The Securities and Exchange Commission today charged five executives and finance professionals with facilitating a $150 million fraudulent bond offering by Dewey & LeBoeuf, the international law firm where they worked.
The SEC alleges that the five turned to accounting fraud when the firm needed money to weather the economic recession and steep costs from a merger. Fearful that declining revenue might cause its bank lenders to cut off access to the firm’s credit lines, Dewey & LeBoeuf’s leading financial professionals combed through its financial statements line by line and devised ways to artificially inflate income and distort financial performance. Dewey & LeBoeuf then resorted to the bond markets to raise significant amounts of cash through a private offering that seized on the phony financial numbers.
“Investors were led to believe they were purchasing bonds issued by a prestigious law firm that had weathered the financial crisis and was poised for growth,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “Dewey & LeBoeuf’s senior-most finance personnel used a grab bag of accounting gimmicks to create that illusion, and top executives green-lighted the decision to sell $150 million in bonds to investors as a desperate grasp for cash on the basis of blatantly falsified financial results.”
The SEC’s complaint filed in federal court in Manhattan charges the following executives at Dewey & LeBoeuf, which is no longer in business: chairman Steven Davis, executive director Stephen DiCarmine, chief financial officer Joel Sanders, finance director Frank Canellas, and controller Tom Mullikin.
In a parallel action, the Manhattan District Attorney’s Office today announced criminal charges against Davis, DiCarmine, and Sanders.
According to the SEC’s complaint, the roots of the fraud date back to late 2008 when senior financial officers began to conjure up fake revenue by manipulating various entries in Dewey & LeBoeuf’s internal accounting system. The firm’s profitability was inflated by approximately $36 million (15 percent) in its 2008 financial results through this use of accounting tricks. For example, compensation for certain personnel was falsely reclassified as an equity distribution in the amount of $13.8 million when they in fact those personnel had no equity in the firm. The improper accounting also reversed millions of dollars of uncollectible disbursements, mischaracterized millions of dollars of credit card debt owed by the firm as bogus disbursements owed by clients, and inaccurately accounted for significant lease obligations held by the firm.
The SEC alleges that Dewey & LeBoeuf finance executives continued using these and other fraudulent techniques to prepare its 2009 financial statements, which were misstated by $23 million. The culture of accounting fraud was so prevalent at the firm that Canellas sent Sanders an e-mail with a schedule containing a list of suggested cost savings to the budget. Among them was a $7.5 million line item reduction entitled “Accounting Tricks.”
According to the SEC’s complaint, Sanders acknowledged in separate e-mail communications, “I don’t want to cook the books anymore. We need to stop doing that.” But he and other finance personnel continued to banter about ways to create fake income. For example, in the midst of a mad scramble at year-end 2008 to meet obligations to bank lenders, Sanders boasted to DiCarmine in an e-mail, “We came up with a big one: Reclass the disbursements.” DiCarmine responded, “You always do in the last hours. That’s why we get the extra 10 or 20% bonus. Tell [Sanders’ wife], stick with me! We’ll buy a ski house next.” DiCarmine later e-mailed Sanders, “You certainly cheered the Chairman up. I could use a dose.” Sanders answered, “I think we made the covenants and I’m shooting for 60%.” He cryptically added, “Don’t even ask – you don’t want to know.”
The SEC alleges that Dewey & LeBoeuf didn’t want investors in the bond offering to know either. The firm continued using and concealing improper accounting practices well after the offering closed in April 2010. The note purchase agreement governing the bond offering required Dewey & LeBoeuf to provide investors and lenders with quarterly certifications. The quarterly certifications made by the firm were all fraudulent.
“As Dewey & LeBoeuf’s revenue was falling and the firm was struggling to meet commitments, its top executives and finance professionals brazenly looked for ways to create fake income and retain their lucrative salaries and bonuses,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.
The SEC’s complaint alleges that Davis violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint alleges that DiCarmine, Sanders, Canellas, and Mullikin violated Section 17(a) of the Securities Act and aided and abetted Dewey LeBoeuf’s and Davis’ violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) pursuant to Section 20(e) of the Exchange Act. The SEC is seeking disgorgement and financial penalties as well as permanent injunctions against all five defendants, and officer and director bars against Davis, DiCarmine, and Sanders. The SEC also will separately seek to prohibit Davis and DiCarmine from practicing as lawyers on behalf of any publicly traded company or other entity regulated by the SEC.
The SEC's investigation, which is continuing, has been conducted by William Finkel, Joseph Ceglio, Christopher Mele, and Michael Osnato. The case has been supervised by Sanjay Wadhwa. The litigation will be led by Howard Fischer. The SEC appreciates the assistance of the Manhattan District Attorney’s Office and the Federal Bureau of Investigation.