September 19, 2020

Bermuda insurer could crimp Dewey defense costs


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abramowitz-elkan-deweyBy Christine Simmons, From New York Law Journal

The ex-leaders of Dewey & LeBoeuf facing criminal trial have momentarily turned their attention away from prosecutors in New York and are attacking an insurance carrier in who threatened to pull the plug on their legal fees.

The insurer’s actions affect all four defendants: , Stephen DiCarmine, Joel Sanders and a former junior manager, Zachary Warren, whose case has been severed. Attorneys for the defendants filed court papers in Bermuda last week to force Iron-Starr Excess Agency to pay their legal fees.

All four men are accused of masterminding a fraudulent scheme that contributed to the firm’s bankruptcy. Davis, DiCarmine and Sanders collectively face more than 100 criminal charges, including first-degree grand larceny, a felony that carries prison time upon conviction. Warren is accused of falsifying business records.

Davis’ lawyer, Elkan Abramowitz, asked Manhattan Supreme Court Justice Robert Stolz (See Profile) on Nov. 21 to delay the January trial, saying “We cannot [handle the trial] without the expert testimony and without the expert help and without the kind of work that goes into a case of this magnitude. You cannot try or defend a six-month case on a shoestring.”

The problem, the defense said, is that Iron-Starr, the excess liability management company, is trying to rescind its insurance policy to Dewey.

About $35 million in coverage from two other management liability carriers, XL Specialty Insurance Co. and OneBeacon Insurance Co., was exhausted by the end of October, leaving only Iron-Starr’s $15 million policy.

“It was only on the eve of trial, knowing that the defendants were relying upon Iron-Starr policy to fund the defense at trial,” that the insurer shared its intention to rescind the policy based on alleged misrepresentations and omissions, according to a Nov. 19 letter Abramowitz wrote to Stolz.

Defense experts say the lack of funds not only affects the hiring of expert witnesses but also the availability of trial resources, such as graphics, technology vendors, transcripts and consultants.

“Defense counsel now urgently must retain and begin working with a number of experts” for the upcoming trial, which may include a testifying forensic accountant, a banking expert, an insolvency expert, a tax expert and a technical expert, Abramowitz’ letter said. “Defendants cannot be assured a thorough and diligent defense at their criminal trial without these experts.”

Iron-Starr has initiated arbitration against the defendants in Bermuda and obtained an order from the Supreme Court of Bermuda barring them from pursuing an action against Iron-Starr outside the Bermuda arbitration.

Iron-Starr’s attorneys did not return calls seeking comment.

It is unclear exactly how the $35 million in insurance coverage has been spent. In Dewey & LeBoeuf’s Southern District bankruptcy case, Dewey’s primary insurer, XL Specialty, agreed to pay about $19 million in a settlement with the estate and Davis.

Other litigation that could have tapped funds from XL and OneBeacon are suits against Davis, DiCarmine and Sanders by the Securities and Exchange Commission and Aviva Life and Annuity Co., that bought bonds from Dewey in 2010.

The policies also covered other Dewey lawyers and employees who held executive positions such as members of the executive committee and management committees, all practice area heads, chairs of various committees and some administrators. Seven former Dewey employees have already pleaded guilty and have signed plea and cooperation agreements.

Trial Costs

Abramowitz said a ruling in the Bermuda case could come by mid- to late December.

Although the three Dewey executives received seven-figure incomes, according to court papers, Abramowitz said the clients cannot afford to front the money needed for trial costs.

DiCarmine and Davis are unemployed while Sanders is working at a small law firm in Florida. Warren recently served in a federal clerkship.

Manhattan Assistant District Attorney Peirce Moser requested that Stolz delay trial for only one month, so that the case would not be controlled by the timing of the Bermuda action.

Stolz moved the trial date from Jan. 26 to Feb. 23. He told defense counsel that he was confident that “if you ultimately do get stiffed,” it would nonetheless be a fair trial and noted the defendants are not indigent.

Preparation and trial costs can easily run into seven figures, depending on how many experts are used. Lawyers close to the case speculated that lack of funds could affect accessing trial transcripts and the maintenance of a server where millions of documents are stored.

Without financial help, “we can’t keep sustaining the technology help we’re getting,” Abramowitz said in an interview. Still, he said he was hopeful the matter will be cleared up.

Roland Riopelle, of four-attorney Sercarz & Riopelle, recently represented a former employee of Bernard Madoff during a six-month trial and had to be paid by the court after federal prosecutors asked him to freeze any money received from his client, whose primary income was tied to Madoff’s firm.

Riopelle said his firm might have assigned another lawyer to that trial if funding wasn’t an issue.

But,”I don’t think it would have made a difference in ultimately how the case was tried or whether we hired a particular expert,” Riopelle said. “We staff our cases pretty lean. There’s a reason for that— it’s so you don’t have economic survival staked on one case.”

Riopelle said that in his experience, investigators and witnesses who have already been retained usually will accept a lower fee, but finding new experts can be difficult in such a situation.

Even if funds run out, Riopelle said, it’s important to keep records of billing and submit invoices to clients to preserve the right to be paid later on, especially if there is an acquittal and the attorney has to litigate against an insurer.

Gerald Shargel, a Winston & Strawn partner, compared trial resources to spending on a car. “The amount of money you can spend on a criminal trial is limitless,” he said. “You could have mock trials and shadow trials. You could have three associates on a case” and receive rush or daily transcripts, he said.

Cases can be tried without some of these resources, but to keep chipping away at resources, in white collar case with millions of documents, “it becomes impossible to try the case effectively,” Shargel said.

Charles Stillman, a partner at , said insurance carriers don’t typically walk away from providing a defense during a criminal trial.

Jury consultants, which can cost about $50,000, may be needed in cases where there’s a bias against lawyers as defendants, Stillman added. Meanwhile, an accounting expert can cost between $10,000 or $25,000, he said.

Abramowitz, a partner at Morvillo Abramowitz Grand Iason & Anello, and other attorneys indicated their intentions to continue defending their clients.

“I owe it to Mr. DiCarmine to continue to represent him, and I continue to do so,” , a Bryan Cave partner, said in an interview.

“We fully expect to see this case through to the end, insurance or no insurance,” Marc Weinstein, a Hughes Hubbard & Reed partner representing Sanders, said in an email.

Initially Warren was on his own, but later an insurance carrier began to pay for his defense, said his attorney, Paul Shechtman, a partner at Zuckerman Spaeder.

“I might not get paid,” said Shechtman, who declined to discuss trial strategy but said he would continue representing Warren, whose trial will follow the one against the Dewey leaders.

One lesson for firms buying multiple layers of insurance is to consider the risks of a foreign carrier insisting on arbitration outside the United States for coverage disputes and the consequences that may have for proceedings in the U.S., said Robert Juceam, an insurance expert who is of counsel at Fried, Frank, Harris, Shriver & Jacobson.

It’s common for law firms to reduce their premium by looking in foreign markets, and Bermuda carriers frequently have policy provisions requiring an arbitration there or in London, said Robert Horkovich, a shareholder at Anderson Kill.

“For a reduction in premium, are you really going to agree to an arbitration in Bermuda?” Horkovich said.”There is a tremendous value in getting insurance where the cards are not stacked against you.”

IMAGE: Elkan Abramowitz of Morvillo, Abramowitz, Grand, Iason & Anello leaves a court hearing with his client, Steven Davis, in March. NYLJ/Rick Kopstein

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