Gary DeWaal’s Bridging the Week: March 3 to 7 and 10, 2014 (Alleged Law Firm Fraud; Possible FX Manipulation)

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Published Date : March 10, 2014

Criminal and civil legal actions against former employees of a major, worldwide defunct law firm, highlighted news in the financial services industry last week, giving many legal and compliance professionals a moment of pause. This week leaders of the exchange-traded derivatives industry will flock to Boca Raton, Florida for the annual FIA International Futures Industry Conference to assess evolving market structure (including the launch of Swap Execution Facilities in the US), cross-border issues, the impact of regulation, and new capital and liquidity requirements, among other topical matters. As a result, the following matters are all covered this week on Gary DeWaal’s Bridging the Week:

Video Version

Article Version:

Lawyers and Financial Personnel Criminally Indicted and Sued Civilly in Connection with Collapse of Formerly Highly Regarded Law Firm

Both the Securities and Exchange Commission and the District Attorney of Manhattan took legal actions against former senior officers of the defunct law firm Dewey & Leboeuf, alleging that they engaged in accounting fraud to deceive the firm’s lenders, investors and others. The Manhattan DA filed criminal indictments in a Manhattan criminal court against two former senior lawyers of Dewey & Leboeuf, Steven Davis and Stephen Dicarmine, who were its Chairman and Executive Director, as well as against its former Chief Financial Officer, Joel Sanders. A former client relations manager, Zachary Warren, at the firm was also indicted. The SEC sued Messrs. Davis, Dicarmine, and Sanders, as well Frank Canellas and Tom Mullikin, the firm’s former finance director and controller, respectively. The SEC’s action was filed in a US Federal Court in Manhattan. Both the SEC and the criminal indictment allege that the named firm employees participated in an ongoing multi-year scheme falsely to amend Dewey & Leboeuf’s financial statements to help disguise a materially worsening financial predicament and inability to satisfy various loan covenants. The SEC’s complaint related specifically to alleged fraud by the firm through the named employees in connection with its issuance of a US $150 Million bond offering during April 2010, as well as in certain quarterly certifications required by the firm afterwards. The SEC is seeking disgorgement and financial penalties as well as permanent injunctions against all five defendants, among other sanctions. According to the SEC’s complaint:

“Unbeknownst to investors, the Defendants - a collection of Dewey's senior most legal and business professionals - had orchestrated and executed a bold and long-running accounting fraud intended to conceal the firm's precarious financial condition. Investors believed they were purchasing bonds issued by a prestigious law firm that had weathered the financial crisis and was poised for growth; in reality, the financial results disclosed in the [private placement memorandum for the bond offering] were materially misstated.“

The criminal indictment alleged fraud both in connection with the same bond offering, as well as well as various loans from 2008 through 2012. In bringing these actions, both the SEC and the Manhattan District Attorney are relying on large number of emails which they allege support their allegations, including one where a defendant in the SEC action expressly discloses his preference not “…to cook the books anymore” and another is captioned “Accounting Tricks.”

Compliance Weeds: Employees, no matter how well trained, inevitably will write incriminating matters in firm-supported electronic communications. This is why financial services’ firms should ensure that their electronic communications are routinely and systematically reviewed for problematic or suspicious communications (not just for compliance and financial breaches, but potential employment law issues too). Many surveillance systems can identify electronic communications containing key words; however, employees may mask known key words by using alternative words or phrases, or by purposely misspelling words or using a foreign language. Surveillance systems should have the ability to adapt to such potential subterfuge. Other types of systematic reviews should also be considered (e.g., targeted reviews of specific production groups, employees generating unexpectedly high levels of revenue). Now that firms increasingly are required to retain recordings of certain oral communications, these should regularly be reviewed too.

And briefly:

Compliance Weeds: As part of its investigation, the Bank of England had reviewed approximately 15,000 emails, 21,000 Bloomberg and Reuters chat room records, and over 40 hours of telephone call recordings. Time will tell how effective the BoE's systematic review of these records were, and if they could have caught potential issues with more effective surveillance earlier. See also Compliance Weeds related to the article "Lawyers and Financial Personnel Criminally Indicted and Sued Civilly in Connection with Collapse of Formerly Highly Regarded Law Firm," above.

“To me, this onslaught of bank regulator rulemaking impacting non-bank markets is the result of a central, albeit unannounced, pillar of Dodd-Frank: the institutionalization of “too big to fail.” The continued focus on “going concern” capital for institutions like broker-dealers that should fail when they take on undue risk can mean only one thing – despite the lessons learned from the financial crisis, despite the rightful disgust the American people directed at the bailouts, the U.S. government is focused on propping up institutions instead of refining the processes by which their failures will be handled. “

For more information, see:

Bank of England FX Investigation:

See also: FCA Confirmation of FX Investigation:

CFTC No Action Relief for Certain Swap Trades Between Affiliated Entities:
CME Amended Rules:
Dewey & Leboeuf Legal Matters

Criminal Indictment (Manhattan District Attorney Press Release):
Securities and Exchange Commission:

Speech of SEC Commissioner Daniel Gallagher before the Institute of International Bankers:
HK SFC Bans Former Bank Employee for Life:
SEC: In the Matter of Worldwide Capital et al:

See also SEC Risk Alert re: Short Selling in connection with Public Offerings:

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of March 8, 2014, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.

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