Author Topic: Inmates running the asylum  (Read 542 times)

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Offline Rapunzel

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Inmates running the asylum
« on: March 07, 2014, 11:28:13 PM »
http://www.economist.com/blogs/schumpeter/2014/03/dewey-leboeuf-s-bankruptcy?fsrc=rss

 Inmates running the asylum
Mar 7th 2014, 2:23 by D.R. | NEW YORK

IT WAS always an awkward coincidence that the cousin of Steve DiCarmine, a former executive at the collapsed law firm Dewey & LeBoeuf (pictured), was “Vinny Gorgeous” Basciano, who ran the Bonnano crime family and is now serving a life sentence in federal prison. Yet according to a 106-count indictment released on March 6th by New York prosecutors, Mr DiCarmine was somewhat of a gang leader himself. He allegedly participated in a criminal conspiracy to defraud the firm’s lenders—the dollar value of which dwarfs even the most lucrative schemes of his notorious relative. The demise in May 2012 of Dewey & LeBoeuf, which once employed 3,000 attorneys people and left its creditors on the hook for $550m in claims, was widely seen as a cautionary tale of partnership dysfunction and mismanagement following an ill-advised merger. The state’s version of events is far more sinister: rather than simply making poor business decisions, the firm’s leaders knowingly falsified its accounts, Enron-style, in a vain effort to keep it afloat.

The root causes of Dewey & LeBoeuf’s implosion, particularly its campaign to lure high-grossing “rainmaker” lawyers from rivals by offering lucrative guaranteed contracts, are well-known and were detailed at length in a New Yorker feature last year. Whereas the indictment does not address the run-up to the firm’s financial squeeze, the charges do imply that it might have gone under far earlier had its management not resorted to an impressive array of accounting shenanigans. As early as 2008, the prosecutors allege, Dewey & LeBoeuf had breached a loan covenant requiring it to post at least $290m in annual cash flow. Rather than advising its lenders of the bad news that it had missed the bar, the firm claimed it had cleared it by $4m.

Prosecutors charge that to derive this figure, the firm’s leaders—Steven Davis, the chairman; Joel Sanders, the chief financial officer; and Mr DiCarmine, the executive director—brought back onto the balance sheet bills they had previously written off as uncollectible and reclassified salaries as profit distribution to partners. As years went on and business further deteriorated, they allegedly exacerbated these manipulations by misrepresenting loan payments and partner capital infusions as fee income, backdating checks to meet financial requirements for prior years and double-counting certain revenues. They then relied on these false financial statements to conduct a $250m debt refinancing in 2010 with a group of banks and insurance companies. On the same day that the New York prosecutors announced the indictment, the federal Securities and Exchange Commission filed a separate civil complaint against the defendants regarding this bond offering.

The defendants’ lawyers insist that their clients have not committed any crimes. They accuse the state of looking for scapegoats, and note that Dewey & LeBoeuf’s auditor, Ernst & Young, signed off on its financial statements—a point that surely has that firm’s leadership squirming. (Enron’s accountant, Arthur Andersen, closed shop a few months after its problem client did.) But they may have a tough time convincing a jury to look past the salacious e-mail trail the defendants, who face up to 25 years in jail, left behind. They openly referred to millions of dollars’ worth of “accounting tricks” and “fake income” and called an auditor “clueless”. Mr Sanders once wrote “I don’t want to cook the books anymore”, before proceeding to continue with business as usual. And after a colleague completed a particularly effective massaging of the numbers, Zachary Warren, a former client-relations manager who was also charged, wrote “Nice work dude. Let’s get paid!”

Perhaps the most striking revelation in the indictment is that such high-flying corporate lawyers managed to be so careless with e-mail. Would it really have been that hard to find an appropriate conference room or water cooler to discuss the firm’s accounting in person? The first piece of advice that any remotely qualified attorney offers these days is never to write in an e-mail something you don’t want to see in court. Even if the defendants manage to get acquitted, future potential clients might want to make sure to use lawyers who practice what they preach when it comes to keeping conversations confidential.

Addendum: Ernst & Young has issued a statement, saying that the defendants in the case lied to its auditors and withheld information in order to conceal their activity.

“The time is now near at hand which must probably determine, whether Americans are to be, Freemen, or Slaves.” G Washington July 2, 1776

Offline Oceander

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Re: Inmates running the asylum
« Reply #1 on: March 07, 2014, 11:34:44 PM »
Quote
The first piece of advice that any remotely qualified attorney offers these days is never to write in an e-mail something you don’t want to see in court.

it is truly amazing how often people are careless with email.  it's treated like some sort of a phone call rather than as a written record of what was said.

Offline Rapunzel

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Re: Inmates running the asylum
« Reply #2 on: March 07, 2014, 11:38:40 PM »
it is truly amazing how often people are careless with email.  it's treated like some sort of a phone call rather than as a written record of what was said.

Emails and text messages, too...

One bad thing about emails is people can cut and paste and make them look like something they never were.

Another interesting thing - re emails... last week on our Phoenix news they had a segment about a company that fired a woman for non-performance.  She turned around and sued the company stating one of their rather new male employees had sent her emails making sexual remarks, etc...   anyway, the guy was new and a small company, but the owner didn't think it added up so he hired a forensic computer specialist to investigate and in the end it turned out she had sent the emails to herself. She had somehow gained his passwords and used his email account, but from her IP.
“The time is now near at hand which must probably determine, whether Americans are to be, Freemen, or Slaves.” G Washington July 2, 1776

Offline Oceander

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Re: Inmates running the asylum
« Reply #3 on: March 07, 2014, 11:46:56 PM »
Emails and text messages, too...

One bad thing about emails is people can cut and paste and make them look like something they never were.

Another interesting thing - re emails... last week on our Phoenix news they had a segment about a company that fired a woman for non-performance.  She turned around and sued the company stating one of their rather new male employees had sent her emails making sexual remarks, etc...   anyway, the guy was new and a small company, but the owner didn't think it added up so he hired a forensic computer specialist to investigate and in the end it turned out she had sent the emails to herself. She had somehow gained his passwords and used his email account, but from her IP.

That could cost her a lot more than just a lawsuit.  Using someone else's login credentials without their permission falls under the criminal unauthorized access statutes of many states, so she could easily be prosecuted for that.

One thing that can help detect a fraudulently altered email is keeping track of an email chain - the original email plus all of the replies back and forth - as well as making sure that your email client always retains a copy of whatever you sent out.  It's a lot harder to fraudulently alter an email that's already been sent out because the header information in the email - which is not normally visible (MS Outlook won't even let you see it at all) - generally cannot be similarly altered.

Offline Rapunzel

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Re: Inmates running the asylum
« Reply #4 on: March 07, 2014, 11:51:53 PM »
That could cost her a lot more than just a lawsuit.  Using someone else's login credentials without their permission falls under the criminal unauthorized access statutes of many states, so she could easily be prosecuted for that.

One thing that can help detect a fraudulently altered email is keeping track of an email chain - the original email plus all of the replies back and forth - as well as making sure that your email client always retains a copy of whatever you sent out.  It's a lot harder to fraudulently alter an email that's already been sent out because the header information in the email - which is not normally visible (MS Outlook won't even let you see it at all) - generally cannot be similarly altered.

They didn't say on the news report, but I suspect the owner of the company was not going to let it just lie there. Really luck for the man who was wrongly accused his relatively new employer didn't just do something knee-jerk like firing him. They gave the usual disclaimer about not sharing passwords, etc..   Most of the sensitive sites I have to use for my work requires me to change the passwords monthly and they can't be repeated for at least a year. I go nuts keeping track of what I'm using where.
“The time is now near at hand which must probably determine, whether Americans are to be, Freemen, or Slaves.” G Washington July 2, 1776

Offline Oceander

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Re: Inmates running the asylum
« Reply #5 on: March 07, 2014, 11:59:48 PM »
They didn't say on the news report, but I suspect the owner of the company was not going to let it just lie there. Really luck for the man who was wrongly accused his relatively new employer didn't just do something knee-jerk like firing him. They gave the usual disclaimer about not sharing passwords, etc..   Most of the sensitive sites I have to use for my work requires me to change the passwords monthly and they can't be repeated for at least a year. I go nuts keeping track of what I'm using where.

I go nuts just trying to keep track of the ones that don't need to be changed so often!

Offline Rapunzel

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Re: Inmates running the asylum
« Reply #6 on: March 08, 2014, 12:10:53 AM »
I go nuts just trying to keep track of the ones that don't need to be changed so often!

If I don't change them then they lock you out so anymore on the 20th of the month I change them to be safe.
“The time is now near at hand which must probably determine, whether Americans are to be, Freemen, or Slaves.” G Washington July 2, 1776


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