Law360, New York (April 26, 2012, 8:53 PM ET) -- A group of Dewey & LeBoeuf LLP partners has asked the New York district attorney to bring criminal charges against the chairman of the tottering firm, which could close its doors as early as next week, a source familiar with the matter said Thursday.
The source told Law360 that an undisclosed number of partners from Dewey asked the New York County district attorney to charge Chairman Steven H. Davis with embezzlement, wire fraud, mail fraud and other criminal activity.
Dewey, which has lost nearly 20 percent of its partnership this year, has stretched itself financially to the breaking point, forcing the firm to seriously consider filing a prepackaged Chapter 11, according to sources familiar with the matter.
The firm could shutter its offices as early as next week without being able to pay off associates, paralegals, kitchen staff and others, a source said Thursday, predicting that “the story can only end one way."
Calling Davis a “sinister character,” the inside source revealed that Davis informed the firm’s partners at a global partners' meeting in October that he had signed more than 100 contracts guaranteeing certain partners compensation.
Those contracts, which added up to approximately $197 million, drained more than 75 percent of the firm’s reported $250 million in year-end profits, leaving hundreds of partners to split up the remaining $50 million.
And while it is not unusual to extend guaranteed compensation contracts to lateral hires joining the firm, the source claims Davis gave out too many, most of which went to friends. The chairman was allegedly “running the firm like a mafia,” the source said.
When questioned, the firm’s executive committee claimed it did not know about the firm’s overextended circumstances, indicating that Davis allegedly handed out the guaranteed compensation contracts — some worth up to $1.2 million — without any oversight.
In addition, Davis has already cashed out his personal capital in the firm, in violation of firm agreements, the source said.
Internally, Dewey told partners in December that it had not made enough money in the past year to even pay partners with guaranteed contracts, leaving many breached. The informant told Law360 Thursday, however, that the firm was insolvent as early as November.
As the insolvency crisis nears collapse, with the firm’s $72 million revolving credit line with lenders J.P. Morgan Chase, HSBC Holdings PLC and others set to expire on the last day of this month, the source says a lot of people will be harmed in the process.
If Dewey does file for bankruptcy, it is predicted to be “the nastiest bankruptcy a law firm has ever had,” the source said, as all of the firm’s capital accounts are brought to zero.
Former partners have already reported that they are waiting for overdue payments of invested capital from Dewey, but if the firm declares bankruptcy, they may never see those funds.
The payments were part of multiyear reimbursement plans that were established to repay former partners for traditional capital contributions the attorneys made when they joined the firm or were elected to partner.
Further, reports that Greenberg Traurig LLP will merge with Dewey may be hasty, the source warned.
“Why would they want to merge?” the source asked, adding that the group of partners negotiating with Greenberg have kept the rest of Dewey’s partners in the dark as to the productivity of the talks.
The source, however, was able to confirm that Greenberg got an inside look at Dewey’s books and that a plan to “cherry-pick” the best of Dewey’s partners was not out of the question.
The district attorney’s office and a representative for Dewey were not immediately available for comment Thursday.
--Editing by Cara Salvatore.