Here it is:
Some key grafs are below. The Wall Street Journal also offers some highlights.
The Scheme
The Firm’s first full year of operations was 2008. The merger, coming just before the financial crisis, was troubled from the start and the Firm’s first year financial performance was severely below expectations. By the end of that year, the Firm had more than $100 million in term debt outstanding and available lines of credit of more than $130 million with four banks (the “Banks”). The Firm’s credit agreements with the Banks contained several covenants, including a cash flow covenant (the “Cash Flow Covenant”) requiring the Firm to maintain a minimum defined year-end cash flow. Because of its poor financial performance, the Firm was unable to meet this covenant in 2008.
The defendants and others at the Firm were aware that the failure to meet the Cash Flow Covenant during the 2008 credit crisis could have disastrous effects on the Firm. To avoid this, the defendants and others at the Firm (individually and collectively, the “Schemers”) engaged in a scheme (the “Scheme”) to defraud the Firm’s lenders and others by, among other things, misrepresenting the Firm’s financial performance and compliance with the Cash Flow Covenant. In later years, among other things, the Schemers continued to misrepresent the Firm’s financial performance and condition and that the Firm was in compliance with the Cash Flow Covenant and other covenants and defrauded additional lenders and investors using similar misstatements. As part of the efforts to ensure the success of the Scheme, the Schemers lied to and otherwise misled the Firm’s partners and auditors, as well as others. The Schemers, themselves or working through others, withheld information and affirmatively concealed the Scheme when they were questioned by partners, including members of the Firm’s Executive Committee, auditors, or others.
The Fraudulent Methods
By or about the end of 2008, the Schemers had created a document they called the “Master Plan” that described certain fraudulent accounting adjustments that the Schemers decided to pursue as part of the Scheme. From in or about the end of 2008 until the Firm’s bankruptcy in 2012, the Schemers input numerous of these and other fraudulent adjustments, and engaged in other fraudulent conduct, most of which made it appear that the Firm had either increased revenue, decreased expenses, or limited distributions to partners. Some of these fraudulent adjustments and acts were:
a. Reversing disbursement write-offs
From 2008 through 2011, the Schemers improperly reversed millions of dollars of write-offs of client disbursements that the Firm had no intention or reasonable expectation of collecting.
b. Reclassifying disbursement payments
From 2008 through 2011, the Schemers improperly reclassified millions of dollars of payments that had been applied to client disbursements during the year and applied the payments instead to outstanding fee amounts.
c. Reclassifying Of Counsel payments
–From 2008 through 2011, the Schemers reclassified millions of dollars of compensation to Of Counsel lawyers as equity partner compensation. Historically, Of Counsel compensation had been treated as an expense in the Firm’s financial statements.
d. Reversing credit card write-offs
In 2008 the Firm initially properly wrote off more than $2.4 million in charges from an American Express card associated with defendant SANDERS that had not previously been expensed and were not chargeable to clients. For year-end 2008, the Schemers fraudulently reversed this write-off and hid the amount in the Firm’s books as an unbilled client
disbursement receivable. Each subsequent year, the Schemers initially wrote this amount off, but then reversed the write-off at year-end. The amount remained on the Firm’s books as an unbilled client disbursement receivable at the time of the bankruptcy.
e. Reclassifying salaried partner expenses
In 2008, the Schemers improperly reclassified as equity partner compensation millions of dollars in compensation paid to, and amortization of benefits related to, two salaried, non-equity partners. Similar amounts had previously been treated as expenses on the Firm’s financial statements, so the reclassification had the effect of reducing Firm expenses. This change in treatment was neither disclosed to the Firm’s auditors nor disclosed on the Firm’s audited financial statements. In later years, the compensation paid to these two salaried partners was classified as equity partner compensation.
f. Seeking backdated checks
During at least two year-ends from 2008 through 2011, the Schemers sought backdated checks from clients to post to the prior year. At the end of each of the Scheme years the Schemers engaged in efforts to hide the date on which checks were received by the Firm. These efforts minimized the risk that the Firm’s auditors would discover that December checks received in January, including backdated checks, were being posted to the prior year.
g. Applying partner capital as fee revenue
–For year-end 2009, more than $1 million that had been contributed by a partner to satisfy his capital requirement was applied as a fee payment for the client of a different partner. This amount was backed out of fees and applied to the partner’s capital account during 2010, but for year-end 2010 it was again applied as a fee payment for the same client.
h. Applying loan repayments as revenue
In 2008, pursuant to defendant DAVIS’s authorization, the Firm took on $2.4 million in bank loans that benefitted defendants DICARMINE and SANDERS. In early 2012, defendants DICARMINE and SANDERS repaid the Firm the final $1.2 million owed under the loans but structured the transaction so the loan repayment would increase the Firm’s revenue for 2011.