3.07.2014

Top officers of a law firm cooked the books

Four former leaders of the once-high-flying law firm Dewey & LeBoeuf violated a rule that lawyers always tell their clients: Don’t put anything incriminating into an email.

The former top officers, who were charged by New York prosecutors on Thursday with orchestrating a nearly four-year scheme to manipulate the firm’s books to keep it afloat during the financial crisis, talked openly in emails about “fake income,” “accounting tricks” and their ability to fool the firm’s “clueless auditor,” the prosecutors said.

The messages were included in a 106-count indictment against Steven Davis, Dewey’s former chairman; Stephen DiCarmine, the firm’s former executive director; Joel Sanders, the former chief financial officer; and Zachary Warren, a former client relations manager. They were charged with larceny and securities fraud. One of the men even used the phrase “cooking the books” to describe what they were doing to mislead the firm’s lenders and creditors in setting the stage for a $150 million debt offering that was supposed to solve the firm’s financial woes, according to the messages.

“Those at the top of the firm directed employees to hide the firm’s true financial condition from creditors, investors, auditors and even partners of the firm,” the Manhattan district attorney, Cyrus R. Vance Jr., said at a news conference announcing the indictment.

At its peak, the combined firm had 26 offices around the globe and employed more than 1,300 lawyers. The $550 million in claims against the firm’s estate made it the largest bankruptcy filing by a law firm on record.

Prosecutors contend that the accounting games at Dewey began in November 2008, not long after the merger was completed, and continued until March 7, 2012, a little before Dewey filed for bankruptcy two months later. The firm found it could not meet provisions in bank loans that required it to meet certain cash-flow projections. To make it appear as though Dewey was meeting those conditions, the top executives schemed to make a series of fraudulent accounting entries that either increased revenue, decreased expenses or appeared to rein in distribution payments to partners, prosecutors said.

The authorities said the accounting scheme was laid out in a document called the “Master Plan.”

Mr. Davis and his team had hoped that the firm’s revenue would eventually increase as the economy recovered. But by the end of 2009, Dewey owed its bank lenders about $206 million, needed to make payments totaling $240 million to its partners, yet had just $119 million in cash.