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| Dewey & LeBoeuf LLP logo |
Dewey & LeBoeuf, a prestigious law firm in New York which employed approximately 3,000 people in 26 offices throughout the world, filed bankruptcy due to financial fraud amongst the firm’s executives. It is the largest bankruptcy on record for a law firm with claims in excess of $550 million. Top executives collaborated for years to produce fraudulent financial records to report higher than actual financial results and used these false records to secure lending and investing. Dewey & LeBoeuf executives face both criminal and civil charges related to the fraud. The firm had half a billion dollars in debt and violated the Securities and Exchange Commission regulations with a 2010 private debt offering of $150 million including bonds which were purchased by several insurance companies. Much of the evidence lies in emails which the executives shared with each other detailing the fraud. There are 106 counts of indictments against Chairman Steven Davis, Executive Director Stephen DiCarmine, CFO Joel Sanders and Client Relations Manager Zachary Warren. Charges include grand larceny, scheming to defraud, falsifying business records, and conspiracy as well as securities fraud. The top executives directed employees to hide the financial condition of the firm from not only creditors and investors but also auditors and some of the firm partners. At least 7 former employees have already pleaded guilty and are cooperating with the investigation. Prosecutors have alleged that the financial fraud began in 2008 and it wasn’t revealed until the merger of Dewey Ballantine and Leboeuf, Lamb, Greene & MacRae in May of 2012. Prosecutor evidence of emails captures executives referring to a master plan to manipulate the accounting records as well as referring to the auditor as clueless. The FBI was taken aback by the display of confidence in the lawyer emails that they would, in fact, get away with the fraud especially considering that lawyers often give the advice to not communicate through email since it is traceable. The emails refer to bonuses ranging from 10-20% based off of the falsely reported financial data. Many are comparing this case to the Enron scandal and claim the law firm was, in fact, being run like a criminal enterprise. As of now, all four men have pleaded not guilty. The actions of the executives at Dewey & Leboeuf created demise for the stakeholders which includes the employees, the clients, the creditors and the investors of the firm. Financial fraud can be examined by business ethics theories such as Individualism – Friedman’s Economic Theory, Utilitarianism, Kantianism, and Virtue Theory.
Individualism
Milton Friedman's view on social responsibility in business was simply to follow the law. As an economist, Friedman emphasized that corporate officers had the sole responsibility of maximizing profits for the shareholders as long as the law was adhered to. As a for-profit corporation, the leaders should not use corporate funds for social welfare simply because they felt it was socially responsible. The officers should, in fact, pay the lowest wages possible, the least benefits and operate a business in the most cost-effective way regardless of potential external consequences as long as they were within the means of the law. The corporation’s sole purpose was to maximize shareholder earnings rather than spend shareholder funds for the social well-being of others. Simply, profits above all else as long as the law was followed.
The executives at Dewey & Leboeuf gave the illusion of maximizing profits for the investors and owners of the firm but were, in fact, destroying the opportunity for future profits by creating fraudulent accounting records that ultimately ruined the firm financially. They violated Friedman’s theory by breaking the law. The executives received bonuses based off of the fraud which was for their own social welfare and against the practice of paying the lowest wages possible and maximizing profits as part of Friedman’s Theory. If the executives were to follow Friedman’s theory, they would have to report accurate financial data and look for ways to improve the firm’s profitability through reduction of expense accounts and better accountability throughout the organization. The actions of the executives at Dewey & Leboeuf were solely in their own best interest and to the demise of the employees, creditors and investors.
Utilitarianism
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| Outside of Dewey & LeBoeuf in NYC |
Utilitarianism is an ethical belief that decisions should be made based on the overall consequences of the actions and how they impact everyone. It focuses on making decisions based on the greater good for all (or as many as possible). Utilitarianism takes into account a cause and effect mentality. These beliefs mean that corporations should be making decisions based on the outcome of the company as a whole, the shareholders, the employees and the consumers. Utilitarianism focused organizations would always be seeking a balance between satisfying shareholder profits, the end users of the products sold as well as the employees of the company.
Dewey & Leboeuf executives definitely did not make the decision to falsify accounting records based off of the overall consequences and how they impact all involved. The decision was for the benefit of few rather than the greater good for all. While the executives might have felt there was enough cause to commit fraud, they did not think through the effect of getting caught. Had the executives wanted to make the best decision based on how it would impact all stakeholders, they would have looked into the reasons for their lack of profitability and came up with solutions to legitimately strengthen the financial position of the firm to ensure greater good for all employees, clients, creditors and investors. Instead, they set the firm up to ultimately collapse and file bankruptcy.
KantianismKantian ethics focuses on the humanity aspect and ethical duty to do what society views as right and for the greater good without self-interest. The most basic and important relationship is personal and humane. The formula of humanity considers a means to an end where one must not treat others as a means to an end but to see them as ends in and of themselves that must be respected. Kant believed in an undeniable duty to all people and actions that are dependent upon these relationships. Corporations would set out to define a Maxim for Action that would execute a business practice for the greater good of the organization as well as the consumers of the product. In the review of the set Maxim, one wants to ensure it comes from the good will to “do the right thing”, otherwise, it must be consistent with good action or it won’t be praiseworthy. Decisions should be rational and logical and all of those affected should be able to make rational and logical decisions. Kant considers three types of motivation, self-interest, character or sympathy and the moral law or duty. In Kantianism, the only proper motivation is that of moral law or duty.
Everything that the executives at Dewey & Leboeuf related to falsifying financial data violated Kantianism. The executives used their positions as a means to their own ends without consideration for the humanity of the other employees, clients, creditors, and investors. They did the wrong thing for personal gain instead of the greater good for all impacted. Their decisions were neither rational nor logical and only served self-interest rather than the moral law or duty. They violated the law at the cost of all involved. The executives should have considered a maxim for action to improve the firm’s financial condition rather than lie about it and cover it up. Kantian management would have felt a moral duty to implement changes to correct the financial position of the firm or seek necessary business remedies. The executives at Dewey & Leboeuf chose self-gain over moral duty.
Virtue Theory
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| Steven Davis, Joel Sanders, and Stephen DiCarmine during a break in the Dew & LeBoeuf trial |
Virtue theory involves understanding the motivating factors behind ethical decisions and knowing that while some people are motivated by self-interest others, in fact, are motivated by compassion, and caring for the well-being of others. Steven Davis, Joel Sanders and Stephen DiCarmineThis philosophy requires ethics-related decisions to be based on the character of the person making the decision and requires companies to review its business goals and practices to reflect on setting a corporate culture and environment of individuals that have the same virtues to create the desired method of achieving company goals and workplace practices. Virtues are essentially positive character traits such as honesty, respectfulness, positivity and kindness. The opposite of a virtue is a vice. Vices include greed, envy, arrogance, and selfishness. The four primary virtues are prudence, justice, fortitude, and temperance. The executives at Dewey & Leboeuf demonstrated poor character with their emails as well as the financial fraud. They set the corporate culture up to fail with bad business practices that led to bankruptcy for the company and imprisonment for themselves and potentially others. There were poor workplace practices in place that allowed this corruption to occur. The executives were not honest or respectful but instead were greedy, arrogant and selfish. When the executives became aware of the struggling financial condition, they should have acted with prudence to develop an action plan that would turn the firm around rather than try to cover it up. There was no justice because the financial fraud is illegal as well as the fact that it was hidden from key people that were impacted by the demise of the law firm. Justice would have entailed full disclosure of the actual financial results. Rather than act with fortitude and courage to attempt to remedy the financial failure, the executives cowardly deceived through fraud their fellow management, employees, creditors, and investors. There was no temperance or humility on the part of the executives that participated in the financial fraud. Rather the opposite was displayed by ego, arrogance, and greed as revealed in the emails that were exposed in the case. The executives violated all of the primary virtues by committing financial fraud at the expense of employees, clients, creditors, and investors.
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