Courts

Criminal Charges Against Law Firm Bosses Follow Dewey & LeBoeuf’s Downfall


The Dewey & LeBoeuf offices in New York

Photograph by Scott Eells/Bloomberg

The Dewey & LeBoeuf offices in New York

If there were any doubt remaining that the business of Big Law has changed dramatically over the last 15 years, those shreds should have been wiped away with the criminal charges filed against three former leaders of the law firm Dewey & LeBoeuf by the Manhattan District Attorney’s Office and the Securities and Exchange Commission.

The criminal case filed on Thursday by prosecutors accuses the former chairman, executive director, and chief financial officer of the now-defunct law firm of “overseeing a massive effort to cook the books,” an alleged fraud that ultimately led to Dewey’s 2012 collapse and the largest law firm bankruptcy ever filed. Dewey & LeBoeuf—which resulted from a merger in 2007 of two old-line New York law firms, Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae—once had more than 1,100 lawyers spread across 25 offices. At one point it ranked as the No. 3 legal adviser to the big banks that serve as financial advisers on mergers. By the time of its failure, the firm’s bankruptcy petition listed assets of $193 million and liabilities of $245.4 million.

The criminal indictment accuses Steven Davis, Dewey’s former chairman, Stephen DiCarmine, the former executive director, and Joel Sanders, the former chief financial officer, of stealing from the firm’s lenders and investors. The charges include grand larceny, securities fraud and conspiracy, and the theft of almost $200 million from 13 insurance companies and two financial institutions. At the center of the alleged scheme, prosecutors allege, was a 2008 effort to falsify the books to hide that the firm wasn’t complying with loan requirements.

All three have pleaded not guilty to the charges. Attorneys for Davis, DiCarmine, and Sanders described the indictment as a meritless effort to scapegoat their clients. A fourth individual, Zachary Warren, who had worked as a client relations manager at the firm, is charged with falsifying business records and conspiracy. He also pleaded not guilty; his attorney did not respond to a request for comment.

This is hardly the stuff of law firm partnerships, especially from the year 2000 and earlier, when partners were tight-knit, loyal, and cautious in how they ran their businesses. And the fraud charges mark a never-before-seen action in the world of New York’s white-shoe law firms. “Fraud is not an acceptable accounting practice,” District Attorney Cyrus Vance Jr. said on Thursday morning while announcing the charges.

So it must have seemed to several former colleagues of the indicted law firm leaders when, back in April 2012, they approached Vance’s office to press for criminal charges to be brought against Davis, accusing him of embezzlement, wire fraud, and mail fraud, according to press reports at the time. DiCarmine, too, was soon under investigation. It was an unprecedented action for so-called partners to turn on each other in this way; whatever was really going on at Dewey in the months and years before, the action it prompted set off a series of events that led to Thursday’s indictments.

By most accounts, Davis and DiCarmine—the “two Steves,” as they reportedly were known at the firm—weren’t exactly effective business managers. They were largely the ones running the firm and in so doing made many questionable choices, from overextending the business by borrowing too much to hiring high-priced partners from other firms and guaranteeing those lawyers astronomical compensation the firm could not afford to pay. The actions deepened the financial hole in which Dewey found itself in 2012, before filing for bankruptcy on May 28, not long after the complaints were brought to Vance’s office.

The criminal indictments are just the latest actions—arguably the most serious—that have dogged the former firm’s partners and the Dewey estate since the bankruptcy filing, including several lawsuits brought by creditors and former partners. One lawsuit filed in June 2012 by a former partner, intellectual-property litigator Henry Bunsow, likened Dewey to a Ponzi scheme, which he said was set up to enrich those running the firm.

Another lawsuit brought in December by the trustee overseeing the firm’s bankruptcy revealed details about generous employment contracts for DiCarmine and Sanders, covering a five-year period from 2008 to 2013. Both collected a base salary ($950,000 annually for DiCarmine, $900,000 for Sanders); an annual bonus ($200,000 each); a discretionary bonus (the amount was determined by Davis and, as the complaint in the action notes, were substantial–more than $1 million each in 2008 and 2009, for example); and an annual deposit to irrevocable grantor trusts redeemable every three years ($200,000 each).

Kessenides is an associate editor for Bloomberg Businessweek.

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