The wreckage of the financial crisis continues to smolder in some unlikely corners of the business world. Last week, a series of criminal indictments and SEC civil complaints were handed down against several former firm executives of Dewey & LeBoeuf, a now-bankrupt New York City-based law firm that once employed 3,000 people and had revenues exceeding $900 million. The former executives are charged with defrauding the firm’s lenders and investors, who were left holding the bag after the firm declared bankruptcy in 2012—an event characterized by the Manhattan district attorney as the “largest law firm bankruptcy that we know of in history.”
Among the charges are that various members of the firm’s finance and executive team created fictitious revenues and misrepresented expenses as part of an elaborate ruse to make their financial condition appear better than reality when the economy started to falter in 2008. Apparently contributing to the firm’s financial distress were multimillion-dollar guaranteed payment contracts the firm entered into to lure highly sought-after partners to the firm and keep others from jumping ship.
Some of the alleged fraudulent accounting adjustments include:
- Reversing fees or expenses the firm previously wrote off that could not be billed to clients (If true, this would have artificially increased the firm’s bottom line.)
- Reclassifying “of counsel” and nonequity partner payments out of expenses to reduce the firm’s expenses and increase the bottom line
Often in these types of investigations, electronic evidence such as emails and text messages can be invaluable in reconstructing discussions going on behind the scenes. Many people today seem aware that even deleted emails can often be recovered, but surprisingly few think before they send. It appears the prosecution plans to use several damning emails in its case. One email quoted in the complaint includes the former chief financial officer asking the firm’s director of finance, “Can you find another clueless auditor for next year?” with a response, “That’s the plan. Worked perfect this year.”
The scheme reportedly started to bother one executive, who reportedly told another in his email, “I don’t want to cook the books anymore. We need to stop doing that.” Regardless of this case’s outcome, that’s good advice for just about anyone.