Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

On March 6, 2014, the SEC brought charges of securities fraud against a handful of executives and finance professionals from the now-defunct global mega-firm Dewey & LeBoeuf.  The SEC alleges that the firm’s co-chairmen (Steve Davis and Steve DiCarmine, known as “the two Steves”) and finance team cooked the books upon which a $150 million bond offering was based.  This was apparently the endpoint of accounting fraud that is alleged to have begun in 2008, when Dewey & LeBoeuf was reeling from the financial crisis and was in risk of defaulting on their financing covenants.   This story has been widely covered in a number of sources, including the New Yorker’s blog, the Economist, and most major news sources.  Rather than attempt to recreate all of that reporting, this blog post provides a few points of interest gleaned from these various sources.

  • When the fraud allegedly began, back in 2008, the firm fabricated $36 million in order to comply with its financing covenants.  The methods by which this alchemy was accomplished include reclassifying compensation of certain personnel as equity distributions in the amount of $13.8 million (even though the personnel had no equity in the firm), reinstating as receivables millions of dollars it had previously written off as uncollectible, reclassifying millions in credit card debt as “client disbursements,” and improperly accounting for the firm’s lease obligations. Other tricks the firm used over the years were counting partner capital contributions and loan payments as fee income, backdating checks, and double-counting revenues.
  • Part of the story is the carelessness with which the attorneys communicated via email about the accounting shenanigans.  An email proposing potential budget savings for the firm contains a $7.5 million line item labeled “Accounting Tricks.”  At least one finance professional wrote that he “didn’t want to cook the books anymore.”  At year-end 2008, after the various accounting tricks were settled upon, the firm’s chairpersons and finance professionals celebrated their cleverness via email.  For other noteworthy email nuggets, check out this Bloomberg article.
  • The firm’s auditors were Ernst & Young.  Internal Dewey & LeBoeuf emails refer to at least one auditor as “clueless,” and E&Y has apparently issued a statement (although I was unable to easily locate it) indicating that Dewey & LeBoeuf deceived them by withholding information and making misrepresentations.
  • Four persons – the two Steves, CFO Joel Sanders, and paralegal Zachary Warren — are facing criminal charges.  The New Yorker blog includes some discussion of the differences in burdens of proof in the criminal matter versus the civil matter, and indicates that there may be difficulty actually implicating the two Steves in the fraud.  If you are registered with Scribd, you can download the 106 count indictment here.
  • Steve DiCarmine seems to be a true caricature.  His cousin Vinny (yes, he has probably earnestly referred to “my cousin Vinny” in conversation  before), who lived with him growing up and is as close as a brother, is the former head of the Basciano crime family and is currently serving a life sentence.  Steve DiCarmine testified in defense of his cousin at his trial, where the death penalty was avoided in favor of the life sentence.  Mafia members reportedly considered Steve DiCarmine to be the family’s Michael Corleone.
  • DiCarmine received a rich salary at Dewey & LeBoeuf, despite reports that he had no clients and generated no fees.  He kept a suite at the high-end One Aldwych hotel in London.  The suite allegedly remained stocked with his expensive suits when he wasn’t there.  DiCarmine also kept a house in the Hamptons and a Miami Beach apartment.  He was reported to have taken his staff to a restaurant in East Harlem popular with mob bosses, and to have been greeted there like a family member.
  • James B. Stewart published a long piece in the New Yorker back in October 2013 detailing the collapse of Dewey & LeBoeuf.  It’s worth reading (or re-reading) with the securities fraud allegations in mind.

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