Students of BigLaw Behaving Badly will have noticed that the trial on financial fraud charges of three top managers at the failed Dewey LeBoeuf firm has begun. Former Firm Chair (managing partner) Steven Davis, Executor Director Stephen DiCarmine and Chief Financial Officer Joel Sanders—essentially the CEO, COO and CFO of the law firm—have been charged with fraud, theft, falsifying business records and conspiracy by the Manhattan District Attorney. Needless to say, these are serious felonies. A jury has been empaneled, and opening statements were delivered earlier this week (see here and here).
The gist of the charges is that Davis, DiCarmine and Sanders oversaw the falsification of the firm’s accounting records by reclassifying various categories of non-income as income. The purpose of these accounting tactics, the prosecutors allege, was to mislead the firm’s lenders that the firm was in compliance with its financial covenants (that is, in good enough financial condition that the lenders did not have the contractual power to “call” their loans and demand their immediate and full repayment). Lest this seem like small beer, it’s worth remembering that Dewey was a billion-dollar business with a $100 million bank line, and another $150 million in privately-placed debt securities.
A year ago when the indictments were handed up, I posted an essay in this space about the nature of the charges, and some ways in which they appeared to be unusual for a large institutional law firm. Part of my point was that, while it’s not unusual in the annals of financial crime for ordinary nonprofessional businesses to cook their books in order to protect their access to outstanding lines of credit, the financial frauds that lawyers commit as lawyers usually involve different kinds of victims and motives than this one did.
Once you see this mess as a fraud by a business on its lenders, though, the opening statements are (judging from the media reports, at least) about what you’d expect. The prosecutors promise to prove that the firm’s top management orchestrated, or at least countenanced, serious accounting mischief because the firm’s survival depended on keeping the firm’s credit lines open and outstanding. And they will produce a half-dozen employees not all that far down the food chain (including the firm’s finance director and comptroller), who have already pleaded guilty, to explain the fraud and the top dogs’ involvement. Davis and DiCarmine have offered the traditional “Splendid Isolation” defense—it’s lonely at the top because no one ever tells you anything, or at least tells you anything clearly enough so you can appreciate, with the limited financial acumen characteristic of those running billion-dollar partnerships including some of the most sophisticated lawyers in the world, that the only thing standing between your empire and catastrophic loan defaults that will precipitate an immediate financial collapse is some bald and indefensible accounting fictions (yeah, you’re right; their lawyers didn’t put it quite like that).
CFO Sanders’ defense is more difficult and seems less clear. He is a Certified Public Accountant who was in charge of the firm’s accounting function. This likely makes it a lot harder as a practical matter for him to claim that he didn’t have some sense of what was going on or understand its significance. His lawyer suggested in opening that he was just doing his job to keep the firm afloat during difficult financial times, and couldn’t really have believed there was anything untoward going on because he dealt with the lenders and agreed to their right to examine the firm’s records. Because no real fraudster ever thinks he can avoid getting caught (yeah, you’re right again; his lawyer didn’t say that last part either).
The prosecution faces the classic challenges of a big financial fraud case—the facts are voluminous, intricate, and depend on accounting principles that seem at best arcane to ordinary jurors. On the plus side of the prosecution’s advocacy ledger, the defendants may be expected to excite very little juror sympathy: They’re lawyers. They’re rich lawyers. They’re rich lawyers who were pulling down millions of dollars a year during the Great Recession. They’re rich lawyers who were pulling down millions of dollars a year that depended on a continuing survival of their empire. They’re rich lawyers who were pulling down millions of dollars a year that depended on a continuing survival of their empire through tactics that some jurors may associate (albeit inaccurately) with the financial and lending misconduct that drove us into the Great Recession.
In the tradition of handicapping horse races like these, I invite readers to predict the outcome in the Comments. Make sure you break down your prediction by defendant (and, if you think it will vary, by the kind of charge). You can explain if you want, or just prognosticate. I can promise that there will be no reward, or even recognition, for those who prove most prescient. [Update: To make this easier, I've added a Reader Survey on the Lounge here. Just click to predict. Make sure you scroll down and make your predictions as to each of the three defendants.]
The trial is expected to last five or six months. The lawyers involved are experienced and highly regarded, so it should be a good show. I’ll try to comment from time to time, so stay tuned.
--Bernie
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