By Joseph Ax
NEW YORK (Reuters) - Former top executives at defunct law firm Dewey & LeBoeuf, including chairman Steven Davis, conspired to falsify income statements in an attempt to forestall its collapse in 2012, the firm's former finance director testified Monday.
Francis Canellas, a key prosecutorial witness at the criminal trial of Davis, executive director Stephen DiCarmine and chief financial officer Joel Sanders, said all three were aware of improper accounting tricks intended to fool auditors about Dewey’s true financial state.
“I participated and directed others to make false accounting entries” from 2008 to 2011, Canellas testified in state court in Manhattan. In March 2014, he pleaded guilty to grand larceny as part of a cooperation agreement with the Manhattan district attorney’s office.
In 2012, Dewey became the largest law firm in U.S. history to file for bankruptcy due to crushing debt and a stream of partner departures.
The three executives are accused of cooking the books to hide Dewey's teetering finances. Their criminal trial, which began in May, is expected to last six months.
Prosecutors hope Canellas can provide a direct link between the three defendants and the illegal accounting maneuvers he helped devise.
Canellas on Monday described the end of 2008, when the firm was more than $50 million short of meeting a key annual cash-flow requirement set by its lenders.
On Dec. 30 of that year, Canellas said, he went to a Manhattan steakhouse with Sanders and Zachary Warren, who helped collect client revenue, to discuss how to handle the shortfall.
After dinner, the men brainstormed ways to adjust the firm’s income statement, plastering the walls of Warren’s office with handwritten notes outlining their ideas, he said.
The result was a spreadsheet titled “master plan” that showed the firm had exceeded the cash-flow benchmark by nearly $3 million, rather than falling short by $53 million, Canellas said.
The adjustments included adding client money the firm did not expect to collect to the ledger, as well as reclassifying expense reimbursements from clients as fees, in an effort to inflate Dewey's income, Canellas said.
In an email to Warren on Dec. 31, Canellas wrote, "Great job dude. We kicked ass! Time to get paid."
Warren was indicted on lesser charges and is set to be tried separately later this year.
Canellas said on Monday prosecutors will recommend a reduced sentence of two to six years in prison for him if he fulfills the terms of his plea deal.
The case is People v. Davis et al, New York state Supreme Court, New York County, No. 773/2014.
(Reporting by Joseph Ax; Editing by David Gregorio)