“We are again honored to have another guest post from our friend and Richmond Chapter 2015 Vice-President, Rumbi Bwerinofa, CFE/CPA/CFF. Rumbi is a Director of the Queens/Brooklyn Chapter of the New York State Society of CPAs and a member of the NYSSCPA Litigation Services Committee. She is the editor of TheFStudent.com, where she discusses financial forensic issues.
Our Chapter members and other professional readers of this blog are encouraged to submit blog posts for publication here … in addition to publication credit, you establish yourself as an expert in the field of fraud examination and help other practitioners by sharing your valuable expertise!” – Charles Lawver-2015 RVACFES Chapter
Fourteen months after being indicted for criminal fraud in the 2012 collapse of the New York law firm Dewey & LeBoeuf, former firm chair Steven Davis, former executive director Stephen DiCarmine and former chief financial officer Joel Sanders all went on trial before Acting Manhattan Supreme Court Justice Robert Stolz. The trio allegedly falsified audits and records to make the firm appear financially healthy from 2008 to 2011. In the process, they lied to lenders and investors, stealing nearly $200 million from insurers and banks. According to prosecutors, rather than tell the truth about the financial realities that faced the firm, the evidence demonstrated that the three defendants used fraud and deceit to intentionally falsify the true nature of Dewey & LeBoeuf’s financial position. The trio met at Del Frisco’s steakhouse where they hatched a plan to cook their books and make it look like the firm was profitable when it was actually teetering on insolvency. Despite the dire situation, the executives continued to richly compensate themselves with packages of more than $2 million a year until the firm’s 2012 bankruptcy. But Davis’ defense lawyer insisted from the start that his client did nothing wrong. He blamed the woes of the firm, which once employed 3,000 lawyers, on the financial meltdown, and greedy partners who bailed after learning they wouldn’t get the extravagant bonuses they had in the past.
Dewey & LeBoeuf was formed in 2007 through the merger of the prestigious firm of Dewey Ballantine — founded by one-time New York Gov. Thomas E. Dewey — and LeBoeuf, Lamb, Greene & MacRae.
White-collar criminal experts at the ACFE say this case may be among the first to accuse law firm executives of accounting-related misconduct targeted primarily at lenders, misconduct, which in this case, directly contributed to the firm’s own demise. While much of the testimony in the trial was less than riveting, the proceedings were closely watched in the legal community because it’s one of the rare times the top executives of a major law firm have been charged criminally with grand larceny and with a scheme to defraud. Over the course of the trial, several former Dewey partners, many of them well known within the legal profession, were called by the prosecution as witnesses. In all, seven lower-level employees at Dewey pleaded guilty to lesser charges in hopes of receiving little or no jail time.
In reading about this complex, criminal fraud trial, I’ve been struck by what a long and complex ordeal it was for all those involved, but especially for the jurors who were expected to render judgment. Dewey LeBoeuf filed for bankruptcy in 2012, accused of creating falsified financial records in order to obtain financing from lenders and investors. There were more than 151 charges levelled against the three former executives of the law firm; after a trial that lasted four months, the jury deliberated for almost another month before finally acquitting the three defendants on dozens of the original charges. A mistrial was declared on 93 of the remaining counts. Several of the defense attorneys said Manhattan District Attorney Cyrus Vance would likely retry the three Dewey & LeBoeuf executives; they and some jurors strongly suggested that Vance pare down the indictment, present fewer witnesses and, most importantly, call in some accounting experts to decrease the level of juror confusion regarding the multitude of complex accounting issues.
The extensive trail publicity brought to mind the overwhelming importance to the prosecution of the type of effective communication, outlined in a recent InnerAuditor post. During the months-long trial, many witnesses were called to testify and the jury did received a lot of data. Several members of the firm’s finance department testified for the prosecution and detailed ways in which they manipulated financial records in order to make Dewey & LeBoeuf appear more profitable than it actually was. Jurors were asked to sit patiently through a long trial during which reams of complex financial information were presented to them non-stop. Opening statements were long affairs where lawyers for both sides spent hours trying to explain complex concepts like disbursement write-offs. At the end of it all, jurors reported that they wished they had received less data and more useful information on the accounting and financial issues themselves; information that they could have used to more confidently come to a conclusion on the facts. For all its crowd of witnesses, the prosecution did not choose to include even one accounting expert. No one was on the stand to specifically frame all the allegations and accusations in a way that the jury could clearly understand. One juror stated that, as he had minored in accounting, he had tried to explain some basic accounting concepts to his fellow jurors, so they could, at least, try to get a better handle of what exactly had happened at Dewey LeBoeuf and why it might be criminal.
The inconclusive outcome of this trial underscores the importance of having forensic accountants and fraud examiners prepare our reports and courtroom presentations in a way really useful to their intended users, whether those user be corporate managers or juries. I’m sure the witnesses were competent and sounded knowledgeable on the stand but, how effective were they if their testimony served only to fry the brains of the jury? We don’t want any jury to be so bogged down by numbers and complicated, unfamiliar accounting terms that it misses what the real story is all about.
So, next time, if there is a next time, the prosecutor assigned this case should seriously consider engaging the services of a financial accounting/forensic accounting expert. Why? Because I think the mistrial sufficiently illustrates the importance to the prosecution, and to the defense, of at least one witness who can explain complicated concepts and financial reporting requirements in a sufficiently straightforward manner to be understood by the layman citizens who make up our juries. Clearly it’s not just the quantity of the proof, it’s the quality.