In a pointed example of a mega-merger gone terribly wrong, jury selection has concluded for the trial of 3 executives from the former New York-based legal powerhouse, Dewey & LeBoeuf. Former Chairman, Steven Davis, former Executive Director, Stephen DiCarmine, and former CFO, Joel Sanders are each facing several charges including fraud, grand larceny, and falsifying business records, among others. The indictments follow a 2012 financial meltdown of the firm which led to its May, 2012 bankruptcy, leading to the firm’s abrupt closure. The 2014 indictment comes from the New York District Attorney’s office’s investigation of a $125 million bond placement from London-based Barclays in which Dewey & Leboef procured due to the firm’s allegedly-illegal accounting methods. While senior partners have admitted using a “different” manner of accounting, the defense is likely to argue that none of the accounting methods constitute the level of fraud. The defense’s confidence is likely tempered, however, due to 7 former employees having already pled guilty for their part in the firm’s demise, and another included in the indictment awaiting a separate trial. If found guilty, the executives could face between 8 and 25 years in prison. Dewey & Leboeuf became the largest firm ever to file for bankruptcy, and the first “Big-Law” firm to close due to criminal activity as a predominant factor. Opening arguments will begin on May 26 in New York’s Supreme Court in Manhattan. The trial is expected to last 6 months or longer.
Dewey & Leboeuf was created in 2007, as the result of a merger between two powerhouse legacy firms based in New York City. Dewey Ballantine began in 1909 as the Root Law firm, with Arthur A. Ballantine becoming a named-partner in 1925. The firm eventually adopted the pre-merger name in 1955 due to the addition of former presidential candidate and prominent lawyer, Thomas Dewey. Dewey’s addition led to the procurement of several gigantic corporate clients, including General Motors, Morgan Stanley, and Mobil Oil. Beginning with New Deal-related business matters, the firm specialized in bankruptcy and corporate reorganizations. Likewise, the firm that would eventually become LeBoeuf, Lamb, Greene & MacRae, was another New York powerhouse, focused on major corporate and public-sector utility and energy industries. Founded in 1929 by Albany-native Randall J. Leboeuf Jr. with the addition of partner and friend, Bill Winston, Leboeuf & Winston began just prior to the stock market collapse. Despite the turbulent economy, the firm was able to successfully establish an office in New York City, using the location to successfully acquire clients involving utility regulation.
In its brief existence, Dewey & Leboeuf was recognized as a practice leader in dozens of categories. With over 1,100 lawyers in diverse fields, the firm ranked as high as 22nd in The American Lawyer’s list of top global firms, although the publication revised their list in light of the alleged fraud. Although the numbers may be skewed as well due to the charges listed in the indictment, it is estimated the company was averaging over $900 million in revenue annually. The company was also known for its representation of Olympic athlete and convicted killer, Oscar Pistorious, during his legal fight to qualify for the 2008 Beijing games, and in 2009, the firm represented South African track athlete, Caster Semenya, representing her civil rights when asked to undergo controversial gender testing.
The bankruptcy itself stemmed from financial mismanagement from nearly the beginning of its merger-based creation. The firm borrowed extensively compared to other Big-Law firms, even amidst a crushing recession. In the bankruptcy filing, the firm listed over 5,000 creditors and over $300 million in debt. The financial problems leading up to firm’s massive debt involved some common risks associated with mega-mergers. In efforts to increase the prestige of the firm in an era of an especially aggressive race to enormity, the firm recruited an expensive influx of new partners, some earning over $10 million per year. At the same time, the merger created many lateral positions, noted by fellow attorney, Stephen M. Axinn, that Dewey & Leboeuf “never really integrated the two cultures of the two firms.” Also, roughly 300 total partners fled the firm by 2012, taking their clients with them amid the financial difficulties as well as the beginning of the criminal investigation. In addition to denying allegations of wrongdoing, the executives blame the investigation for the exodus, as well as its resulting negative publicity preventing the firm from fining a successful merger-partner. Axinn pointed out, however while being interviewed for Forbes in 2012, “But if the leadership of the combined firm had placed the interests of the firm ahead of their own interests, this would never have happened.”
Fortune – Allan Dodds Frank
The American Lawyer – Brian Baxter
Wall Street Journal Law Blog – Sara Randazzo