THE DUBIOUS CASE OF DEWEY & LEBOEUF

Original Story: nytimes.com

The names Enron and WorldCom are synonymous with accounting fraud and an era in which top executives turned to desperate measures to inflate company earnings, mislead investors, prop up share prices and supercharge their already exorbitant compensation. A Boca Raton white collar crime lawyer is following this story closely.

Surprisingly, the post-Lehman Brothers, post-financial crisis period has yielded no such headline-grabbing cases. So it’s easy to imagine that the Manhattan district attorney, Cyrus R. Vance Jr., thought he had struck gold when someone accused the top officials of Dewey & LeBoeuf — the prestigious global law firm that imploded in May 2012 after a series of partner defections — of defrauding the firm’s lenders and bondholders by means of a sophisticated accounting conspiracy.

Steven H. Davis, the firm’s former chairman; Stephen DiCarmine, the firm’s former executive director; and Joel Sanders, its former chief financial officer, have been on trial in Manhattan Criminal Court for three and a half months. The prosecution rested its case last week, and the defense offered no witnesses of its own, arguing that the prosecution had utterly failed to meet its burden of proof.

I attended some of this week’s closing arguments, and the jury is expected to begin its deliberations next week. While there’s no knowing what the jury will decide, one thing already seems clear: Dewey & LeBoeuf is no Enron, and Mr. Davis, Mr. DiCarmine and Mr. Sanders are unlikely to emerge from the proceedings as household names synonymous with accounting fraud, no matter what the verdict. A St. Louis white collar crime lawyer provides professional legal counsel and extensive experience in many aspects of white collar crime law.

I don’t recall any Enron or WorldCom witness describing any of the defunct companies’ top executives as “awesome.” But that’s what a prosecution witness called Mr. DiCarmine. “Maybe Mr. DiCarmine is awesome,” an assistant district attorney, Peirce Moser, conceded in his summation. But, he said, “awesome people commit crimes, too.”

Some of the accounting “adjustments” made to enhance Dewey’s fiscal picture during and after the financial crisis may well have been improper. Three employees pleaded guilty to one felony each, including the prosecution’s star witness, Frank Canellas, the firm’s former finance director. Four low-level employees pleaded guilty to misdemeanors.

There’s no doubt that the accountants, with the encouragement of their bosses, were doing their best to make Dewey & LeBoeuf’s financial statements look as good as possible during a difficult period for all law firms. But it still isn’t entirely clear they believed they were committing crimes: several testified that at the time, they didn’t believe they were doing anything wrong. Business accounting in Encino provides basic tax management and accounting services to more in-depth services.

In any event, none of these adjustments amounted to the kind of blatant financial falsehoods that dominated previous scandals. No one is accused of falsifying revenue that did not exist. No one at the firm is accused of entering into sham transactions for work that was never performed or for booking revenue that was never paid.

Instead, much of the testimony was about arcane, small-bore accounting issues — whether revenue received by the firm during the first few days of January for work performed and billed the previous year could be booked in December; whether the return of a client’s retainer could be amortized over five months in the same calendar year; and under what circumstances payments to partners could be classified as a return of their capital contributions. Jurors were subjected to hours of testimony on each of these topics, which are also the subject of extensive discussion in accounting literature.

For some reason, prosecutors didn’t call any accounting experts to testify that any of Dewey & LeBoeuf’s accounting was improper. Nor did they call the Ernst & Young partner in charge of the firm’s audits. As even Mr. Canellas testified, on “almost any accounting issue people can differ in opinion.”

And while Mr. Sanders, as chief financial officer, was at least involved in some of the considerations of the accounting treatment, there was scant evidence that either of the “two Steves,” as Mr. Davis and Mr. DiCarmine were known at the firm, understood that any of the adjustments were questionable, let alone that they directed a conspiracy to defraud lenders and investors. There was testimony that Mr. Canellas hid some accounting adjustments from Mr. Davis and, in one instance, told a participant “not to tell Mr. Davis anything about it.”

In his summation, Mr. Moser seemed to address this missing link, arguing that Mr. Davis and Mr. DiCarmine “can’t escape” being convicted “just because they had others do their dirty work for them.” And he said that when Mr. Davis told employees that Dewey & LeBoeuf needed to meet its loan covenants, that was actually “a command to commit fraud.”

No matter the verdict, the Dewey & LeBoeuf prosecution may well add to a growing national concern about “overcriminalization and excessive punishment,” to quote Justice Elena Kagan of the Supreme Court. She was discussing the overzealous prosecution of trivial matters or, in the accounting context, prosecuting the exercise of business judgments over which experts can differ.

The Justice Department this week began a new initiative to hold corporate executives accountable for crimes at the corporate level, a response to widespread frustration that so few high-level executives have been prosecuted since the financial crisis even as their corporate employers have admitted wrongdoing and paid billions in fines. But that doesn’t mean prosecutors should bring cases based largely on inference and flimsy evidence.

Justice Kagan criticized aspects of the Sarbanes-Oxley corporate reform law as “a bad law — too broad and undifferentiated, with too high maximum penalties, which give prosecutors too much leverage and sentencers too much discretion,” which she found to be “an emblem of a deeper pathology in the federal criminal code.”

Justice Kagan was writing in the now infamous fish case Yates v. United States, in which a Florida fisherman was prosecuted under Sarbanes-Oxley’s antifraud provisions for throwing some underweight grouper overboard, which prosecutors claimed amounted to tampering with any “record, document or tangible object.” (The Supreme Court overturned the fisherman’s conviction.)

The Dewey & LeBoeuf case isn’t as absurd as Yates, and Mr. Vance brought it under state rather than federal law. Still, the prosecution raises some of the same issues.

John F. Lauro, a former federal prosecutor in Brooklyn and now a white-collar defense lawyer, said the Dewey case illustrated that “the criminal laws are so broad that virtually any accounting issue can be turned into a criminal cause.” That means, he added, that “someone can go to jail simply for exercising their best judgment, which isn’t fair.” An Atlanta white collar defense lawyer is reviewing the details of this case.

Mark Chenoweth, general counsel for the Washington Legal Foundation, which promotes business interests and free enterprise and has criticized the overprosecution of accounting decisions, said he could not comment on the Dewey case specifically, but noted: “Prosecutors can easily file charges over legitimate judgment calls, and because the defendant’s personal freedom is at stake, the prosecutor can get tremendous leverage.”

He added: “Of course, these charges are almost always going to be filed after a severe problem has occurred that implicates the accounting decision, so what was a legitimate judgment call at the time may look like an obviously bad or even criminal decision later. But just because a bad outcome resulted does not mean that an accounting decision was unjustified.”

Mr. Lauro said that most such cases are better left to the Securities and Exchange Commission, which can pursue civil remedies, like fines and other relief, but not jail time. It also faces a lower burden of proof.

“These cases belong in civil court, not criminal court,” Mr. Lauro maintained. “Some of the issues are so complex that I’ve had to take advanced accounting courses just to be able to cross-examine a witness.”

Mr. Vance, the Manhattan district attorney, has much riding on the outcome, given how he trumpeted the indictments back in March 2014. “Those at the top of the firm directed employees to hide the firm’s true financial condition from creditors, investors, auditors and even partners of the firm,” he said at the time.

On the contrary, Mr. Davis’s lawyer, Elkan Abramowitz, argued this week, “the simple truth is that Steve Davis did not have anything to do with any illegality that may have occurred in the accounting department. He had no belief that anyone there was doing anything wrong.” He relied on accounting experts and people like Mr. Canellas, Mr. Abramowitz said, “not one of whom brought any evidence of wrongdoing to Mr. Davis’s attention.”

Mr. Vance already faces criticism for his handling of the Dominique Strauss-Kahn sexual assault case, which was eventually dismissed; his pursuit of Sergey Aleynikov, the former Goldman Sachs programmer after his conviction for stealing computer source code was overturned; and for filing a dubious mortgage fraud case against Chinatown’s Abacus Federal Savings, whose top officials were exonerated at trial. (The Abacus case was the subject of a column by my colleague Gretchen Morgenson.)

Mr. Vance’s office could not be reached for comment.

“Sometimes prosecutors make mistakes,” Mr. DiCarmine’s lawyer, Austin Campriello, told the jury this week. “Sometimes they make mistakes because they jump to conclusions.” Sometimes “they become fixated.” And sometimes, he argued, “they can’t step back.”