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SEC Reaches Settlements with Defunct Dewey & LeBoeuf Executives

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  • Posted on: Oct 29 2018

Last month, former Dewey & LeBoeuf, LLP (“Dewey”) executives agreed to a settlement with the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) to pay civil penalties in connection with their roles in a $150 million fraudulent bond offering by the now defunct international law firm.

The SEC claimed that the executives used accounting tricks when the firm needed money to weather the economic recession and steep costs resulting from the merger between the predecessor firms that made up Dewey.  Fearful that declining revenue might cause its bank lenders to cut off access to the firm’s credit lines, Dewey’s executives combed through the firm’s financial statements and devised ways to artificially inflate income and distort financial performance.  Dewey then resorted to the bond markets to raise significant amounts of cash through a private offering that seized upon the phony financial statements.

Former Dewey & LeBoeuf Leaders Face Civil Penalties

In September, the SEC announced (here) that a federal district court entered judgments on consent against Francis Canellas (“Canellas”), Thomas Mullikin (“Mullikin”), and Steven H. Davis (“Davis”), former executives of the firm, in connection with their roles in the fraudulent bond offering by the now defunct law firm.

In its complaint (here), filed in the Southern District of New York on March 6, 2014, the SEC alleged that Dewey’s 2010 bond offering fraudulently relied on the firm’s materially misstated financial results for 2008 and 2009, which were incorporated into the private placement memorandum for the offering and provided to investors. (See also the SEC press release discussing the charges, here.) The SEC alleged that Canellas, Dewey’s then-director of finance, along with Dewey’s former chief financial officer, orchestrated a scheme to falsify Dewey’s financial statements and provide the false financial statements to investors. The Commission also alleged that they instructed Mullikin, Dewey’s then-controller, and others in the firm’s finance department, to carry out the scheme. Davis, the firm’s then-chairman, who was aware of the fraudulent adjustments, made key decisions concerning the offering, including approving the offering and signing off on the private placement memorandum.

Canellas consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) and requiring him to pay $43,178.82 in disgorgement and prejudgment interest.

Mullikin consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of the Securities Act and the Exchange Act and requiring him to pay $8,635.78 in disgorgement and prejudgment interest.

Davis consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of the Securities Act and the Exchange Act, prohibiting him from acting as an officer or director of a public company, and requiring him to pay $130,000 in a civil penalty.

The settlements resolve completely the cases against Canellas, Mullikin, and Davis.

Jury Deadlocked on Charges of Fraud and Larceny

In October 2015, a Manhattan jury found itself deadlocked on charges of fraud and larceny brought against Davis, Stephen DiCarmine (“DiCarmine”) and Joel Sanders (“Sanders”), the latter two being executive directors of the firm. The three were accused of conspiring to manipulate Dewey’s financial statements in an attempt to defraud the firm’s lenders and insurance companies during the financial crisis.

Both Canellas and Mullikin had plea agreements in effect in exchange for their cooperation with the government.

Government Drops Charges in Exchange for Suspension and Ban

In 2016, Davis reached a deferred prosecution agreement, which included not practicing law in New York State for a period of five years as well as a lifetime ban on practicing before the Commission. In exchange for successfully completing that agreement, the government agreed to drop the charges.

Retrial of DiCarmine and Sanders Leads Sanders to Appeal

In 2017, DiCarmine and Sanders were retried together. Though a Manhattan jury acquitted DiCarmine, it found Sanders guilty of securities fraud, a scheme to defraud, and conspiracy. He was sentenced to 750 hours of community service and ordered to pay a fine of $1 million. According to news reports, Sanders was appealing the verdict.

On April 18, 2018, a federal court entered judgments against DiCarmine and Sanders in an SEC enforcement action arising from their roles in the fraudulent bond offering discussed above. (See SEC press release, here.) DiCarmine consented to the entry of a final judgment permanently enjoining him from violating the Securities Act and requiring him to pay a civil monetary penalty of $35,000. Sanders consented to the entry of a judgment permanently enjoining him from violating the Securities Act and the Securities Exchange Act, prohibiting him from acting as an officer or director of a public company, and requiring him pay money in disgorgement, plus prejudgment interest, and a civil penalty to be determined by the court at a later date.

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