Wednesday, March 12, 2014
The big news on the white-collar crime front in New York last week was the long-expected indictment of persons involved in the defuct law firm of Dewey & LeBoeuf. Charged were its chairman, executive director and chief financial officer, as well as a low-level client relations manager. Seven not-yet-identified others have pleaded guilty. Only two of the eleven criminally charged appear to be lawyers, and the cases against them may be the weakest. See James B. Stewart, "In Dewey's Wreckage, Indictments," New Yorker Blog, March 7, 2014, see here.
The charges essentially are that the defendants cooked the books in order to keep the failing firm alive with institutional financing. More specifically, it is charged, they falsified financial records submitted to banks and investors to demonstrate that the firm had complied with existing loan covenants and were worthy of further investor loans, and made fraudulent accounting entries to support their false representations. The top charge is grand larceny in the first degree, theft in excess of $1 million, a Class B felony with a potential sentence of 25 years, and a minimum sentence of one to three years.
In many ways, as the facts are alleged, this is a not untypical case, where businesspeople -- ordinarily law-abiding -- fall into financial situations where they desperately need to borrow money to keep their businesses going and falsify income, receivables, expenses and the like in order to get it. Such chicanery is far from rare and is often undetected or overlooked, particularly if the borrower improves its financial position and pays off all or a substantial part of the amount owed. And, if detected, such wrongdoing is often made public only in private civil litigation and without criminal prosecution. Generally, the borrowers have an expectation and/or hope, often unreasonable, that they will ultimately be able to pay off the loan and thus arguably lack the intent to permanently deprive (an element of larceny) the lenders.
There are several interesting aspects of the case. It is being brought by a state prosecutor -- the District Attorney of New York County -- rather than the United States Attorney for the Southern District of New York, the predominant prosecutor of white-collar crime in Manhattan. The District Attorney, like most state and local prosecutors forced to deal with every police street arrest, whether for murder or disorderly conduct, and lacking sufficient available personnel and resources to conduct many complicated and lengthy white-collar investigations, generally has a far less significant presence in white-collar prosecution than his federal counterpart.
More unusual, in this case, much of the legwork for the state prosecution apparently was done by the FBI (and not a state or city police agency). Almost always, when the FBI does the investigative work on a white-collar case (or even when the work is done jointly by federal and state investigators), that case is prosecuted by federal authorities. I do not know why this case is an exception. Perhaps the United States Attorney declined the case because he questioned its strength or jurisdictional basis, or, even less likely, felt his resources were better used on other goals. My best guess is that the case was prosecuted by the District Attorney because he jumped on it first, and/or was first provided evidence of alleged wrongdoing by some of the firm's unhappy partners. In any case, if this joint effort between federal investigators and New York State prosecutors is a harbinger of further cooperative efforts, it will be a significant step forward for white-collar prosecution in New York City, the financial (and probably white-collar crime) capital of the country. Far too often, federal authorities let significant matters brought to their attention go by the wayside because of jurisdictional problems or federal lack of interest rather than turn them over to state prosecutors. And, far too often, state prosecutors let significant matters go by the wayside because of their lack of resources and expertise rather than turn them over to federal prosecutors.
The New York County District Attorney, Cyrus R. Vance, Jr., in a press statement, claimed that the victims were not just the lending financial institutions but also the thousands of people who lost their jobs when the firm failed. I strongly disagree. The firm's employees actually were for the most part beneficiaries of the loan proceeds, and therefore if the allegations are true, unknowing beneficiaries of the criminality that enabled that borrowing, which kept the firm alive and staved off bankruptcy for a time. Those who lost their jobs when the firm ultimately failed and went into bankruptcy most likely kept those jobs much longer than they would have had the law firm not been able to secure the funding. Dewey & LeBoeuf failed not because of criminal acts, but, if criminal acts did occur, in spite of them.
The real victims in this case, the only direct victims, are the banks and other financial institutions which loaned the firm unrecovered money. Sometimes, in cases of this kind, the bankers are negligent in their due diligence and occasionally actually compliant with the borrowers in order to achieve short-term profits for their institutions and immediate benefits for themselves in bonuses and salary increases. I have no knowledge that either negligence or complicity happened here.