This is bad. Very very bad.
Let's hop in the time machine and go back to 2012, when Colin caught us up on just how bad the situation was over at Dewey (spoiler alert: tax partners were jumping ship and heading to KPMG):
You might not be aware of this, but mega law firm Dewey & LeBoeuf is in a lot of trouble. It seems to have started back in February with rumors of financial troubles and things have spiraled from there. Partners leaving in droves. Late bonuses. Layoffs. Problems with K-1s. The bright side of all these troubles is the myriad of punny headlines at Above the Law.
Well, that was certainly a bad omen. It only got worse from there. Let's head back to Above the Law (who skipped on beauty sleep to share this with the world while most of you were knocked out last night):
Criminal charges are on the way for Steven Davis, Stephen DiCarmine, and Joel Sanders — the former chairman, executive director, and CFO, respectively, of defunct Dewey & LeBoeuf.
Almost two years have passed since the Biglaw firm’s bankruptcy filing, causing some observers to think that perhaps the Steves would never get charged. The argument, in a nutshell: they might have been poor managers or even downright moronic, but they didn’t commit any crimes.
Whelp, that's an excellent defense and all but unfortunately for them, the SEC must disagree:
The Securities and Exchange Commission today charged five executives and finance professionals with facilitating a $150 million fraudulent bond offering by Dewey & LeBoeuf, the international law firm where they worked.
The SEC alleges that the five turned to accounting fraud when the firm needed money to weather the economic recession and steep costs from a merger. Fearful that declining revenue might cause its bank lenders to cut off access to the firm’s credit lines, Dewey & LeBoeuf’s leading financial professionals combed through its financial statements line by line and devised ways to artificially inflate income and distort financial performance. Dewey & LeBoeuf then resorted to the bond markets to raise significant amounts of cash through a private offering that seized on the phony financial numbers.
“Investors were led to believe they were purchasing bonds issued by a prestigious law firm that had weathered the financial crisis and was poised for growth,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “Dewey & LeBoeuf’s senior-most finance personnel used a grab bag of accounting gimmicks to create that illusion, and top executives green-lighted the decision to sell $150 million in bonds to investors as a desperate grasp for cash on the basis of blatantly falsified financial results.”
But that's not all, folks! Let's take a look at the SEC complaint, which is jam-packed with lots of fun words that make a reasonable person assume these guys probably thought they were never going to get called out for "financial chicanery":
So pervasive was the culture of financial chicanery at Dewey's top levels that its highest ranking officials – including the Defendants – had no qualms about referring among themselves in various emails to "fake income," "accounting tricks," "cooking the books," and deceiving what they described as a "clueless auditor."
That clueless auditor? Ernst & Young. DealBook was unable to reach them for comment, likely because they are all sitting around bemoaning the fact that they don't have time for this shit what with that small Lehman thing still hanging around their necks:
Before the merger, Dewey’s long-time audit firm was Ernst & Young, and after the two law firms combined, Ernst continued to audit the firm’s financial statements. A filing by the liquidation trustee in the bankruptcy said Ernst audited the firm’s “financial statements and related statements of fees and expense, changes in partners’ accounts and cash flows.”
The defendants are expected to argue that because Ernst reviewed and blessed the firm’s financial records, the accusations that they doctored the books are erroneous.
Perhaps the worst part of the whole thing (and it's hard to pick just one) is that these guys totes should have known better and did it anyway (hey, go read this entire article from Matt Levine on Bloomberg View, it's worth it):
A principal business of big law firms is to send teams of lawyers to review the e-mails of banks and corporations, shake their heads at how much stupid stuff is in those e-mails, and then negotiate the least embarrassing available settlement with regulators or prosecutors or plaintiffs. This is called "white collar defense," or "securities litigation." Really, that is like half of what they do, chuckle ruefully over the idiot e-mails that their idiot clients send. And yet, there in their own book-cookery, they couldn't resist sending the same dumb e-mails themselves. Pick up the phone, guys!
Full complaint below, feel free to skim for the parts in bold italics.