NEW YORK — (Mealey’s) Francis Canellas, the former director of finance for bankrupt law firm Dewey & LeBoeuf, entered a plea agreement with the New York County district attorney today admitting that he, under the direction of firm chairman Steven H. Davis and other principals, made “inappropriate adjustments” to the firm’s financial books to “deceive” the firm’s lenders into believing that the firm had met all of its financial covenants when, in fact, it had not.
Dewey & LeBoeuf filed for Chapter 11 bankruptcy in 2012 in the U.S. Bankruptcy Court for the Southern District of New York.
The Securities and Exchange Commission filed a lawsuit against Davis and other Dewey & LeBoeuf executives in the U.S. District Court for the Southern District of New York, alleging that they engaged in a fraudulent bond offering to finance the ailing firm in violation of various federal laws governing the issuing of securities.
The SEC alleges that Dewey & LeBoeuf executives Davis, Stephen DiCarmine, Joel Sanders, Canellas and Thomas Mullikin violated the Securities Act of 1933, 15 U.S. Code Section 77q(a), the Securities Exchange Act of 1934, 15 U.S. Code Section 78j(b ) and 17 Code of Federal Regulations (CFR) Section 240.10b-5 when they “orchestrated and executed a bold and long-running accounting fraud intended to conceal the firm's precarious financial condition.”
Canellas told the district attorney that in the fall of 2008, “it became clear that the firm might not comply with the cash flow covenant contained in its various credit agreements. By the last week in December, it became clear that we would not meet the covenant, and Sanders told me, in substance and among other things, that DiCarmine and Davis said we had to meet the covenants.”
Canellas says in his plea statement that he and Sanders “began discussing accounting adjustments that could be made to help us meet the covenant,” and “based on the recommendations Sanders was making, it became clear to me the decision had been made to make inappropriate adjustments in order to meet the covenant.”
Furthermore, Canellas says Sanders told him “to be prepared with excuses to give the auditors if the adjustments were questioned, so that the firm could get through the audit.” Canellas says that “Sanders instructed me” that if the auditors questioned what are called disbursement write-off reversals, Canellas was to say that the firm was attempting to collect those amounts. “Both Sanders and I knew that was untrue,” Canellas says.
Canellas adds that “several different types of false adjustments were made for year-end 2008.”
Specifically, a number of the adjustments involved reversing amounts that had appropriately been expensed and booking them to the balance sheet, Canellas says in the statement. Additionally, amounts were “inappropriately taken into revenue,” and certain expenses were “reclassified as partner compensation, which was inconsistent with how the amounts had been treated the prior year,” Canellas says.
“All of these adjustments were made in an effort to increase net income, without regard to the appropriate treatment,” Canellas says.
The SEC has argued that Dewey & LeBoeuf used “gimmicks” to reclassify certain compensation as equity distributions in the amount of $13.8 million.
The agency also contends that the firm used fraudulent techniques in preparing its 2009 financial statements, which were misstated by $23 million, and undertook "a wide-ranging campaign of fraud and deception."
The SEC is represented by Andrew M. Calamari, the regional director of the SEC Regional Office in New York, and Howard S. Fischer, senior trial counsel in the SEC Regional Office in New York.
Canellas is represented by Brian E. Maas of Frankfurt Kurnit Klein & Selz in New York. The district attorney is represented by Assistant District Attorneys Peirce R. Moser and Steve Pilnyak with the Office of the District Attorney in New York.
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