed by the Manhattan District Attorney’s office and alleging that former Dewey Chairman Steven Davis, former executive director Stephen DiCarmine, and former Chief Financial Officer Joel Sanders misrepresented expenses and falsely claimed revenue to hide a cash flow shortfall stemming from the financial crisis.
Among the key excerpts from the indictment, which charges that the “scheme” was developed in 2008 and concluded with the collapse of the law firm in 2012. All charges are denied by the defendants.
(Page 5) The merger, coming just before the financial crisis, was troubled from the start and the Firm’s first year financial performance was severely below expectations. By the end of that year, the Firm had more than $100 million in term debt outstanding and available lines of credit of more than $130 million with four banks (the “Banks”) …
By or about the end of 2008, the Schemers had created a document they called the “Master Plan” that described certain fraudulent accounting adjustments that the Schemers decided to pursue as part of the Scheme….
(Page 55) On or about December 30, 2008, at or about 9:18 PM, in New York County, defendant [Chief Financial Officer Joel Sanders] sent an email to defendants [Executive Director Stephen DiCarmine]and [Chairman Steven Davis] that read, in substance, “We need $50M tomorrow to meet our covenant.” On or about December 30, 2008, at or about 11:42 PM, in New York County, defendant DAVIS replied, in substance, “Ugh.”
On or about December 31, 2008, in New York County, Employee C documented the fraudulent adjustments he and defendant SANDERS decided to employ in the presence of defendant [client-relations manager at the firm, Zachary Warren] on or about December 30, 2008 in a document Employee C named the “Master Plan.”…
[A]fter creating the “Master Plan,” Employee C wrote an email, at or about 7:24 PM, to defendant WARREN, which stated in substance, “Great job dude. We kicked ass! Time to get paid.”
(Page 8) In February 2009, the Firm reported to its lenders that it had satisfied the Cash Flow Covenant at year-end 2008 by a little more than $4 million. In fact, the Firm was able to achieve this result only by making millions of dollars of fraudulent accounting entries, including, among others, those described above….
In fact, the Firm’s financial condition was so poor in 2009 that defendants DAVIS, SANDERS, and DICARMINE realized that, despite planning millions of dollars in fraudulent adjustments for that year, they would be unable to come up with enough fraudulent adjustments by year-end to show compliance with the Cash Flow Covenant. As a result, defendant SANDERS sought a waiver of the covenant from the Banks. The Cash Flow Covenant floor was reduced from $290 million to $246 million, but the Banks placed burdensome conditions on the Firm, which caused additional financial pressure.
June 27, 2009:
(Page 57) SANDERS forwarded an email to Employee C regarding the departure of the audit partner from Accounting Firm A who was engaged on the 2008 year-end audit of Dewey and LeBoeuf, and wrote, in substance, “I assume you new [sic] this but just in case. Can you find another clueless auditor for next year?”
Nov. 10, 2009:
(Page 58) SANDERS wrote in an email to defendants DAVIS and DICARMINE, and Employee B, an individual known to the Grand Jury, and C, in substance, regarding the Firm’s targets, “I said at the Exec Committee meeting that if we can really collect (with no adjustments) between $850k and $875k then we will do between $14k and $15k per point.
Dec. 9, 2009:
(Page 58) SANDERS wrote in an email with the subject line, “Reality Check,” to defendants DAVIS and DICARMINE, in substance, “I’m really sorry to be the bearer of bad news but I had a collections meeting today and we can’t make our target. The reality is we will miss our net income covenant by $100M and come in at about $7k per point. . . . I can probably come through with enough ‘adjustments’ to get us to miss the covenant by
$50M-$60M and get the points to $10k but that pretty much wipes out any possible cushion we may have had for next year which was slim at best. The banks are going to require a plan which is not going to be pretty . . . . ”
Dec. 31, 2009-Jan 1, 2010:
(Page 59) Employee N typed , as dictated above, an email to defendant SANDERS and Employee C, which read, in substance, “Dear PARTNER, Thursday’s collections were disappointing. We left $40M of confirmed receipts on the table. We did not receive payments on 12/31 from the following clients . . . . It is imperative that you contact every one of these clients first thing Monday morning and ask them to send us a check dated 12/31 for the amount listed above. Sincerely, Joel.”….SANDERS forwarded the email to defendants DAVIS and DICARMINE
Jan. 2, 2010:
(Page 60) DAVIS again responded to defendant SANDERS’s email, writing in substance, “I would change the wording of the last sentence slightly to say ‘It is imperative that you contact each of these clients on Monday morning. All payments through checks dated December 31 will be included in revenues for 2009.’”
(Page 9) In April 2010, the firm refinanced its debt with a $150 million private placement of securities with 13 insurance companies and a $100 million revolving line of credit with a syndicate of banks. To obtain this financing, the Schemers, among other things, misrepresented the Firm’s financial condition and practices to potential investors and lenders. For example, the Schemers provided potential investors and lenders with financial statements that falsely represented, among other things, that the Firm had complied with its covenants.
Feb. 9-10, 2012:
(Page 61) [A]fter a meeting with defendant SANDERS, Employee G wrote in an email to Employee C, in substance, “We are taking the following reductions in the budget for presentation tomorrow and want to run them by you to ensure they are not ‘not-doable.’” On or about February 10, 2012, in New York County and elsewhere, Employee C responded to Employee G, copying defendant SANDERS, stating in substance, “Each of these present audit risk.”
(Page 10) By in or about March 2012, the Scheme had collapsed in on itself. For years, the Schemers had been fraudulently claiming revenue that the Firm did not have and pushing expenses and financial obligations off into the future. The Firm could no longer pay partners enough to prevent their departure, and the Schemers could no longer fool the Firm’s lenders, investors, and others. The Firm declared bankruptcy; thousands lost their jobs; and the Firm’s creditors were left owed hundreds of millions of dollars.
The indictment against the former Dewey & LeBoeuf lawyers charges them with engaging in a vast, years-long fraud that was designed to hide the financial depths to which the firm had sunk.
The scheme allegedly ran from November 2008 to early March 2012, shortly before Dewey fell into bankruptcy court and dissolved, and was designed to create the illusion that the firm had weathered the financial crisis and was set to grow, according to the indictment
See: The Indictment