Risk & Compliance

Law Firm’s Demise Blamed on Accounting Gimmicks

N.Y. prosecutor says ex-CFO schemed with two other former execs to hide Dewey & LeBoeuf's true financial state.
Matthew HellerMay 28, 2015

The former CFO and two other former top executives at Dewey & LeBouef LLP schemed for years to conceal the true condition of the now-defunct law firm’s finances with accounting gimmicks, a prosecutor told a Manhattan jury.

As The Wall Street Journal reports, the Manhattan District Attorney’s Office is seeking to show that Dewey’s former leaders deceived banks and insurance companies into lending more than $250 million that ultimately didn’t prevent Dewey’s 2012 collapse.

Former CFO Joel Sanders, ex-Chairman Steven Davis, and ex-Executive Director Stephen DiCarmine are facing dozens of counts of larceny, fraud, and falsifying business records. If convicted, they could face between eight and 25 years in prison.

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The trio schemed to “make it appear to those inside the firm and outside the firm that Dewey & LeBoeuf’s financial performance was far better than reality,” Assistant District Attorney Steve Pilnyak said Wednesday in his opening statement at their trial.

But defense attorneys said “greedy” lawyers who abandoned Dewey and took big clients with them brought about the firm’s bankruptcy filing.

“They rendered the firm unable to survive,” Davis’ lawyer Elkan Abramowitz said, according to The New York Times. “They picked up their marbles and ran.”

Dewey’s bankruptcy filing marked the largest law-firm failure in U.S. history. According to Pilnyak, the defendants came up with a “Master Plan” for the accounting fraud over a dinner at a Manhattan restaurant in 2008, when the financial crisis was in full swing.

The plan spelled out the accounting adjustments that could help the firm to appear to meet crucial covenants on its bank debt., the prosecutor said. The maneuvers allegedly included reclassifying loans as fees from clients, backdating checks, and counting partner capital contributions as revenue.

Rather than accusing Sanders, Davis, and DiCarmine of manipulating the firm’s books directly, prosecutors say the trio directed lower-level employees to make false accounting adjustments.

Abramowitz countered that all of the adjustments pointed out by prosecutors added up to just a few million dollars for a firm that at its peak generated $1 billion in gross revenue.