October 6, 2022

Dewey case comes into focus

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Joel Sanders' defense attorney Andrew Frisch, left, questions Thomas Mullikin, a former key financial manager at Dewey & LeBoeuf, on the stand, right, at The Manhattan Criminal Courthouse, on June 11, 2015.  Credit: Elizabeth Williams.  (COPYRIGHTED - DO NOT USE WITHOUT PERMISSION.  FOR REUSE PLEASE CONTACT ELIZABETH WILLIAMS AT lizillustration@yahoo.com)

Joel Sanders’ defense attorney Andrew Frisch, left, questions Thomas Mullikin, a former key financial manager at Dewey & LeBoeuf, on the stand, right, at The Manhattan Criminal Courthouse, on June 11, 2015. Credit: Elizabeth Williams. (COPYRIGHTED – DO NOT USE WITHOUT PERMISSION. FOR REUSE PLEASE CONTACT ELIZABETH WILLIAMS AT [email protected])

By Julie Triedman, From The National Law Journal

Yet to be heard is finance director Frank Canellas (UPDATE: See below).

With testimony from roughly a third of the expected 79 prosecution witnesses in the criminal trial of Dewey & LeBoeuf’s former three top executives now complete, the basic contours of the New York County District Attorney’s case have come into sharper focus.

The 22-day parade of witnesses, as well as emails and spreadsheets painstakingly uploaded to a rickety courtroom Elmo projector, have given prosecutors ample opportunity to fill in the often arcane details of many of the allegedly illegal accounting tricks sketched out in the indictment of ex-chairman Steven Davis, former executive director Stephen DiCarmine and former chief financial officer Joel Sanders. The three stand accused of defrauding 13 insurance companies that invested in a $150 million bond issued by the firm in April 2010, and of alleged misrepresentations to the firm’s bank lenders between late 2008 and early 2012. Each faces years in prison if convicted.

Former finance staff, including three cooperating witnesses, have been called to explain dozens of adjustments that artificially boosted the firm’s revenue, including misclassifying departing partner income as a capital return; reversing millions of dollars in expenses that had long since been written off; and reclassifying salaried partners as equity partners.

Prosecutors have also conveyed via emails read aloud to jurors the high anxiety experienced by Sanders, and to lesser extent DiCarmine and Davis, about meeting cash flow covenants with the firm’s bank lenders at the end of 2008 and 2009.

As the trial in New York County Supreme Court moves into its seventh week, much depends on one cooperating witness, former Dewey finance director Francis Canellas, who has yet to be called to the stand. Canellas, the reviled subject of so much finger-pointing by four former finance staff, is the missing link between the defendants and the ledger tampering at the root of the case. Prosecutors have not yet said when they will call him.

Canellas, a cooperating witness facing a parallel civil claim, is critical to the prosecution’s case because, until now, they haven’t yet been able to place either Davis or DiCarmine squarely in the ­driver’s seat authorizing the ledger ­tampering.

Two cooperators — the firm’s former controller, Thomas Mullikin, and a former partner-relations specialist, David Rodriguez — both blamed Canellas for bullying them into making adjustments they didn’t feel comfortable with. The defense has also worked hard to undermine Canellas: Mullikin testified under cross-examination that he was a chronic liar. They and two more finance and collections staff witnesses also confirmed on cross-examination that none had ever communicated their concerns to either Davis or DiCarmine.

For Dewey watchers and jurors alike, the testimony by seven partners called by the prosecution has provided some of the most fascinating and at times salacious material. But while the defense used the opportunity to cross-examine them to reveal the dysfunction, greed and lack of oversight within the firm’s top ranks, prosecutors produced little ­specifically tying the defendants to the alleged wrongdoing.

One, Richard Shutran, a former executive committee member who oversaw the legal advisory work on the bond offering, testified that he relied on Sanders’ team for financial information included in the offering, and that DiCarmine participated in a road show with investors. And two former partners whose final-year income was misclassified as capital returns, both testified that they complained to DiCarmine.

Elkan Abramowitz-Morvillo, Abramowitz, Grand, Iason and Anello, attorney for Steven Davis, enters court on the first day of the Dewey LeBoeuf trial. Tuesday May 22, 2015 052615

Elkan Abramowitz-Morvillo, Abramowitz, Grand, Iason and Anello, attorney for Steven Davis, enters court on the first day of the Dewey LeBoeuf trial. Tuesday May 22, 2015
052615

Elkan Abramowitz-Morvillo, Abramowitz, Grand, Iason and Anello, attorney for Steven Davis, enters court on the first day of the Dewey LeBoeuf trial. Tuesday May 22, 2015..052615

Davis has so far come across as his lawyer, Elkan Abramowitz, a partner at Morvillo Abramowitz Grand Iason & Anello, portrayed him in his opening: a hands-off manager focused on building the firm while ceding financial matters to his professional staff. Evidence against Davis so far appears to amount to a few emails in early 2009 requesting that a client backdate a $130,000 check to Dec. 31, 2008. He is copied on very few of the emails produced so far, and none that qualify as a “smoking gun.”

Prosecutors haven’t yet explained how $1.4 million in partner capital that Canellas asked Rodriguez to return to Davis in early 2011 was illegal, although the capital return has come up a few times. And partner-relations specialist Rodriguez was forced to acknowledge that he had no record of a meeting in Davis’ office in late 2010 during which he asserted he had given Davis and others a list of former partners whose final-year earnings his department had reclassified as a return of capital.

Hard evidence tying DiCarmine to the accounting misdeeds also remains sparse, although prosecutors have shown one email in which Sanders tells him about a misrepresentation to a bank lender. Another potentially damaging piece of evidence was shown during direct examination of a cooperating witness, Ilya Alter, the firm’s former director of budgeting and planning. Alter confirmed that he made a special version of a PowerPoint detailing 2008 accounting adjustments for DiCarmine to review.

VULNERABLE POINT

The most vulnerable at the trial’s quarter point remains Sanders, a certified public accountant with a business degree who faces many more counts of falsifying business records and who has been almost as ubiquitous a presence in emails and in witness testimony as Canellas. The three cooperating witnesses have all testified that Sanders knew what was going on in the finance department.

Sanders has been shown pressuring subordinates to lift collections and to find ways to boost the firm’s net to meet bank requirements. But prosecutors haven’t been as convincing in casting some damaging emails written by Sanders as the sinister ploy of one motivated by personal greed.

Steve Pilnyak - ADA Manhattan District Attorney's Office, enters the courtroom on the first day of the Dewey LeBeouf trial May 26, 2015

Steve Pilnyak – ADA Manhattan District Attorney’s Office, enters the courtroom on the first day of the Dewey LeBeouf trial
May 26, 2015

He more frequently has come across as a fearful and overwhelmed manager trying to keep his employer afloat. In an email in early 2010, for example, Sanders tells DiCarmine that the firm should refrain from asking for an additional term loan because Sanders has just hidden from the firm’s lender, JPMorgan Chase & Co., that it had spent its $125 million long-term loan on partner compensation rather than on capital improvements and technology upgrades for which the loan was intended. “Obviously I couldn’t tell the bankers,” Sanders writes DiCarmine.

He also has come off as an angry boss prone to outbreaks. A young client-relations manager at the firm, Susanna Sanchez, testified that Sanders harshly scolded her for failing to meet collections targets in late 2009, potentially triggering a default in the bank lending covenants. “[Sanders] said, ‘You shit the bed,’ ” she recalled. “He said, ‘This is a disaster,’ and that I could have bankrupted the firm.” Sanchez also testified that Sanders wrote a form letter for partners to send clients during the first week of 2010, asking them to date their payments to the last day of the previous year.

Andrew Frisch, Sanders’ lawyer, worked to defuse his client’s most damaging emails — like one in which he asks Canellas to find “another clueless auditor,” and one mentioning “fake income” — by showing evidence that several Dewey witnesses on the stand, including Shutran, also used inappropriate language in emails with colleagues.

Also, while prosecutors attempted to show that DiCarmine and Sanders received sweetheart compensation deals signed by Davis — bonus retention agreements and multiyear guarantees that resulted in the two each clearing above $2 million annually during the firm’s final three years — DiCarmine’s counsel, Bryan Cave partner Austin Campriello, hit back, getting several witnesses to testify that such “golden handcuff” retention agreements for executives were par for the course in companies.

One thing prosecutors have delivered on: their promise in opening statements that the case would involve a lot of arcane accounting that, at times, would be plain boring. “Not all the evidence that you hear and see will be riveting,” Assistant District Attorney Steve Pilnyak (left) said in an understatement in his opening on May 26.

At times, even acting New York Supreme Court Justice Robert Stolz has appeared confused. “What does the phrase unreconciled expense write-off mean?” he interjected last week during questioning of Alter, the former budget director.

In fact, the case, although followed obsessively by many in the corporate law firm world, has mostly lacked ­sizzle. “There’s nothing sexy or anything that’s going to get jurors to sit up and say, ‘Really?’ ” said Peter Henning, a former federal prosecutor and professor of law at Wayne State University Law School.

“You don’t have the $6,000 shower curtain that [former Tyco International CEO L. Dennis] Koslowski had, the ice sculpture of ‘David’ urinating Stolichnaya. There’s nothing really leaping off the page here that says to me, ‘These guys are really bad guys.’ ”

IMAGES:

Joel Sanders’ defense attorney Andrew Frisch, left, questions Thomas Mullikin, a former key financial manager at Dewey & LeBoeuf, on the stand, right, at The Manhattan Criminal Courthouse, on June 11, 2015.

Defense attorney Andrew Frisch, left, questions Thomas Mullikin, a key Dewey manager. Elizabeth Williams

Elkan Abramowitz

Steve Pilnyak – ADA Manhattan District Attorney

For more on this story go to: http://www.nationallawjournal.com/id=1202731892975/Dewey-Case-Comes-Into-Focus#ixzz3fs7pgpgU

 

UPDATED:

Star witness takes stand in Dewey & LeBoeuf criminal trial

Canellas

Canellas

By Nell Gluckman, From The Am Law Daily

Francis Canellas, the finance director of now-defunct Dewey & LeBoeuf, testified Monday that he and Dewey’s former CFO met at the end of 2008 to craft a series of accounting adjustments that would make it appear that the firm could meet agreements with its lenders.

Canellas’ testimony has been hotly anticipated in the month-and-a-half-old criminal trial of the firm’s former executives, which resumed Monday after a weeklong break. New York state prosecutors accuse former Dewey chair Steven Davis, former executive director Stephen DiCarmine and former CFO Joel Sanders of misleading bank lenders and bond investors about the firm’s true finances in a fraudulent and ultimately unsuccessful effort to stave off collapse.

In prior witness accounts, Canellas, a cooperating witness in the state’s case, has emerged as a key potential link between the defendants and the firm’s finance administrators, seven of whom have pleaded guilty to falsifying accounting records. He testified Monday under direct examination by Manhattan assistant district attorney Peirce Moser.

On Monday morning, Canellas, 36, described for jurors Dewey’s financial struggles at the end of 2008, the first full year of operation after legacy firms LeBoeuf, Lamb, Greene and MacRae and Dewey Ballantine merged in 2007.

As 2008 drew to a close, Canellas said, it became clear that the firm would not meet a cash flow covenant with its banks. He testified that he first presented his concerns to Sanders, his direct supervisor, in an email in early November. As December wore on, Canellas said the prospect of breaching the covenant—and triggering a default on the firm’s loans—seemed more and more likely.

During that time, Canellas and Sanders discussed accounting adjustments that would either increase the firm’s revenue or decrease its expenses, Canellas testified.

“Some were legitimate, but not all were legitimate,” Canellas said.

On Dec. 30, 2008, it was clear that the firm was still about $50 million short of meeting its cash flow covenant of $278 million, Canellas testified. He requested a meeting with Sanders and Zachary Warren, the firm’s client relations manager, who is facing a separate criminal proceeding.

The trio had dinner at a midtown steakhouse, Del Frisco’s, and then continued their meeting back at Warren’s office later that evening, Canellas said. Canellas said Sanders wrote out ideas that he and Warren suggested on a flip board. As pages on the flip board filled up, they would be torn off and taped to the wall of Warren’s office, he said.

Canellas told the jury that they created an Excel spreadsheet called the “master plan,” which was saved on Warren’s computer. On Jan. 2, 2009, Warren sent the document to Canellas so he could print it out and bring it to Sanders, the witness testified. (Canellas said he doesn’t know what happened to the pages from the flip board.)

The spreadsheet included items such as “reapply disbursements as fees,” for $10.5 million, and “Reverse premium (One London Wall)” for $3.4 million, which presumably refers to adjustments made to fees associated with terminating the firm’s lease in London.

In testimony Monday afternoon, Canellas said that some of the adjustments included in the “master plan” were false, a fact he knew at the time. He said that he and Sanders discussed the risks associated with making these entries and came up with ways to explain the adjustments to auditors if necessary.

Unlike previous cooperating witnesses, Canellas said he often met directly with the defendants. At times, he interacted with Sanders multiple times a day, and by the end of 2011 and in early 2012, he spoke with Davis and DiCarmine two or three times a week, he said.

Canellas has pleaded guilty to grand larceny in the second degree, a felony, and agreed to cooperate with the Manhattan district attorney’s case against Dewey’s executives in exchange for a lighter sentence. The DA’s office has agreed to recommend a two-to-six-year sentence if he cooperates fully.

During much of his testimony, Canellas’ eyes alternated between Moser and the courtroom floor. He told the jury that he had been unable to find work since he began cooperating in the investigation and ceased advising Dewey & LeBoeuf’s bankruptcy trustee in February of 2014.

Canellas grew up in Brooklyn and attended Pace University, where his mother worked as an administrator, he said. While in school, he interned with LeBoeuf Lamb for $12 an hour. He took a job at the firm after he graduated because it was the highest-paying job he was offered and his mother was very sick with Lou Gehrig’s disease, he said.

Moser will resume his direct examination of Canellas on Tuesday.

IMAGE: Witness Frank Canellas testifiies on July 13, 2015 under direct examination by Manhattan Assistant District Attorney Peirce Moser. Joel Sanders and his attorney Andrew Frisch, are seated far right. Judge Robert Stolz presiding.

Illustration by Elizabeth Williams

For more on this story go to: http://www.americanlawyer.com/id=1202732001286/Star-Witness-Takes-Stand-in-Dewey–LeBoeuf-Criminal-Trial#ixzz3fsO4QvY1

 

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