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Citibank Hid Firm’s Financial Troubles, Ex-Partner at Dewey & LeBoeuf Says

There has been no shortage of finger-pointing since the collapse of the law firm Dewey & LeBoeuf, with most of the animus directed toward the firm's managing partner and its broader leadership.

bankruptcy
bankruptcy

Now, an aggrieved former partner has taken aim at an unlikely target: Citibank .

In a recent court filing, the former partner, Steven P. Otillar, says Citibank conspired with Dewey's management to hide the law firm's true financial condition in the months before its collapse.

Mr. Otillar made the claim in response to a lawsuit brought against him by Citibank seeking repayment of a $210,000 loan. The bank lent Mr. Otillar the money to pay for his capital contribution to Dewey when he joined the partnership in August 2011. (New partners typically must make a financial contribution to a law firm when they join.)

The filing said that Citibank had extended Mr. Otillar the loan as part of a fraudulent scheme intended to benefit Citibank and Dewey's management. By recruiting him and other partners to join the financially troubled firm in the months leading up to its demise—and collecting millions of dollars from them—Dewey's partners enriched themselves and kept the firm afloat.

Mr. Otillar blames Citibank for his ill-fated career move, saying the bank had a legal obligation to disclose Dewey's financial state. He said that he never would have joined Dewey and taken out a loan from the bank if he had an accurate picture of the firm's condition.

A spokeswoman for Citibank declined to comment. The filing was earlier reported by Reuters.

Mr. Otillar's claim echoes a lawsuit filed this year by Henry Bunsow, another former partner, that accused the firm's leadership of running a Ponzi schemethat had used money contributed from the newly hired to pay existing partners and finance the imperiled firm. Like Mr. Otillar, Mr. Bunsow joined Dewey just months before it filed for bankruptcy.

The accusations made by Mr. Otillar and Mr. Bunsow are just a blip in the broader legal fallout from Dewey's failure. Once one of country's largest law firms, Dewey entered Chapter 11 bankruptcy protection in May after a debt-heavy balance sheet and poor financial performance forced it to slash partners' pay, leading to a mass exodus.

In recent weeks, roughly half of Dewey's former partners agreed to return about $70 million of their past compensation that will help pay the firm's creditors, which are owed more than $300 million. By agreeing to this "clawback" settlement, these partners insulate themselves from future lawsuits related to the firm's dissolution. A group of partners who did not sign on to the settlement have asked a judge to appoint an examiner to investigate the unwinding of the firm.

The Manhattan district attorney is also investigating whether there were any financial improprieties committed by Steven H. Davis, Dewey's former chairman. Mr. Davis has denied any wrongdoing.

Mr. Otillar's claim highlights a major cause of Dewey's demise. The firm recruited Mr. Otillar in 2010 as part of an aggressive growth plan, one of several dozen lawyers lured to the firm with lavish multiyear pay guarantees. Mr. Otillar was part of a push to expand Dewey's Houston office and, with it, its energy-industry practice.

Yet, as Dewey added Mr. Otillar and dozens of new partners to its ranks with guaranteed contracts, it had already piled up millions of dollars in back pay owed to existing partners. The firm, even after taking a hit during the financial crisis, also took on substantial debt to fuel its expansion plans.

Citibank was one of the banks that facilitated Dewey's growth. It had a varied and lucrative relationship with the firm. Not only did it finance Dewey's operations through a large line of credit, but it also lent money to newly hired partners to cover their capital contributions to the firm.

Mr. Otillar said that when Dewey recruited him from Baker & McKenzie in 2010, he raised concerns about the firm's finances. Management assured him that the firm was in growth mode and that he was joining at the perfect time, according to the court filing. And then after he came on board, he said, Dewey and Citibankpushed him to participate in the bank's loan program so he could make his capital contribution as soon as possible.

Like virtually all of the more than 300 Dewey partners, Mr. Otillar has found a new home. Now a partner in the Houston office of Akin Gump Strauss Hauer & Feld, Mr. Otillar declined to comment.

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