As another pundit among many slowing down to rubber neck the wreckage strewn from the Dewey & LeBoeuf crash, it’s hard to know where to start. The question that hovered on everyone’s minds since earlier in the year, as the media dissected every move there, was whether we were watching the disintegration, again, of a major law firm: one which counted in 2011, at least according to statistics cited by the firm, over 1200 lawyers, 300 partners, 26 offices and revenue pushing $950 million. A firm that won numerous awards for diversity and pro bono initiatives, and that made The American Lawyer‘s 2011 “A-List,” ranking among the top 20 law firms in the US according to revenue per lawyer, pro bono activity and associate satisfaction and diversity.
But it was also one with a debt load upward of $250 million (see Adam Smith’s entry for a good case for a total debt load of $350 million), including a rare-for-the-industry $125 million private placement bond issue, dozens of lawyers added laterally (and the dubious distinction of being one of the top ten firms in 2011 in lateral partner hiring), with some big names receiving fixed dollar guarantees possibly dwarfing by as much as 20/1 the average legacy partners’ comp.
As you may well know by now, Dewey & LeBoeuf was created by the merger of old-line law firms Dewey Ballantine (founded in 1909) and LeBoeuf, Lamb, Greene & MacRae (1929) in October 2007. (Full disclosure: at one time I worked as an associate and later as Of Counsel at LeBoeuf.) At the time, it was the largest merger in history of two U.S. law firms. In retrospect, just looking at the date of such a big tie-up gives one a sense of foreboding.
The merger occurred only months after Orrick Herrington & Sutcliffe’s merger talks with Dewey failed, the word on the street being that management styles and pension differences were key. Our entry back in February 2007 pointed out Dewey’s managing partner Morton Pierce’s 3300 annual billable hours vs. Orrick’s Ralph Baxter’s full time management responsibilities, quoting Pierce admitting at the time that “Management is not my passion,” which turns out to be one of the great understatements of the decade.
Dewey evidently had accumulated significant debt for defined benefit pension obligations, which, even with the pre-merger due diligence help of McKinsey & Co., LeBoeuf either did not discover or at least did not inform partners of until months after the merger. To cover those obligations and others, such as the cost of new office space, Dewey had been one of the pioneering law firms to float private placement bond debt, first in 1990 and again in 2001 and 2002–a trick that Dewey & LeBoeuf quickly copied in the spring of 2010, refinancing debt (for a lower rate, they said) in a $125 million private placement bond issued to insurance companies.
An interesting provision in the bond issue, if reports are accurate, was that below a certain revenue the firm couldn’t pay partners until they had paid bondholders, which did not apply, however, to partners with whom the firm had guaranteed comp arrangements, a group comprising around 25 partners at the time of the issuance. In 2011, after the firm’s lateral hiring spree, that number had risen to almost 100.
It All Falls Down
It was a stack of cards that looked fairly stable in the fall of 2007 but by 2012 all fell down over the course of only a few months–the headlines alone are enough to tell the story:
- Nationwide Layoff Watch: Dewey & LeBoeuf Starts Making Cuts (referring to layoffs and office closings) February 26
- Lean Times for Dewey and LeBoeuf March 15
- The Struggles at Dewey & LeBoeuf Continue March 16 (18+ partners have left since the first of the year)
- Law Firm Scrambles to Reassure its Partners March 18 (30+ partners have left)
- Do We Stay? Flee the Sinking Law Firm March 22
- Dewey Officially Doing Damage Control March 22
- Dewey Hires Paris Hilton’s PR Man to Fight Negative Press March 23
- Shake It Up! Dewey & LeBoeuf Overhauls Its Leadership March 27
- Dewey Losses Accelerate; Eight More New York Partners Head to the Exits April 17 (60+ partners have left)
- Storied Law Firm Pitches Plan for Rescue April 20
- Dewey in Discussions with Rival Law Firm April 21-22
- As Dewey Collapses, Partners and Retirees Face Big Financial Losses May 12
- Assigning Blame In Dewey’s Collapse May 13
- Dewey Tries to Save What Remains May 13
- Distressed Debt Investors Circling Around Dewey May 14
There were plenty of messy steps in between these headlines: firm announcements of planned reductions in lawyers and staff, of delays in paying associate bonuses, insistence by the firm that it was not in default under any of their loan agreements, charges of pervasive management secrecy and surprise partnership meeting agendas, off-the-record complaints by some of those departing that accrued partner compensation hadn’t been paid in some cases for years, and then reports of a partnership meeting announcing that the firm was taking a “second look” at whether those amounts would ever be paid. Speculation was that as much as 80% of firm profits were being paid to 10% of partners under guaranteed comp provisions given to old firm bigwigs and a passel of newcomers. Most recently, even partners with preferential agreements didn’t receive all the money they were owed. Said one oft-quoted ex-partner, “For years you had the haves and have-nots. What’s happening now, is the haves are not getting paid.”
Then there was the little matter of a $155 million mismatch between revenue numbers reported by the firm to The American Lawyer and those reported to the firm’s partners, tidily explained by their reporting of 14 months vs. 12 months of revenue. And among the typical array of outstanding lawsuits against the firm–including a smattering of SEC and labor law investigations–there was a $3 billion malpractice suit relating to predecessor firm LeBoeuf’s representation of General American Life Insurance Co. at a time when that firm, including some of the same individual lawyers, also represented MetLife, to whom General American’s LeBoeuf lawyers recommended it be sold. While the suit was evidently settled recently, no one seems to know the firm’s liability in the matter.
Let’s not forget that there was active management all along. The firm’s executive committee numbered 35 as of last fall, including two nonlawyer executives. Several someones were at least nominally in charge of minding the store.
Nonetheless, the missteps astound. In late March, Steve Davis, the beleaguered chairman, who had just been reelected last August for a five-year term, pronounced that “If the direction we’re taking the firm in was somehow disapproved of, then the reality is that there ought to be a change in management. But I don’t sense that.” Within days, he was ousted from management. And then the chosen PR firm to help refashion the firm’s image was the same one that represented party girl Paris Hilton and Chris Brown after he beat up his girlfriend Rihanna.
Dewey intellectual property litigator Henry Bunsow did acknowledge that the firm was dealing with what he called short-term financial issues but took the position that it’s common for firms to defer payments to partners, pointing to Howrey and Brobeck, Phleger & Harrison, firms where he had previously worked. Both of which, almost every commentator was quick to point out, are now defunct.
Of course, these are just the official steps and missteps and their consequences. There will be plenty of personal losses and repercussions ahead for the Dewey & LeBoeuf displaced, like those suffered by others who have been victims of bad firm management and a poor economy.
Lessons To Be Learned
So what are the lessons to bring home? The mistakes are so fundamental and so frequently warned against by this pundit and others, it’s extraordinary that they have to be pointed out again.
1. Bigger is not better. Convergence and Profitability, or Bigger is Only Bigger ; Largest Law Firms the Most Fragile?
2. Lateral hires are a difficult way to grow. The Challenges of Lateral Hiring
3. Successful mergers require diligently obtaining buy-in and following up with extensive integration. Big Merger Goes Bust
4. Large compensation spreads cause more problems than benefits. Large Firm Spread
5. Good communication, particularly in a large firm, is critical. Talking to the Troops
The New World
Paul Lippe of Legal OnRamp summed it up this way:
If you think about it, there’s no particular reason to imagine that the people running large firms are well-prepared to manage change. As lawyers, we’re oriented to a particular style of thinking—detail oriented, somewhat abstract, risk-averse, not especially emotionally intelligent, very short-term focused in terms of business activities, and with a somewhat odd presumption both that we’re more virtuous than other people and that more selfishness is usually a good thing.
If you have those attributes, spend 20-30 years working hard and loyally as a lawyer, find yourself in a position of middle or upper middle management, and then are selected to run the firm, what would have prepared you to lead a few thousand people in many offices with hundreds of millions or even a billion dollars of revenue? In a time of stability, maybe 90 percent of law firm heads could manage continuity. But in a time of change, how many are “wartime consiglieres”?. . .
Let me suggest that Dewey—like Howrey and Heller before it—is not simply an ill-fated miner, but further proof that pumping up short-term revenues instead of re-setting for the New Normal is a bit like lighting a match to look for methane build-up.
As we have also pointed out, (“Downsizing the Legal Industry”), Businessweek reporter Paul Barrett predicts that Dewey & LeBoeuf is just the leading edge of a “broad restructuring among some of the best known brand names in American law” due to an oversupply of lawyers.
These issues as they connect with the new economy are more comprehensively examined in our white paper “What the 21st Century Law Firm Looks Like: The Necessary Reinvention of a Reluctant Industry.”
“I think the world changed after the merger in October 2007” said bankruptcy specialist Martin Bienenstock, who toward the end was made a member of the new four-partner office of the chairman at Dewey & LeBoeuf and insisted as long as possible that “There are no plans to file bankruptcy. And anyone who says differently doesn’t know what they’re talking about.” Bienenstock also has the distinction of having been the first star hire by the newly merged firm in late 2007, coming from Weil Gotshal & Manges, with a correspondingly star level guaranteed compensation package. “And no one saw the new world coming,” he added.
When you’re feeling a little smug in your evaluation of your firm or personal success, you might keep that in mind. No one, not the firm nor the star, saw the new world coming.