[ by Melanie Gretchen ]

Did top managers at Dewey & LeBoeuf LLP purposely mislead lenders about the law firm's financial health, as a criminal probe into the firm's failure intensifies?  Did the law firm's leaders make false statements to former partners about Dewey's progress repaying loans on their behalf?

These are just the latest questions posed by the district attorney's office in Manhattan during an investigation into the bankrupt law firm, according to people with knowledge of the investigation, and a person briefed on the probe.  The New York law firm, which once had more than 1,300 lawyers in offices around the world, filed for Chapter 11 bankruptcy on 5/28/12 after a wave of partner defections spurred largely by compensation disputes and concern about the firm's finances. 

The investigation began some 5 months ago on the eve of the New York-based firm's collapse. Since then, the fingers haven't stopped pointing by banks, bondholders, and other creditors as they attempt to recover the $315 million owed.

What's transpired so far:

• The Manhattan DA has sent subpoenas in recent months to Dewey and at least 1 of its lenders seeking information relating to communications Dewey's leaders had with banks and former partners, according to people with knowledge of the investigation
• Prosecutors have met with Dewey's bank lenders, according to one of these people.

What's at Stake: whether former Dewey chairman Steven Davis or other leaders of the firm intentionally made misstatements that violated state laws, such as those that prohibit the keeping of false business records, according to one person briefed on the probe

• statements made by Dewey's leaders to a bank syndicate with which the firm had a $100 million revolving line of credit, according to the person briefed on the probe. The agreement with a consortium of lenders, led by JPMorgan Chase & Co., expired earlier this year, and the firm's managers were trying to extend it in the months leading up to Dewey's demise.
   
• bank loans that some former Dewey partners took out from Barclays PLC's corporate-banking division to buy equity in the firm, a common practice at large law firms, according to the person briefed on the probe.  When those partners left, Dewey was supposed to return their capital by paying down the balance of the loan, which the firm had struggled to do.

At a hearing last month, Dewey's bankruptcy advisers said that, based on conversations with former partners, any civil claims relating to the firm's demise would most likely be brought against

• Steven Davis, former chairman
• Stephen DiCarmine, former executive director
• Joel Sanders, former chief financial officer

A lawyer representing Davis, DiCarmine, and Sanders in the bankruptcy proceedings said his clients weren't responsible for the firm's collapse, and that no evidence proving their culpability had yet been presented.  In their defense, Ned Bassen Hughes Hubbard & Reed LLP said his clients haven't been contacted by prosecutors regarding the criminal probe.

"As far as we are concerned they didn't do anything wrong civilly—and they certainly didn't do anything wrong criminally."

For further details, go to [WSJ, 10/8/12].