- March 10, 2014
- Labaton Sucharow
Like many in the legal community, we’ve been closely following the ongoing saga of Dewey & LeBoeuf LLP- the once venerable international law firm that was forced to declare bankruptcy in May 2012 amid accusations of financial mismanagement. On Thursday, the SEC and the New York County District Attorney’s office brought respective civil and criminal charges against members of Dewey’s senior management, alleging that its former Chairman, CFO and others engaged in accounting fraud in an attempt to forestall the firm’s eventual collapse. The SEC’s complaint includes dramatic evidence of this alleged fraud, including emails in which certain defendants describe their conduct as “cook[ing] the books,” and express hope that their auditors will continue to be “clueless”.
While the SEC has brought numerous actions against lawyers who facilitate frauds perpetrated by their clients, it’s unusual for a law firm’s own accounting to be the subject of an SEC suit. But, as the Dewey matter vividly reflects, securities violations are not the sole purview of public corporations, stock brokers and hedge fund managers. Instead, given the expansive definition of a security under the Securities Act of 1933 and other securities laws, securities violations can arise in a huge range of businesses, including those which, like Dewey, are or were privately-held. In Dewey’s case, the alleged securities violations occurred, giving the SEC jurisdiction, when Dewey raised desperately-needed cash through a public bond offering. According to the SEC, the private placement memorandum (“PPM”) for the bond offering contained numerous misrepresentations, including doctored financial statements and false descriptions of the firm’s accounting policies. Thus, Dewey’s apparent accounting shenanigans not only harmed its partners and employees – the majority of whom appear to have been ignorant of the long-running fraud – but also bond investors who relied on the PPM and related documents.
For potential whistleblowers and their counsel, one key take-away of the Dewey matter is that individuals with information regarding a possible fraud should not automatically assume that their information falls outside the scope of the SEC Whistleblower Program simply because it doesn’t involve a public corporation; instead, the relevant question for potential whistleblowers should be whether the wrongdoing has some connection to a security, whether it is a traditional security like a stock or bond, or a less traditional security like an investment contract, security-based swap or an interest in oil and gas rights. (For an overview of possible securities violations please see our Securities Law Primer). As our securities markets continue to grow more complex and expansive, it is likely that securities violations – and whistleblower complaints –will continue to arise in unexpected places.
