Dewey Trial: Living in Fear of the Auditor

During the first month and a half of the trial against three former Dewey & LeBoeuf leaders, one defendant’s name has hardly come up: Steven Davis, the former chairman.

Tuesday, a key prosecution witness finally had a story to tell about Dewey’s former top executive.

Francis Canellas, the now-defunct firm’s former finance director, recalled a meeting he attended with the firm’s auditor at Ernst & Young in either 2010 or 2011. Before going in to the meeting, Mr. Davis “appeared nervous,” Mr. Canellas said during questioning from a prosecutor.

“He was normally very calm and collected, and he just didn’t appear himself that day.”

Even before the meeting, Dewey’s then-chief financial officer, Joel Sanders, raised the question of whether Ernst & Young might want to talk about adjustments the firm made to its books, Mr. Canellas told jurors Tuesday. Over two days of questioning, Mr. Canellas has detailed to a jury what he says were improper accounting adjustments he and others at the firm made to appear to stay in compliance with the terms of the firm’s bank loans.

In the end, that meeting with the Ernst & Young auditor had nothing to do with accounting adjustments, Mr. Canellas said. Instead, the auditor “said the audit went well and that the books were in good shape,” he said in court.

Afterwards, Mr. Davis told Mr. Sanders “to keep up the great work keeping the firm’s books in great order,” according to Mr. Canellas’ recollection. Prodded by a prosecutor, Mr. Canellas said the comment was made in “a sarcastic tone.”

Messrs. Sanders and Davis, as well as the third defendant, former executive director Stephen DiCarmine, have all denied the charges accusing them of conspiring to commit financial fraud by lying to lenders and creditors in the run-up to Dewey’s May 2012 collapse.

Mr. Canellas testified Tuesday that he and Mr. Sanders discussed each year from 2009 to 2011 what they would say to auditors if any of the adjustments they made—including reversing write-offs and reallocating payments made to salaried lawyers as partner distributions—were detected.

The audit of 2008’s books, Mr. Canellas recalled, was not as thorough as it could have been.

“I was nervous the audit would show those adjustments,” said Mr. Canellas, who has pleaded guilty to second-degree grand larceny and is cooperating with the Manhattan district attorney’s office. “At the end of the audit, there were no issues.”

When an auditor working with the firm that year said in June 2009 that he was leaving Ernst & Young, Mr. Sanders sent an email to Mr. Canellas, shown to jurors, that said, “Can you find another clueless auditor for next year?” Mr. Canellas replied: “That’s the plan. Worked perfect this year.”

The “clueless auditor” came around again in March 2010, sending Mr. Sanders an email saying he was once again switching jobs, and inviting him to a seminar, according to evidence presented Tuesday.

Mr. Sanders forwarded the note to Mr. Canellas, saying, “Can we get him back as our auditor?”

An attorney for Mr. Sanders argued earlier in the trial that his client was using sarcasm when he used the term “clueless auditor.”

Lawyers for all three defendants will get their chance to question Mr. Canellas once the prosecution is done.