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Woes at Law Firm Business Deepen

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Updated April 27, 2012, 7:38 p.m. ET

Woes at Law Firm Deepen

Probe of Dewey & LeBoeuf Focuses Largely on Law Firm's Chairman, According to Internal Memo
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By JENNIFER SMITH, ASHBY JONES and STEVE EDER

One of New York's largest law firms, already engulfed in a financial crisis that threatens its survival, is being investigated by the Manhattan district attorney's office. The firm, Dewey & LeBoeuf LLP, has been wrestling with the effects of big guaranteed pay packages that were handed out to top lawyers even as corporate clients were pushing back on legal fees. Those two factors, along with heavy debt and a wave of departures by partners, are dragging down Dewey, formed four years ago by merging two storied law firms. The district attorney's investigation is focusing on former Chairman Steven Davis, who held that role from 2003 until several weeks ago, when his responsibilities were diminished in a management shake-up, according to an internal firm memorandum reviewed by The Wall Street Journal. A call to Mr. Davis at his office Friday wasn't returned. A spokeswoman for the Manhattan district attorney's office declined to comment. More
Dewey & LeBoeuf Faces Debt Deadline (4/24/2012) Dewey in Discussions With Rival Law Firm (4/21/2012) Storied Law Firm Plans Rescue (4/20/2012) Read more at the Law Blog

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Dewey is considering filing for bankruptcy protection, and also is trying to arrange a merger with, or transfer lawyers to, 1,700lawyer Greenberg Traurig LLP, according to people familiar with the matter. A Greenberg Traurig spokeswoman said the firms have had "preliminary discussions" but no commitments or agreements have

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Woes at Law Firm Deepen

been reached. The problems at the law firm weren't fully clear until last October, when the firm held a partnership meeting in Dewey's Midtown Manhattan base. For months, scores of the firm's 300 partners had been paid far less than they had expected as profits ran short. Mr. Davis revealed a startling statistic at the meeting. Some 100 lawyers had special pay deals of different types, meaning the firm would have to pay out tens of millions before other partners saw a dime. "You could see the light bulbs going off in heads around the room," said a former partner. "I think a lot of people realized then the depth of the firm's

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New York Prosecutor to Investigate Possible Wrongdoing at Dewey & LeBoeuf - WSJ.com

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troubles." Law firms often guarantee salary when they bring in lawyers. But the Dewey deals stand out because of the duration of the commitments, according to current and former partners. The guarantees snowballed in subsequent years under Mr. Davis and his executive director, Stephen DiCarmine. Even nonpartner managers, such as Mr. DiCarmine, were able to cut deals that pulled in $2 million a year, current and former partners say. Mr. DiCarmine didn't respond to requests for comment. A Dewey spokesman said Friday the "practicing members" of its office of the chairmanJeffrey Kessler, Richard Shutran, Martin Bienenstock and Charles Landgraf "each voluntarily deferred a significant amount of the full comp they were due to receive in 2011, and in some cases prior years as well, for the good of the firm." The firm didn't comment on whether Messrs. Davis or DiCarmine had deferred pay. Dissolution of Dewey & LeBoeuf, should it occur, would leave a long line of creditors, including partners owed money, headhunters and bondholders. Should the firm declare bankruptcy, the earnings of some partners could be subject to clawbacks from creditors, as happened several years ago after the failures of the California law firms Heller Ehrman LLP and Brobeck, Phleger & Harrison LLP. "Dewey and LeBoeuf would be the biggest failure of all," said David Wilkins, a Harvard Law School professor. Dewey & LeBoeuf was born with the goal of creating an international juggernaut: a 1,400-lawyer firm that would scoop up lucrative corporate work all over the world. It was driven largely by Mr. Davis, who won the sole chairmanship of LeBoeuf, Lamb, Greene & MacRae LLP in 2003. Described by some as a polished guy in "Yale clothing," Davis was "a vision guy, not an execution guy," said one former LeBoeuf partner. Tracing its roots back to 1929, LeBoeuf Lamb had for years thrived largely by catering to clients in two steady, if unglamorous, industries: insurance and energy. Dewey Ballantine, started in 1909 and once run by former New York governor and presidential candidate Thomas E. Dewey, had prime Manhattan real estate and a well-regarded corporate practice, including a vaunted mergers-and-acquisitions group. The combined firm was saddled with debt. LeBoeuf's obligations totaled about $150 million, including about $81 million in pension obligations, while Dewey owed about $122 million, $108 million of which were pension-related, according to a 2007 memorandum prepared before the merger for the firms by consultants at McKinsey & Co. reviewed by The Wall Street Journal. McKinsey declined to comment. To prevent the partner exits that typically accompany law-firm mergers, Mr. Davis offered new pay deals to key partners. They included mergers-and-acquisitions lawyer Morton Pierce, as well as Messrs. Kessler and Shutran, according to current and former partners. Mr. Pierce declined to comment on his pay.
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Steven Davis, former chairman of Dewey & LeBoeuf

All kinds of arrangements were struck. Some were actual written contracts.
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New York Prosecutor to Investigate Possible Wrongdoing at Dewey & LeBoeuf - WSJ.com

29/04/2012 09:16

Others were "soft guarantees" that the firm generally honored but which lacked the same hard legal edge. While some junior partners made as little as $300,000 a year, other partners were pulling down $6 million or $7 million, according to former and current partners. As the guarantees piled up on the cost side of Dewey's accounts, the income side remained under tremendous pressure from the 2008 credit crisis and a slowdown in demand for legal services from big corporate clients. In 2008, the firm failed to meet its revenue target. The firm also missed those targets for the next three years. In 2008 and 2009, the firm tried to cut costs by closing offices and laying off staff and lawyers. But profits continued to fall. Every month, law firm partners collect their "draw," a base amount given to all equally; at Dewey, that is around $25,000 a month, according to current and former partners. Generally the remainder of a partner's pay gets paid out in the latter half of a firm's fiscal year. If a firm falls short of its target, partners typically end up getting less than they anticipated. At Dewey & LeBoeuf, when profits fell short, some partners were told they would get the money in years to come, in the form of IOUs. In 2010, as the end of the year approached, Dewey partners started getting emails from firm leadership, announcing that payouts were getting delayed. Often, the reason given was "collections"partners weren't nagging their clients to pay up. At large law firms, executive committees of senior lawyers are supposed to monitor financial performance, though it isn't uncommon for power to be centralized among a few leaders. The Dewey committeewhich included some lawyers who had guaranteed compensation deals themselvesdid little to rein in pay, according to a current partner and several ex-partners. In an interview Thursday night, Mr. Pierce, a member of the executive committee, said, "I think the members of the committee did the best job that they could under the circumstances." Mr. Shutran said Friday that the firm's partnership agreement gave broad authority to the chairman and described the mission of the committee as "acting on what was brought to it by the Chairman." As pressure on the firm's finances continued to build, Dewey kept hiring. In 2011, the firm picked up 37 new partners, including prominent bankruptcy lawyer Bruce Bennett in Los Angeles. Star partners typically come with junior partners, associates, secretaries. The rule of thumb is top performers need to bring in at least three times their compensation to make the firm a profit. Some of the new Dewey hires didn't, according to one current partner. The financial crunch intensified. The American Lawyer magazine estimates the firm's revenue sank to $782 million last year from $1.03 billion in 2008. Dewey's management disputes those figures and says revenue last year was $935 million. By the beginning of 2012, the tab for deferred compensation had grown to more than $100 million, according to one current and one ex-partner. At a partner meeting in late January, Mr. Davis fielded questions about where the money had gone. It became clear most people wouldn't be getting anything more. Mr. Davis called an end to the meeting. In March, Mr. Davis told the firm that it was starting to downsize and that it expected some partners to leave for other firms. By the middle of the month, at least 30 had gone. Days later, the firm said it would relocate Mr. Davis to London, where he would practice law and share management power with four other partners. For the moment, he is still in New York, Mr. Shutran said. The layoffs were needed to cut costs. In 2010, Dewey had sold a bond of at least $125 million to a group of insurance companies to refinance existing debt at more favorable rates. Dewey also had a revolving $100 million credit line with a syndicate of banks led by J.P. Morgan Chase JPM -1.05% & Co. As of last week, the firm had drawn down about $75 million, according to people familiar with the matter. It is unclear how Dewey
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New York Prosecutor to Investigate Possible Wrongdoing at Dewey & LeBoeuf - WSJ.com

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used the money. J.P. Morgan declined to comment. Dewey's leaders began considering a novel rescue plan that would involve a prearranged trip through bankruptcy court and a partial merger with another law firm. Many Dewey partners aren't waiting. Recruiters said they have been flooded with resumes from Dewey lawyers, including top rainmakers. Mr. Pierce himself has been discussing a move with at least three law firms, according to people with knowledge of the matter. Asked about that on Thursday, Mr. Pierce said: "I spent all day in a conference room at the office and continue to work at Dewey." The latest sign of stress came at the beginning of the week. In a Sunday night memo, the law firm signaled its credit was no longer good with the car services that take partners home after late nights on the job. Two were no longer to be used. Instead, partners could use a third service. But only if they paid with their corporate or personal cards.
Reed Albergotti contributed to this article.

Corrections & Amplifications Dewey & LeBoeuf has asked two of its lawyers, Harvey Kurzweil and Seth Farber, to conduct an internal investigation. An earlier version of this article misspelled Mr. Farber's surname as Faber. Write to Jennifer Smith at jennifer.smith@wsj.com, Ashby Jones at ashby.jones@wsj.com and Steve Eder at steve.eder@wsj.com
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