Monday, March 24, 2014

Dewey LeBoeuf Staff Indictments: Time For Law Firms to Have Whistle-blower Programs?

DISCLAIMER: this blog does not now,  and never has had any connection to Dewey LeBoeuf. The last time I wrote a post about the colllapse of Dewey LeBoeuf some people thought I had worked at Dewey. Last week a reader asked me to settle a bet about my blog name. Did it refer to Melville Dewey or the fictional law firm "Dewey Cheatem and Howe?" Dewey Cheatem & Howe has been used by humorists from The Three Stooges to The Car Talk  Magliazzi Brothers, as a parody of the most negative stereotype of lawyers as scheming scam artists....


In recent  weeks the space between Dewey LeBoeuf and "Dewey Cheatem and Howe" was narrowed with the filing of a 106 count indictment of Dewey LeBoeuf’s former senior leadership team. I am reminded of country singer Kinky Friedman’s line that "it is only one small step from the limousine to the gutter."

Zach Warren Follows Dewey Leaders (c. ALM)
The Indictment in "The People of the State of New York against "Steven Davis, Stephen DeCarmine, Joel Sanders and Zachary Warren" is in the running to be the most depressing and appalling read of 2014. The stars of this document are the Managing Partner, The Executive Director and the Chief Financial Officer...smart men who were foolish enough to leave a trail of damning emails. But the indictment wasn't limited to people in "the C Suite."


The emails cited in the indictment suggest the insidious way in which Dewey LeBoeuf’s leaders turned staff into accomplices in "cooking the books". An email from Sanders the CFO asks an employee to "find another clueless auditor for next year:" There are references to the CFO offering to take employee C to lunch to reassure him because "he is hearing and seeing too much." Employee C asked Employee N for backdated checks. The sinister web appears to have threaded its way into many corners of the finance department. The section entitled "overt acts"  introduces employees  A,B, C, D, E , F and N who testified about various aspects of the fraudulent activities which they observed or participated in. Additional staff members are subjects of a related  SEC indictment. 

The NY State indictment alleges that staff were asked to "make adjustments" to business records, reclassify disbursement payments, reclassify " of counsel" payments, reverse disbursement write-offs. charge firm costs to clients, miscode credit card expenses, reclassify salaried partner expenses, .produce back-dated checks, apply loan repayments as revenue. The "grand scheme" was designed to hide the true financial condition of the firm from the partners, the firms auditors and investors. Were staff really supposed to second guess the decisions of the managing partner, executive director and CFO? Are staff supposed to discern the line of demarcation in gray space where "sharp lawyering" and "creative accounting"  techniques morph into fraud?


Count One Hundred and Six: Conspiracy : Is Your Staff Bonus a Deal with the Devil?


Dewey’s Managing Partner, Executive Director and the Chief Financial Officer are charged with 105 counts of grand larceny and falsifying business records. At count 106 the name Zachary Warren appears. Warren was a 28 year old client relations manager. He is charged with the crime of "conspiracy in the 5th degree ."  A recent New York Times article "A Dragnet at Dewey Snares a Minnow" details the plight of Zach Warren. After graduating from Stanford University, he applied for a job as a paralegal at the pre-merger LeBoeuf Lamb firm but was offered a job doing client collections. He was then promoted to a role as Client relations manager where he fell into the orbit of the "two Steve’s" shenanigans. After leaving Dewey LeBoeuf in 2009 he went to Georgetown Law School, was admitted to the bar and clerked for 2 federal judges. He has a job offer from DC law firm Williams and Connelly. And now he has been indicted for trusting the leadership at Dewey LeBoeuf. A bit of a "curve ball" at the start of an otherwise promising career.

As Bruce MacEwan pointed out in his keynote at the 2013 PLL Summit : "the law firm world is still highly stratified. There are lawyers and non-lawyers." The lawyers give the orders…. Staff follow them. Is someone in the  New York County DA’s Office actually confused about the pecking order in law firms? Certainly there have been cases where a staff member "goes rogue" on their own and commits fraud without the knowledge of firm leadership – but that is not what happened at Dewey. .


A Colossal Failure of Culture

Since 2007 law firms have thinned both lawyer and staff ranks with layoffs, outsourcing, onshoring and automation.  While these activities may be both necessary and great for the bottom line,  firms should consider how the chronic state of uncertainty may be fraying the threads of common culture. Not only may staff be losing touch with firm culture i.e. not recognizing when they are being asked to do something which is unethical, but staff may become more likely to keep their heads down and be compliant if they witness inappropriate behavior.  Will staff feel they are risking their own jobs by questioning the judgment of their boss?

In organizations with a strong culture there are cues about the ethical boundaries. The firms of Dewey Ballantine and LeBouef Lamb had undergone the cultural trauma of "a merger of equals." In the wake of a merger, staff are working under enormous stress and uncertainty: new bosses, new processes, new technologies, new  rules. Suddenly no one is sure what the cultural norms are. To make things worse, the Dewey LeBoeuf  merger occurred in October 2007 right as whole legal marketplace was tumbling into  the seismic upheavals of the Great Recession.

Are Whistle-blowing Programs the Solution?

The ABA rules require a lawyer to report unethical behavior, but what about staff? Will Dewey LeBoeuf be a wake up call which prompts firms to create a clearly defined and safe protocol allowing staff to report questionable activities to an ethics partner or the firms general counsel?


Rule 8.3  of the ABA Model Rules of Professional Conduct  requires lawyers to report misconduct of another lawyer but most staff are not lawyers. I could not locate any rule requiring lawyers to create mechanisms such as a Whistle-blower program to facilitate staff reporting of misconduct within the law firm environment. Law firms have gotten bigger and it has gotten harder for lawyers to have direct knowledge of misconduct being orchestrated down the hall but executed by staff in the back office.


The indictment of Zach Warren should be a wake-up call for staff and for law firm leaders. Staff need to do a"gut check" and seek a second opinion from Human Resources or the firm’s ethics partner if they have any suspicion that they are being asked to do anything illegal or unethical. The price of  just "going along"  is too high. I am sure there's little comfort in knowing your former boss is walking ahead of you in handcuffs. Just ask Zack Warren.  
Related: Dewey Leboeuf and The Due Diligence Imperative

1 comment:

  1. I'm reminded of Michael J. Fox's line in "The American President" which goes something like this - "It's always the guy in my position who ends up doing 18 months in minimum security ..."

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