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Law firm's executives cooked books, ex-finance director says at trial

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(Reuters) — Former top executives at defunct law firm Dewey & LeBoeuf, including chairman Steven Davis, conspired to falsify income statements in an attempt to forestall its collapse in 2012, the firm's former finance director testified Monday in New York.

Francis Canellas, expected to be the key prosecutorial witness at the criminal trial of Mr. Davis, executive director Stephen DiCarmine and chief financial officer Joel Sanders, said all three were aware of improper accounting tricks intended to fool auditors and lenders about Dewey's true financial state.

“I participated and directed others to make false accounting entries to the accounting system” from 2008 to 2011, said Mr. Canellas, who pleaded guilty in March 2014 to grand larceny as part of a cooperation agreement with the Manhattan district attorney's office.

In 2012, Dewey became the largest law firm in U.S. history to file for bankruptcy due to crushing debt and a stream of partner departures.

The three top former executives are accused of cooking the books to hide Dewey's teetering finances. Their criminal trial, which began in May, is expected to last six months and has already seen more than two dozen witnesses.

Prosecutors hope Mr. Canellas can provide jurors with a direct link between the three defendants and the illegal accounting maneuvers he helped to devise.

During his first two hours of testimony Monday, Mr. Canellas described the final days of 2008, when the firm was more than $50 million short of meeting a key annual cash-flow requirement set by its lenders.

On Dec. 30, Mr. Canellas said, he went to a high-end steakhouse in midtown Manhattan with Mr. Sanders and Zachary Warren, who helped collect client revenue for the firm, to discuss how to handle the shortfall.

For hours after dinner, the men brainstormed ways to adjust the firm's income statement, covering the walls of Warren's office with paper on which they jotted their ideas, he said.

The result was a spreadsheet titled “master plan” that showed the firm had exceeded its required cash-flow benchmark by nearly $3 million, rather than by $53 million, Mr. Canellas said.

Mr. Warren was indicted on lesser charges and is set to be tried separately later this year.

Mr. Canellas faces up to 15 years in prison, but prosecutors will recommend a reduced sentence of two to six years if he fulfills the terms of his plea deal.