UPDATE 1-Ex-Dewey finance director admits accounting was false

Thu Mar 27, 2014 6:12pm EDT

(Adds comment from former chairman's lawyer)

By Karen Freifeld

NEW YORK, March 27 (Reuters) - Dewey & LeBoeuf's ex-finance director pleaded guilty to grand larceny last month and admitted he knew false financial statements were being provided to the firm's lenders, according to court documents unsealed on Thursday.

Francis Canellas, 34, faces anywhere between no jail time and five to 15 years, the documents showed, for his role in the accounting fraud at Dewey & LeBoeuf, which became the largest U.S. law firm collapse when it went bankrupt in May 2012.

He is one of seven firm employees who have pleaded guilty to the fraud, according to prosecutors, and has agreed to cooperate in the case against the firm's management.

Dewey & LeBoeuf's former chairman Steven Davis, 60, executive director Stephen DiCarmine, 57, chief financial officer Joel Sanders, 55, and client relations manager Zachary Warren, 29, were all criminally charged March 6 for the alleged use of accounting gimmicks and fraud to cheat banks and investors in a failed attempt to keep the law firm alive.

"We all knew that adjustments were being made to deceive our lenders and others," Canellas said in a five-page statement unsealed on Thursday by Manhattan State Supreme Court Justice Michael Obus.

Dewey's lenders included JPMorgan Chase & Co, Citigroup Inc's private banking unit, Bank of America Corp and HSBC Holdings Plc.

Canellas said the "inappropriate" adjustments began in late 2008 after Sanders told him that DiCarmine and Davis said they needed to meet cash flow covenants in the firm's credit agreements. Over the years, he said, he instructed others to make the adjustments.

Canellas also said he, Sanders and others provided information "that we knew to be false" to investors in a $150 million bond offering in 2010, and that he participated in efforts to keep the firm's auditors, Ernst & Young, in the dark.

Lawyers for the executives charged in the case played down the potential impact of Canellas's statement. All of the executives have pleaded not guilty.

Attorney Elkan Abramowitz, who represents Davis, said the statement does not contain "any direct evidence of wrongdoing against Davis because there isn't any."

Austin Campriello, the attorney who represents DiCarmine, called Canellas's statement a "very thin reed on which to build a case against Steve DiCarmine." He said the case against his client "will crumble."

New York attorney Edward Little, who represents Sanders, said he was not surprised "that a cooperating witness who has admitted to a crime is trying to implicate others and blame them, especially when he got such a sweet deal."

Canellas said in the statement that he interacted with Sanders on a daily basis and discussed their activities.

Lawyers for Warren and Canellas could not be immediately reached for comment.

Agreements for the six other employees who have pleaded guilty are expected to be unsealed on Friday.

A separate civil case was filed by the U.S. Securities and Exchange Commission over the bond offering.

The case is New York v Davis et al, New York State Supreme Court, New York County.

(Reporting By Karen Freifeld; Editing by Diane Craft)

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