Five executives and finance professionals from the now-bankrupt international law firm Dewey & LeBoeuf have been charged with facilitating a $150 million fraudulent bond offering and inflating financial results, including a $7.5 million line item reduction labeled "Accounting Tricks."

The Securities and Exchange Commission charged the five executives Thursday, and the Manhattan District Attorney’s office also filed criminal charges against three of them in a related matter.

The SEC alleges that the five turned to accounting fraud when the firm needed money to weather the recession and steep costs from a merger. Worried  that the law firm’s declining revenue might cause its bank lenders to cut off access to the firm’s credit lines, Dewey & LeBoeuf’s leading financial professionals allegedly combed through the firm’s 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 SEC’s Division of Enforcement director Andrew J. Ceresney in a statement.  “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 defunct law firm’s former chairman Steven Davis, executive director Stephen DiCarmine, CFO Joel Sanders, finance director Frank Canellas and controller Tom Mullikin. In a parallel action, the Manhattan District Attorney’s Office also announced criminal charges against Davis, DiCarmine, and Sanders.

According to the SEC’s complaint, the fraud began in 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.”

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, according to the SEC complaint.  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.”

DeCarmine’s attorney disputed the charges. “Steve DiCarmine is not guilty,” said Austin V. Campriello, a partner at Bryan Cave LLP in an emailed statement. “He did not commit any crimes. He did not cause the collapse of Dewey & LeBoeuf. Steve was a salaried employee, not a partner, who worked tirelessly for Dewey & LeBoeuf. This indictment is guilty of scapegoating. It spins some inartful emails into crimes. It also betrays a lack of understanding of some basic principles of law firm accounting. It is very easy for a prosecutor to bring an indictment. The grand jury only hears one side. But cases like this crumble when an innocent person gets to mount a defense in court. And that is what we will do.”

The SEC alleges that Dewey & LeBoeuf did not 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 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.