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For Law Firm Liquidators, There’s a Lot of Gold in Them Thar Hills Aside from Jewels


For Law Firm Liquidators, There’s a Lot of Gold in Them Thar Hills Aside from Jewels.

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Saving Dewey & LeBoeuf


Saving Dewey & LeBoeuf.

Saving Dewey & LeBoeuf


Dewey

Dewey (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

May, 2012

The current state of the public record suggests that Dewey & LeBoeuf began its ill fated trip to disaster years ago. It appears that by last winter, the partners knew that a brick wall was hurtling at them at 200+ miles an hour. The question nobody has yet asked is whether the firm could have been steered to safety at that late date.  I would suggest that with capable leadership, enjoying the confidence of the firm’s partners, associates and other stakeholders and a collaborative approach by the full partnership it was possible to avoid the oncoming brick wall.

The starting point would necessarily be the firm’s October, 2011 partners’ meeting at which the partners were first told that about a third of the firm’s 300 partners had special deals under which their compensation was guaranteed at fixed lucrative amounts, not pegged to the firm’s profitability. The net effect was what Professor Steve Harper and others called a fatal “partnership within a partnership” and a Ponzi scheme. Much ink and much of the Internet ether has already been spent on why this dubious compensation scheme just doesn’t work and I won’t add to that discussion here. The point here is that reasonably intelligent lawyers, hearing a state of facts that commands a single conclusion, namely, that their law firm was on a catastrophic course, had the capacity to make critical flight or fight decisions. It appearing that no viable or credible stay and fight decisions were presented, a critical mass of vital partners chose to begin heading for the exit ramps.

The survival course that was actually foisted on the gathered leaders had no appeal. The “Plan” was to reduce headcounts, including at the partner level, by some 5% and foist a deferral of guaranteed compensation agreements. That cannibalism just doesn’t instill confidence since any reasonably intelligent lawyer would (and apparently many if not most did) conclude that this “plan” sounds dumb and other personal options should be explored. The flaws in this “plan” were essentially a lack of confidence in the incumbent leadership, an historic lack of transparency in management which did not appear to be changing in any way, kicking the can down the road with a hope for a change in luck was recognized as the foolhardy aspiration of dice rollers on a losing streak, a fear of being kicked under the bus in inevitable subsequent partner reductions as the “plan” inevitably spun into failure.

Instead, the only viable plan required (a) a complete, detailed mea culpa  from the firm leadership; (b) a demonstrable and credible guarantee of  full transparency by firm leadership with a new reliable form of governance with appropriate checks and balances in place; (c) a detailed explanation of the disastrous personal consequences to each partner if the firm should implode; (d) implementation of a public relations crisis management plan;  and (e) a signed pledge by each partner to stay the course.

There was no acceptance of responsibility by incumbent management.  Rather, months later the firm’s managing partner was unceremoniously tossed under the bus.  The previous clandestine management style was replaced by an apparently equally stealthy “office of the chairman.” Partners did not fully appreciate that massive escapes to the exit doors were more likely to be collective defenestrations.  Subsequent media disclosures were replete with, shall we say, dissembling, to be kind.  And public claims and denials by the partners of the existence of a pledge made for mirth.

Would this plan have worked? It was only tried once before when the New York office of a national law firm (the New York office was itself previously a proud stand alone law firm)  confronted with the fact that the law firm was destined for implosion because of claimed improprieties at other branch offices. The New York office adopted each element of the plan outlined above, with resounding success. But would this plan have worked for Dewey & LeBoeuf? We’ll never know. But we do know the “plan” it chose was an abject and tragic failure.

© 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

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


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

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

Dewey, Sex, Lies and Videotape


Cover of "Sex, Lies, and Videotape [Blu-r...

Cover of Sex, Lies, and Videotape [Blu-ray]

Jerome Kowalski

Kowalski & Associates

May, 2012

 

Do you really want to be a partner in a law firm?

As we all daily sit transfixed staring at the horrific train wreck of Dewey & LeBoeuf, a firm with glorious legacies, many have already begun to undertake the post mortem to try to determine what went so horribly wrong as to bring the demise of one of the twenty largest law firms in the nation, a swift final journey that is barely two months in duration, which is remarkable for a 1,000 lawyer firm with a century of history.

.  The most comprehensive piece that has appeared to date comes from the brilliant and articulate Bruce MacEwen, writing as Adam Smith, Esq., in which Bruce dissects what is now obvious to most informed observers.  Some claim that some of the partners were simply too greedy and that the firm’s leadership was too eager to accommodate that greed, providing those partners with guaranteed incomes, regardless of productivity or law firm profitability. The fault, according to some, is base criminality and greed at the hands of the firm’s leadership.  Still others point to the firm’s unsustainable leverage:  Well over $700,000,000 in bank, institutional,  legacy and similar liabilities (not taking into account current liabilities for rent, wages, and vendors), an amount that simply cannot be sustained under any circumstances on the backs of 300 partners, bringing in $900,000,000 in gross revenues.  There are those suggesting sexual peccadilloes by the firm’s senior leadership.   Still others point to ongoing deception by current firm leadership, which one day encouraged partners to seek alternative employment in rather plain language and the next day, in the tradition of Lewis Carol, said that the epistle didn’t mean what it said. In other instances of unfortunate lack of candor, the firm’s leadership said that help was on its way in the form of a major law firm merger partner which was being discussed with “a number” of firms, only to fail to mention that all of those preliminary inquiries were politely previously declined.   Or one day promoting a bankruptcy strategy, while eschewing bankruptcy as an option a day or so later, no matter that the initially promoted bankruptcy strategy had no likelihood of succeeding.

All of the facts will emerge as the long slog of litigation and bankruptcy proceedings take their inevitable course, Presumably, some depositions of key players will be videotaped for the benefit of interested parties, courts and perhaps the movie (documentary or fictionalized) that seems to be inevitable.

Instead of dawdling too long over all of the foregoing (too much ink and space on the Internet has already been taken), I turn to the repeated lament of Steve Harper of Northwestern University School of Law, retired Kirkland & Ellis partner, noted author and keen observer of the legal profession. Harper recently returned to a theme he has repeatedly previously eloquently addressed, namely, the devolution of the concept of law firm equity partner, particularly in the face of Dewey & LeBoeuf’s utter deconstruction.

The fact is that in Dewey World, a good number of the firm’s most highly compensated partners were not in fact equity partners, although they proudly bore and boasted of having that moniker.

The hornbook definition of a partnership is two or more people engaged in a business who agree to share the profits and losses of that business. The Dewey highly compensated partners did not share profits.  Rather, they were apparently bestowed with contracts which provided them with fixed premium incomes, regardless of their own production or the firm’s profitability.  I guess we all now know that this business model doesn’t work. Actually, we learned this lesson in 1987, with the demise of Finley, Kumble , then the world’s second largest law firm, but as Santayana said, those who have failed to learn the lessons of history are destined to repeat them.

The point is why did all of these very smart, accomplished and talented lawyers take on the visage of “equity partners,” when that was simply not the case? There doesn’t seem to be any rational explanation.  These soon to be former highly compensated Dewey equity partners are soon to have some of the torments of Dante’s financial inferno visited upon them, as, among other things, they will be subject to clawbacks, loss of capital, adverse tax consequences and clawforwards.

A noted bankruptcy lawyer, who himself suffered through these torments as his firm went bankrupt thirty years ago said that he would never be a partner in a law firm again. His observation was that partners can do things to you even spouses can’t do, without your express consent:  They can make you liable for substantial debt, they can encumber your assets and otherwise wreak very real financial and professional havoc. This lawyer continued to practice for many years quite successfully and with a substantial client following at several very large successful law firms. Yet, he always was simply “of counsel” or “counsel” to the firms. His income never suffered and he says he never missed out on an engagement because he didn’t possess the adornment of partner. Given his success and standing at the bar, he had a voice in all significant law firm decisions. He was never inclined to take less money than he was worth only to have what he described as a meaningless ego gratifying title on his business card.

So, let’s see what happens to those who took on the honorific of being an equity partner in a world where partners are free agents and where partners are employees at will:  These ex Dewey partners will probably face years of legal proceedings as well as serious adverse financial consequences. They will likely have to repay substantial sums. Had they been salaried employees dubbed as counsel or of counsel and subject to simple written employment agreements (which in many senses, they actually were), they would be creditors of the bankrupt estate, entitled to priority treatment with regard to payments to which they claim an entitlement. The estate would be sending them checks, not the reverse.

Surely, ego is likely to prevent accomplished lawyers from taking what is ostensibly a step down, but that bruise to the ego should be assuaged by simple financial and other real world vagaries.

The interesting irony is that some of these highly compensated partners may well take the position in ensuing litigation that in fact they were not partners at all but merely highly compensated salaried employees and should be treated accordingly in the bankruptcy process. I can’t predict how the courts will react, but I would note that for the last thirty years, the lower levels of the law firm partnership have frequently claimed that they, too, were not actually partners; they were nothing more than salaried employees working for wages only. They had no role in management, and at best, were “mushroom partners:” kept in the dark and fed muck. The argument, while repeatedly made, has never gained real favor, except that mushroom partners (a term of art in law firm liquidations) typically wind up writing smaller checks than those at the summit.

© 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

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


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

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