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Avoiding Law Firm Implosions by Mandating Firms to Undergo Annual Stress Tests


Stock footage taken at Beaumont Hospital. 14:1...

Stock footage taken at Beaumont Hospital. 14:18, 28 October 2006 (UTC) (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

May, 2012

The horrific death spiral of Dewey & LeBoeuf, which started within the firm in October of 2011 and debuted its public spectacle in March, 2012, continues to evoke gasps and cries from all observers and participants. The latest horrors, not unexpected, are the loss of hundreds of jobs and the disappearance or dramatic reduction of thousands of pensions.  To be sure, more ugliness lies ahead: Draconian financial penalties to partners and prosecutorial inquiries of potential criminal liability for some key Dewey players.

The question I pose to you today, dear readers, is whether we are simply voyeurs or whether a sense of professional high mindedness should prevail so that urgent steps are taken to prevent the next seemingly inevitable law firm implosion? Did we come to the speedway pretending only to be interested in the competition but hoping for carnage or are we among those who seek to promote safety and prevent future crashes?

Dewey & LeBoeuf’s Current State of Play

The crescendo of public discourse of the Dewey disaster escalates daily. One of the most recent cogent pieces, sets forth a seemingly well informed and apparently factual exposition of the events leading up to the inevitable denouement.  Other well informed pieces analyzes the root causes of the Dewey & Leboeuf debacle.  A brief moment of levity was inserted into the mix as an avuncular former Dewey & LeBoeuf partner and department head stared straight faced into a  television news camera and calmly explained that the reasons for the firm’s implosion was that after Steven Davis, the now ousted chairman of Dewey, sat down with his partners in January and apparently revealed to them for the first time that the firm was functionally insolvent, headhunters had the gall to help partners find new positions, the media had the temerity to report on the facts and the district attorney had the audacity to conduct an investigation of serious allegations of criminal wrongdoing by senior managers at Dewey & LeBoeuf. These bon mots brought to mind the tale of the owners of a bus company who were called to task because they had employed an alcoholic bus driver who in his stupor caused a horrendous crash resulting in awful carnage. The owners calmly explained that they were not to blame.  The reason so many people were taken to the hospital was because of the fleet of ambulances that descended on the scene and the cause of so many reports of broken limbs was attributable to the zeal of the hospital’s ex ray technicians.

The fact is that since the 1988 implosion of Finley Kumble, then the world’s second largest law firm, there have been some 43 major law firm bankruptcies.  Each major law firm bankruptcy brings disgrace to the profession, disrupts lives, erodes confidence in the profession and creates a cascade of unemployment, poverty, death and disease (the rate of stress related diseases and mortality post law firm bankruptcies, reported only anecdotally, is staggering) and divorce (again, reported only anecdotally).

The blight on the profession is not simply the fact of these law firm failures, but the utter failure of the profession to address these failures and take any steps to prevent them. The appalling nature of this Ostrich like  stance is the generally accepted belief that a number of large law firm failures in the coming months seems inevitable.

The problem

The three inch thick annotated American Bar Association’s Model Rules of Professional Conduct that sits in every law firm in America is completely silent on the issue of law firm financial reporting, whether it be to the firm’s partners, its lenders, vendors or the media. The self reporting through The American Lawyer is largely recognized to be unreliable at best, or a large bad commercial joke at worst. Let’s simply look at the soft, puffing (and apparently demonstrably false) report that Mr. Davis gave The American Lawyer in March, 2012 as a prime example. Neither the firm nor Mr. Davis was called to task for gross overstatements of revenues; The American Lawyer, which derives significant revenues from theses annual reports and the hoopla leading up to them did not immediately exercise the requisite journalist imperative of rigorously subjecting Davis to the crucible of informed journalistic inquiry (although it did, to its great credit, after public disclosure of the Dewey deception, take the unprecedented step of unilaterally restating Dewey & LeBoeuf’s financial reports).

The Model  Code is also strangely silent on the issue of law firm governance. Based on what has this far been revealed and now seems indisputable, based on the public record to date,  the demise of Dewey & LeBoeuf is largely attributable to a complete and abject failure of proper governance. The tragic irony is that Dewey still boasts on its web site of its superlative corporate governance practice group. Read it now, while the web site is still up and running. If you missed it, here is a pertinent excerpt:

“Based on decades of experience in corporate law, governance, restructuring and litigation, Dewey & LeBoeuf has assembled a next generation capability to achieve clients’ goals… Our multidisciplinary approach enables us to develop special tools that allow directors and management to avoid ‘not knowing.’”

We can apparently now conclude that Dewey did not capitalize on its “generations of experience” in establishing a system for itself of checks and balances, oversight and accountability required of this generation of commercial enterprises. The firm’s culture seems to have been built on partners proudly “not knowing.” The firm’s mascot may well have been an ostrich; the firm seems to be a paradigm of the cobbler’s children going barefoot.

Of the two score and some firms that failed over the past three decades, all have seen complete failures of appropriate governance, inaccurate financial reporting and excessive leverage and debt.  Some, like Dewey have fallen victim to excessive compensation paid to laterals.  More have flawed partner compensation systems.

The Solution

The need to address these issues could not be more urgent. To rely on the sloth of the ABA to urgently address these issues, then followed by fifty-one local bar rule making deliberative bodies, which collectively makes the ABA seem lightening-like, would require the complete suspension of disbelief. To suggest that large law firms could be brought into line fearing disciplinary action by state disciplinary bodies would require the confidence of a naïf.  Despite the three inch thick annotated tome that comprises the Model Rules, the overwhelming number of disciplinary actions brought by these bodies only relates to escrow account defalcations and disbarments of convicted felons. Witness the fact that the current public record shows an ongoing criminal investigation of Dewey managers, as well as seemingly clear evidence of deception by some of these lawyers, some rather facially convincing prima facie evidence of securities fraud by the firm as an issuer of securities, violations of fiduciary obligations to partners, violations of statutory duties to employees and violations of rights owed to the pension beneficiaries of the firm. Certainly, there may well be complete defenses to each of these matters and I invite my many Dewey readers (or their counsel) to provide them below. But the real point is that while investigations by disciplinary committees are secret, we each can sleep soundly tonight assuming that no such investigation has commenced.

Rather.  the solution to this clear and present danger of future large law firm failures must come from BigLaw itself and its stakeholders, including law firm lenders, institutional clients and the academy.

What is required is for law firms to retain independent professionals who would annually conduct a stress test, having full and unfettered access to all of the firm’s data and information,  and then report to the firm and its partners (equity and non-equity) that (a) the firm has adequate procedures in place to provide adequate oversight of its management group; (b) an appropriate system of accountable governance is in place; (c) the firm’s financial reporting (audited or not) fairly states the firm’s financial condition as of the reporting dates; (d) the firm’s general counsel is timely provided with all information necessary to discharge his or her duties and that he or she has full and open access to all relevant information as well as the ability to report any concerns to a full governing body; (e) the firm has an appropriate risk assessment and management officer, adequately performing the require objectives of that office; (f) the firm has an appropriate mechanism in place to avoid conflicts of interest and to otherwise insure full compliance with all applicable ethical rules, laws and regulations, (g) the firm maintains adequate insurance coverage; and, finally, (h) no set of facts was discovered that raises any apprehension that the firm is at risk in continuing as a going enterprise. Any failures or suggested improvements in any of these areas should also be described in detail. Similarly, any deficiencies detected in previous reports and the adequacy of any steps taken to ameliorate those deficiencies should be further described. Should management of the law firm elect to discharge the independent professional because of any disagreements in interpretation, the professional should be contractually bound to disclose those facts to the partnership.

There may well be other items that should be included in these reports and suggestions will doubtless appear in the comments section below. If you have a thought, feel free to pony up.

I would further propose that the independent professionals conducting these tests prepare at least two forms of reports: The first being the detailed report described above and the second a summary form which might be made available to clients and prospective clients, lateral candidates and law schools as part of a NALP disclosure. Every one of these stakeholders has a simple right and need to know that the firm will be there next year.

As I suggested, it is extremely unlikely that any regulatory body will timely and efficiently create a mandate for these reports. Rather, a forward looking well managed law firm will certainly see the universal benefit and advantage of having such reports issued to provide comfort and assurances to its stakeholders and to avoid being tarnished by the reputation of a failed law firm.  The reports would be potent marketing and recruiting tools. These reports would certainly be most beneficial to top down management style law firms and those that operate in a black box.

I could certainly also see institutional lenders and clients routinely requiring their borrowers and counsel, respectively, requiring these stress tests, particularly as they have been seriously burnt by previous law firm failures and certainly as to lenders, they may correctly feel that what’s sauce for the goose is sauce for the gander.  It will, I suspect, take only a very small number of lenders and important clients to make these reports a required norm; indeed, mandatory. Similarly, it will take only a handful of the AmLaw 200 to come forward and proudly offer these reports to make their annual production an industry requirement. The market will require nothing less.  The implosion of a law firm casts a pall on the entire profession and creates a blot on every large commercial law firm. Those blots can be avoided by having  large law firms don the Teflon that these stress tests should provide.

© Jerome Kowalski, May, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

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Dewey Need to Take a Pledge?


The National Assembly taking the Tennis Court ...

The National Assembly taking the Tennis Court Oath (sketch by Jacques-Louis David). (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

April, 2012

 

Again, I am constrained to comment on a rather absurd story appearing in a Reuters dispatch concerning a venerable law firm listing along a perilous course. Leigh Jones, a capable journalist now reporting for Reuters and, I suspect in this instance taken in by the firm’s Hollywood Ninja flack, posits that this firm can hold steady and survive the storm if a “few key players” stay on board (all men) and steer the firm to safety.

The proposition is dubious as a general matter. Given where this law firm finds itself right now, the notion requires a complete suspension of disbelief. Sure, there are a few notable large law firms that achieved remarkable success because of the drive, skill and leadership of a few key players.  Boies, Schiller & Flexner, Kassowitz, Benson, Torres & Friedman and Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor come to mind. However, Dewey & LeBoeuf is not, in its current incarnation, the product of a few driven leaders of the bar.  Dewey is a century old global law firm with 1,000 professionals (maybe fewer by the time you read this) and 24 offices. The notion that a law firm in crisis can survive the loss of 50 partners and a complete crisis in confidence by and among all of its stakeholders by keeping a small cadre signed on to stay the course is simply not credible. Collaboration, the key to law firm survival, is painfully missing here.

Ms. Jones goes on to note that Dewey “… firm leaders say that the vast majority of the departures are due to the firm’s decision to downsize in order to increase profitability.”  Let’s look at the numbers: Six of thirty-five executive committee members have left, four of nine office managing partners are gone and some seven practice group leaders have checked out. And the folks at Dewey want you to believe that this loss of leadership – previously key parts of this firm’s management who have credible client following will enhance profitability.  What we do also know is that one fellow who certainly was tossed out the window (I guess to “increase profitability”); he was the firm’s duly elected chairman who took his defenestration with style and grace.

The firm provocateur then identified the seven amigos on whose shoulders the firm’s survival can be bound: “The seven key Dewey lawyers … are Martin Bienenstock, a bankruptcy attorney; Jeffrey Kessler, a litigator; Morton Pierce, a mergers and acquisitions attorney; Ralph Ferrara, a regulatory and corporate governance lawyer; Michael Fitzgerald, a corporate securities attorney; Bruce Bennett, a partner in the business solutions and governance group; and Berge Setrakian, an international commerce and corporate lawyer.” Well, gosh, that’s neat. Each of the Magnificent Seven were in place as part and parcel of the cadre that charted the disastrous course, and, presumably prime beneficiaries of the healthy succor doled out to the big producers. The message here is that the Magnificent Seven chose poorly when they allowed the now departed executive committee members, office heads and practice group leaders to assume positions of law firm leadership.

But, these seven keys to success do not quite seem to be reading from the same playbook.

Marty Bienenstock advised Reuters that “[t]wo weeks ago, more than 50 business-generators each individually pledged to stay with the firm.”  Mort Pierce, the firm’s vice chairman saw it differently: “There was no formal pledge, no secret handshake,” he said. Asked whether he was part of the “consensus,” Pierce said, “There was a meeting and I was there.” Ralph Ferrara acknowledged that he is busily fielding calls from the firm’s competitors seeking to lure him away. Jeffrey Kessler offered some faint praise: “I am committed to Dewey and believe the firm will prosper.” Bennett, Setrakian and Fitzgerald did not respond to requests for comment.

None of these fabulous lawyers offered up the solid pledge that Bienenstock averred was in place. And these are the believers.  One who didn’t drink the Kool Ade is John Altorelli, an outstanding corporate lawyer and former Dewey executive committee member who is now at DLA Piper. Altorelli, who ironically actually began his career at LeBoeuf, thought well of his former associates and publicly opined that while most of the folks at Dewey were quite good, management (of which he was a member) was “obtuse.” Altorelli also plainly stated that the king has no clothes: “I’m not sure how [Dewey] can weather the departures.”

It’s not just the previously announced departures.  Bienestock probably had it right when he spoke of the “pledges.”  He is an outstanding bankruptcy lawyer, after all, and knows how valuable pledges can be. The key here is for a public announcement, with no wiggle room, in which at least the  Magnificent Seven and hopefully the Key 50 make an unwavering vow to stay with the firm until either they retire or events force a shutdown. This pledge is certainly unenforceable in any judicial proceeding, but it is crucial in the court of public opinion, where the firm is now being badly battered. These outstanding lawyers have much to lose in the event the firm implodes and for that reason should be motivated to provide an oath of loyalty.

© Jerome Kowalski, April, 2012. All Rights Reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

Dewey Shoot the Lifeboats as Our Partners Seek Safety From Our Law Firm in Stormy Seas?


Telegram from SS Amerika via SS Titanic on loc...

Telegram from SS Amerika via SS Titanic on location of two large icebergs 14 April 1912 (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

April, 2012

I recently wrote about a major global law firm which now appears to be very publicly flaming out or perilously close to doing so.

The media trouncing this law firm is going through is, quite simply of its own making. But, we need to learn from all of our experiences and observations. Thus, some observations, as this high drama, cum tragedy, unfolds:

  • Do not publicly grossly overstate your financial condition. You will get caught and  it will be embarrassing, let alone impair your credibility. As previously reported, this law firm reported to The American Lawyer that its 2011 gross revenues were a robust $935,000,000 and a nanosecond later advised its partners that gross revenues for 2011 were actually only $780,000,000.  Sure, everybody puffs their AmLaw numbers, but $155,000,000 is well beyond mere puffery.
  • When you lose about 50 partners in a matter of weeks, including practice leaders and office heads, don’t heap excrement on your former partners or the law firms they are joining. Shooting at these partners as they board their life boats does nothing to enhance the firm or its financial vitality. To suggest that losing these lawyers will have no economic impact on the firm and was all for the best of the law firm, sends pretty abysmal messages: The firm has no loyalty of any kind to its partners of many years; management of the firm fell short in discharging its management duties in not realizing that all of these practice leaders and other escapees contributed nothing to the firm’s profitability; and the AmLaw 100 and magic circle law firms these folks are joining are pretty dumb in not conducting adequate due diligence on the lumpen masses leaving the Titanic seeking safety. This sniping at the lifeboats lacks credibility and shows your mean and vindictive side.

When Chico Marx was caught by his wife en fragrante delicto  in Duck Soup he violently protested his innocence and fidelity even as his wife peered down upon him in bed with his paramour. He famously said “Who are you going to believe, me or your eyes?” Phineas T. Barnum said that nobody ever went broke underestimating the intelligence of the average American.  But, nobody ever saved a floundering law firm by denying what is in plain sight and underestimating the intelligence of a firm’s partners, associates, clients, lenders and competitors.

© Jerome Kowalski, April, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

Trending for Law Firms in 2012: What to Expect This Year


Trending for Law Firms in 2012: What to Expect This Year.

Trending for Law Firms in 2012: What to Expect This Year


United (States) Parcel Service.

Image by matt.hintsa via Flickr

                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      January, 2012

 

Thirty items affecting the legal profession that are guaranteed to dominate the headlines in 2012

It is that time of year when you are entitled to know what to expect for this new year.  Accordingly, here is what the hot trends for 2012 will be:

  •  Continuing decline in legal spend on outside counsel.
  • As law firms continue to more efficiently and timely bill for matters and, the trend of law firms whittling away at their inventories (WIP), while not being able to replace that inventory because of the lethal combination of  reduced headcounts and  reduction in the legal spend, lenders to law firms will require more stringent reporting and will in some instances, reduce available credit lines.
  • Deleveraging of work with partners and other senior lawyers billing increased hours and the trend towards the inverted pyramid model continuing.
  • Law firms establishing subsidiaries to engage in services complementary to their services, including e-discovery, document review, legal staffing services, investment advisory services for high net worth clients and the like.
  • Congress, the courts and the judicial conference will make serious progress about modifying e-discovery rules, bringing down their current gravity defying costs as well as dampening down the torrent of spoliation claims and the attendant Herculean tasks companies need to take to avoid these claims.
  • Given weakening retail sales and decreased demand for most commercial real estate, buyers will emerge to take advantage of attractive pricing on some properties, perceiving real value opportunities.  Private equity funds will move in to this arena in a big way.
  • Increased  focus on collaboration, within the law firm, vertically with clients and horizontally with vendors of support services and co-counsel. Extranets will be enhanced and new technologies will emerge to provide greater transparency and real time feedback and collaboration.
  • More paperless offices.  With the bulk of communications now being electronic and the expected decline in timely services from the United States Postal Service likely to increase the trend of communicating electronically, law firms will be incentivized to go completely paperless. Incoming snail mail will be scanned and digitized. The huge cost of storing paper documents will evaporate.
  • Increased use of outside facilities management companies for mail, fax, reproduction, IT, bookkeeping and legal records departments.
  • Law firms will make more investments in technology than in people. The IT hotspots are knowledge management, software to farm information for the purpose of responding to RFP’s, making an AFA proposal, based on prior similar work handled by the firm and for project management purposes.
  • Every lawyer will tuck an IPad under his or her arm and no lawyer will attend a meeting without opening one. Continued development of apps for lawyers will simply make this tool not only essential, but a lawyer not having an IPad at the ready, risks a serious loss of credibility.
  • Tough times often brings out the worst in some folks.  Last year’s small spike in BigLaw partners and even other law firm personnel who engaged in defalcations of client funds will sadly probably continue.  Look for more headlines of such tales.  Law firms will be well served to now tighten controls and checks and balances regarding client finds.
  • There will be periodic announcements by a partner at a BigLaw firm stating “after 25 rewarding and wonderful years with my former firm, I have decided to open a solo practice so that I can work more closely with my clients.”  Sometimes these announcements will be sincere and genuine.  Sometimes these announcements really mean “I’ve been on the job market for almost a year since I was asked to leave my former firm.  I haven’t been able to find a new slot and my firm wants me out right now, so I may as well give this a try.”
  • Virtual law firms, such as Clearspire and Rimon will continue to grow and gain real traction and increased market credibility.

I am quite sure that we have been fairly thorough and inclusive. If you think we left anything off the list, please let us know by commenting below. Similarly, if you think we are wrong about any of the above, post a comment.

It’s going to be a challenging year.  Please fasten your seatbelts, hold on to the handrail and make sure that your arms and legs do not extend outside your car. We are in for an interesting year.

© Jerome Kowalski, January, 2012.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

The Coming Invasion of the Body Snatchers: Are Offshore Law Firms Going to Invade the United States?


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