In 2012, the New York based law firm Dewey & LeBoeuf made headlines by filing for Chapter 11 bankruptcy. The firm, which was among Vault.com’s Top 50 Law Firm Rankings from 2009 to 2012, employed more than 1,400 attorneys across fifteen countries before announcing its collapse. Since the announcement, Dewey’s top managers have been at the center of both a criminal and civil lawsuit after allegations surfaced that they had made fraudulent accounting representations to obtain funding.
Dewey & LeBoeuf’s problems began shortly after its inception in 2007, when Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae combined in the largest law firm merger to date. The new firm quickly became a powerhouse in the legal industry, representing high-profile transactions for clients such as A.I.G., BP, JPMorgan Chase, Disney, Dell and eBay. The firm built this enviable list of clientele largely by making “lateral hires,” the practice of drawing high profile lawyers from other firms by extending highly profitable contracts. One such hire was Ralph Ferrara, a successful securities litigator that Dewey was able to lure with an annual salary of $1.6 million and signing bonus of $16 million.
During the financial crisis of 2008, Dewey’s top managers continued to finance such lavish partner contracts with over $300 million in funding from a bond offering and other financial lenders. The prosecution in the case, led by Manhattan District Attorney Cyrus Vance, claimed that Dewey’s executives obtained this funding by committing securities fraud and pressuring the firm’s accountants to falsify business records. According to Richard Frankel, the head of the FBI criminal division in New York, the executives “backdated checks, changed write-offs and even misappropriated loan payments as revenue,” Frankel said.
The four executives charged were Steven H. Davis, the firm’s former chairman, Stephen DiCarmine, the firm’s former executive director, Joel Sanders, its former chief financial officer, and Zachary Warren, a former client relations manager. The prosecution brought a number of Dewey employees as witnesses, including Frank Canellas, the firm’s former finance director, who pleaded guilty to collaborating with the firm’s executives to commit fraud, a felony under the New York Penal Code.
However, while the prosecution was able to eliminate nearly any doubt that the executives did adjust the firm’s financial statements, the defense successfully raised some doubt as to the executives’ awareness that their conduct was criminal, all without calling a single witness. Elkan Abramowitz, an attorney for Davis, claims his client acted in “good faith” and “in service of the firm’s best interest.” Sanders’ lawyer, Ned Bassen, stated that the prosecution is “attempting to elevate traditional and typical accounting adjustments to crimes.” In effect, the defense made a case that the executives should be held to the business judgment rule rather than a strict liability standard, and in part, it worked.
The three-month trial culminated last October with a deadlocked jury. A new trial has been scheduled for September, but will only bring DiCarmine and Sanders as defendants. In January, Davis reached a deal with prosecutors, under which he is barred from practicing law in New York for five years. Zachary Warren also reached a deal with the prosecution, which entails 350 hours of community service, though he is not pleading guilty to any charges or admitting any wrongdoing.
Warren was not an attorney when he worked at Dewey, and apparently facing criminal charges with some of the giants of the industry did not dissuade him from becoming one. Warren will start as an associate at Williams & Connolly in Washington, D.C. this fall.
Business Judgment Rule Tentatively Prevails in Case against Dewey & LeBoeuf Executives (PDF)