Last year, the mega-law firm Dewey & LeBouef generated revenue totaling $782 million. It was the 20th largest firm according to the National Law Journal. Its clients included the Los Angeles Dodgers, the NFL Players Association, and eBay. But over the last five months, 206 of its partners defected. It currently owes approximately $315 million to creditors. There is a criminal investigation involving a pension plan allegedly underfunded by $80 million. Last week, the legacy firm, which dates back to 1909 (and whose "Dewey" refers to the Thomas Dewey), filed for Chapter 11 bankruptcy protection.
How can such a legal powerhouse die? Last year, I blogged about the demise of Howrey, based here in Washington. In that case, much of the business relied on construction, which took a hit after the recession. Then came the defections. Dewey & LeBouef certainly suffered from the recession, but it also spent millions to acquire star lawyers the way Dan Snyder spends to bulk up his Redskins—a not always successful gambit.
As a Thomson Reuters timeline lays out, it cost the firm $5.5 million a year to acquire sports litigator Jeffrey Kessler, $6 million for bankruptcy lawyer Martin Bienenstock, and another $3.5 million annual salary for M&A attorney Richard Climan. More money was spent to keep partners on board.
As the Wall Street Journal explains,
Ultimately, the deals left little money for hundreds of rank-and-file partners. More recently, even some with the deals started getting shortchanged by the firm, according to current and former partners, prompting a trickle of defections that by May became a flood.
In a separate Journal interview, Bienenstock deflected the partner-pay issue, saying, "I don't want to point a finger at any single part of the firm that wasn't performing. You want to remember the time. In 2008 and 2009, every Wall Street law firm suffered, had layoffs and delayed their new-associate start dates. I think the world changed after the merger in 2007, and maybe some of the contracts given to people were not as prudent in the new world. And no one saw the new world coming."
Bienenstock has since fled to Proskauer Rose.
Although the firm, which had offices in places like London and Dubai, is winding down quickly (a visit to its homepage is grim), it is only the beginning. Aside from the Manhattan District Attorney's Office investigating the pension, more lawsuits are expected. "Bankruptcy administrators for failed firms often sue former partners to recover money paid out before the firm went under," the Journal notes. "They also target law firms where ex-partners from a dissolved firm go, taking unfinished legal work with them, under the theory that profits from that business rightly belong to the old firm." Meanwhile, as the National Law Journal reports, "On May 10, a document specialist filed suit, claiming inadequate notice of layoffs under the WARN Act." (The publication's timeline is especially useful.)
Ironic that the firm, which suffered a string of lawyer defections, will now be deluged by lawyers.
There was a time when partners were cultivated and partnerships were extended only after years of service. As Michael Bobelian at Forbes writes, "[firms] wanted their future partners to come from their own ranks, to inherit the know-how passed down the generations, to find a mentor or two (and one day, serve as one), and to build a degree of attachment and loyalty to a firm one might compare to a marriage. In this prevailing ethos, the idea of a partner switching firms was even more abhorrent, not to mention rare." Today firms are much less personal and much more like any other cash-and-carry business. It's fungible. There isn't the same sense of fortunes rising and falling together or a love for "the culture." In fact, there is no stable culture for associates to develop, what with all the mobility and disaffection in their midst. And why even linger at a firm when corporations are hiring in-house counsel—a less expensive alternative in many cases (not to mention small companies that specialize in documentation services and digitization)?
Upon graduating from law school, an attorney friend of mine landed his first job at the premerged LeBouef, Lamb, Greene & MacRae. I remember him calling to tell me he'd gotten firm tickets to a Caps hockey game. Like many big firms, LeBouef had courtesy tickets to various sporting events and, as it turned out, hockey was the least in demand. I'd never seen an NHL game live, so I went. The seats were on the club level, midsection, second row. A server came down to take our order. We ended up seeing a few Caps games while my friend was at LeBouef, and it was a great time. At least while it lasted.