SEC Paints Dewey & LeBoeuf|in Dark Colors

MANHATTAN (CN) - The SEC on Thursday charged five men with executing a fraudulent $150 million bond offering for the doomed Dewey & LeBoeuf law firm.

Dewey & LeBoeuf has gone out of business. The law firm and its defendant financial experts juggled the books for the fraudulent April 2010 bond offering, the SEC says in its 32-page federal lawsuit.

"Investors in the bond offering relied on Dewey' s fraudulent and materially misstated financial results for 2008 and 2009, which were incorporated into the private placement memorandum ('PPM'), and provided to investors," according to the SEC complaint.

"Unbeknownst to investors, the defendants - a collection of Dewey's senior most legal and business professionals - had orchestrated and executed a bold and long-running accounting fraud intended to conceal the firm's precarious financial condition. Investors believed they were purchasing bonds issued by a prestigious law firm that had weathered the financial crisis and was poised for growth; in reality, the financial results disclosed in the PPM were materially misstated.

"The roots of the fraud date back to late 2008, when the defendants first became aware that Dewey's declining revenue might cause its lenders to cut off access to the firm's credit lines. Dewey and the defendants thereafter initiated a wide-ranging campaign to manufacture fake revenue by manipulating various entries in Dewey's internal accounting system.

"In connection with closing out its 2008 financial results, Dewey inflated its profitability - defined as the excess of fees collected over operating and non-operating expenses - by approximately $36 million, or 15 percent, using several inappropriate accounting entries. Among other gimmicks, the defendants reclassified salaried partners' and of counsels ' compensation as equity distributions in the amount of $13.8 million, improperly reversed millions of dollars of uncollectible disbursements, mischaracterized millions of dollars of credit card debt owed by the firm as bogus disbursements owed by clients, and improperly accounted for significant lease obligations held by the firm.

"Dewey continued using these and other fraudulent techniques in preparing its 2009 financial statements, which were misstated by $23 million. Dewey and defendants undertook a wide-ranging campaign of fraud and deception. 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.'

"Dewey's accounting fraud was orchestrated by the firm's senior-most finance professionals, most notably Joel Sanders (CFO), Frank Canellas (director of finance), and Thomas Mullikin (controller). Dewey's senior management, which included Steven Davis, the firm's chairman, and Stephen DiCarmine, the firm's executive director, was also aware of and supported these efforts to falsify Dewey's financial results. And it was Davis, in his capacity of chairman of the firm, who authorized the firm to raise $150 million via a bond offering whose PPM incorporated blatantly falsified financial results."

The five men named in the previous paragraph are the defendants.

The SEC seeks disgorgement of the money they earned during the fraud, fines, and restraining orders.

The complaint is signed by SEC Regional Director Andrew Calamari.

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