US authorities today charged five former executives with international firm Dewey & LeBoeuf for their part in an alleged $150m (£90m) fraudulent bond offer.
The Securities and Exchange Commission (SEC) alleges that the five turned to accounting fraud ‘in a desperate grasp for cash’ to survive the 2008 financial crisis. The New York-based firm, which employed more than 1,000 lawyers, filed for bankruptcy in May 2012 after experiencing financial difficulties.
The SEC says the firm’s leading professionals devised ways to artificially inflate income and distort financial performance, fearful that declining revenue might cause its bank lenders to cut off access to the firm’s credit lines.
The allegation is that the firm then resorted to the bond markets to raise ‘significant amounts of cash’ through a private offering that seized on fake 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 Andrew J Ceresney, director of the SEC’s division of enforcement.
‘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 $150m in bonds to investors as a desperate grasp for cash on the basis of blatantly falsified financial results.’
The SEC’s complaint filed in the federal court in Manhattan charges the following executives: chairman Steven Davis, executive director Stephen DiCarmine, chief financial officer Joel Sanders, finance director Frank Canellas, and controller Tom Mullikin.
In a parallel action, the Manhattan District Attorney’s Office announced criminal charges against Davis, DiCarmine, and Sanders.
According to the SEC’s complaint, the roots of the fraud date back to 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 $36m (15%) in its 2008 financial results through this use of accounting.
‘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.
According to the SEC’s complaint, Sanders acknowledged in separate email communications: ’I don’t want to cook the books anymore. We need to stop doing that.’
The Financial Times reported on Friday that lawyers for Davis, Sanders and DiCarmine have said the trio strongly deny the charges.
The SEC investigation, which has the assistance of the FBI, continues.