Legal Meltdown: Was Dewey Too Big To Fail?

Guaranteed $5 million pay packages with no strings. Borrowing from a number of banks to stay afloat. Lavish corporate offices. Unchecked spending. Questionable financials.

Another Wall Street meltdown? Not quite. This one is a law firm. And it’s huge.

Until recently, Dewey & LeBouef, LLP, (formerly the separate firms of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, now just referred to as “Dewey”) was one of the largest law firms in the world. Earlier this year, the firm touted more than 1,100 lawyers in 26 offices; it was considered one of the largest law firms in New York City and one of the largest US firms located in London. A few years ago, Dewey lawyers were making news advising in Walt Disney’s $4 billion cash and stock acquisition of Marvel Entertainment team and successfully defending Dallas Mavericks owner Mark Cuban against insider trader accusations. Now, they are packing up their offices and running from what many in the legal community have called “chaos.”

When a public company melts down, the market generally reacts. The price per share of stock tends to fall and investors can, if they think the company is worth saving, rush in and “rescue” the company by buying up those shares. Depending on the nature of the company, it can be taken apart and sold off (think about Richard Gere’s job in Pretty Woman) or some assets can simply be liquidated in order to pay off debts.

But that’s not what happens in a law firm. There are no public investors. And there is generally no incentive for another firm to “rescue” a struggling one. And there are no assets to liquidate: the assets are the people who work at a firm. And the very real problem with law firms is that, at any moment, those people can get up and simply walk away. That’s exactly what’s happening to Dewey. As of last night, the firm’s web site indicated that the number of partners at Dewey stood at about half of what it was a few months ago with defections happening every day.

There have been whispers about Dewey for months now. It was clear that the firm’s financials weren’t as solid as they were said to be. While revenues were publicly stated to be about $1 billion, those financials were eventually adjusted down by a jaw-dropping quarter billion dollars.

Even as profits were falling, partners in the firm were pocketing big dollars. Many Dewey partners had pay packages worth several million dollars that were guaranteed – even if the partner wasn’t profitable.

As guaranteed paychecks were doled out, Dewey reportedly couldn’t manage its debt load. Despite its struggles, banks continued to lend to the firm, with guaranteed credit worth a reported $100 million issued by JPMorgan Chase, Citigroup, Bank of America and HSBC.

The firm’s reputation took an even bigger hit last month when it was disclosed that the firm’s then acting chairman, Steven Davis, was under investigation by the Manhattan District Attorney’s office on grounds of “financial irregularities.” Davis was subsequently voted out of all leadership positions in the firm. Davis has, as expected, denied any wrongdoing.

The good news for partners at the firm is that they received their guaranteed April “draws” in the neighborhood of $25,000 so long as they get their time in. The bad news is that may be the last check many receive. While the firm has said, that it has no plans to file for bankruptcy, The AmLaw Daily, is reporting that Dewey’s doors will close on May 15.

There’s no doubt that many of the partners will land on their feet. Many have already fled to firms like Morgan Lewis and White & Case. But it’s a grim job market for lawyers. Finding a new home for more than 1,000 lawyers won’t be easy. And finding a new home with guarantees similar to those touted by Dewey will be nearly impossible.

Dewey had existed in some form for nearly a century. It was a stalwart in the legal world, one of a number of firms that rolled off your tongue when asked about “BigLaw.” So when we heard about the implosion, it felt a little crazy at first. This kind of thing isn’t supposed to happen in “BigLaw” – I think we all kind of bought into the notion that some firms, like banks on Wall Street, were too big to fail. It was the little firms that were supposed to crumble.

But then I remembered Brobeck, Phleger & Harrison, LLP and Wolf Block, LLP. I thought about Howrey LLP and Heller Ehrman, LLP. And I recalled the spectacular downfall that was Drier LLP (so spectacular, in fact, that Hollywood made a movie about it).

As lawyers, we make our living fixing other problems. It’s an odd thing to watch a law firm be so caught up in its own – arguably dysfunctional – culture that it can’t fix its own problems. Banks and automotive industries call in lawyers to right the ships when they were going down: so who do lawyers call?

The answer is obviously other lawyers. But, in a profession that is increasingly caught up in tradition and appearances at a time when our world is changing so very quickly, I question whether the legal culture can offer a suitable response anymore.

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