(Bloomberg) -- Three former top executives of Dewey & LeBoeuf LLP avoided potential prison terms after a Manhattan jury failed to agree on whether they lied to investors in the run-up to the largest law-firm bankruptcy in history.
The mistrial followed weeks of deliberations during which jurors acquitted the trio of lesser charges. The case, while prosecuted by the office of Manhattan District Attorney Cyrus Vance Jr., involved the type of fraud often pursued by the U.S. government. The outcome underscored the difficulty prosecutors face -- even with the benefit of cooperating witnesses -- as they seek to hold individuals accountable for corporate crimes. Vance must now decide whether he’ll retry the men.
Prosecutors charged the defendants with grand larceny, fraud and conspiracy, alleging they inflated income as the law firm’s cash flow slowed amid the financial crisis.
The law firm cut costs by mischaracterizing payments to salaried lawyers, reversing disbursements that had been written off, double-booking income, encouraging clients to backdate checks and delaying expenses, prosecutors said. A $150 million bond deal that Dewey sold to the public in 2010 was based on inflated revenue and hidden expenses, they alleged, adding that the three men allegedly stole almost $200 million from 13 insurers and two financial firms.
While law firms aren’t subject to the same regulatory scrutiny as public companies, they do face pressure to boost metrics, such as their profits-per-partner, used in industry rankings. Even without a conviction, the case should serve as a “wake-up call” for the industry, attorneys following the case said. The three men still face a lawsuit by the U.S. Securities and Exchange Commission.
“Lawyers are smart, tenacious and intelligent -- so in an organization made up of those types you’d think they would be poring over the accounting books,” said Jeff Ifrah, a white collar attorney at Ifrah PLLC and a former special assistant U.S. attorney.
“But obviously at Dewey that wasn’t the case.”
While prosecutors called more than 40 witnesses, defense lawyers presented none, choosing instead to use cross- examination to prove their clients didn’t know about the fraud, or that the accounting was more complicated than alleged.
No experts, including officials at Dewey’s lead auditor Ernst & Young LLP, were called to testify in support of the government’s claim that the accounting was improper, the defense attorneys noted.
Vance’s probe was aided by seven former Dewey employees, including the finance director, who cooperated and pleaded guilty.
In 2012, Dewey was ranked 28th in gross revenue among large law firms by American Lawyer, a trade magazine. The New York- based firm was the product of a 2007 merger between Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae. When the financial crisis hit a year later, work slowed and the billing director -- who pleaded guilty and aided prosecutors -- said she began falsifying invoices to boost accounts receivable.
Dewey filed for bankruptcy in May 2012, owing creditors $245 million.
The SEC complaint focuses on allegations similar to the state charges, citing as evidence e-mails from the three men expressing regret even as the alleged malfeasance continued.
“I don’t want to cook the books anymore,” Sanders, the Dewey CFO, said in a Dec. 4, 2008 message, according to the regulator. “We need to stop doing that.”
In a June 27, 2009, e-mail, Sanders asked Dewey finance director Frank Canellas, “Can you find another clueless auditor?” Canellas pleaded guilty in the state case and cooperated with Vance’s investigation.
“The Dewey case as a whole has made people in big law more cognizant of how finances are being handled at their firms," said Richard Strassberg, a partner at Goodwin Procter LLP. “You better make sure everything is fine.”
The state case is People v. Davis, 773-2014, New York State Supreme Court, New York County (Manhattan). The SEC case is SEC v. Davis, 14-cv-01528, U.S. District Court, Southern District of New York (Manhattan).