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Did Big Law Learn Anything From the Demise of Dewey & LeBoeuf?

Aug. 12, 2022, 9:45 AM

Maybe it’s not seared in your memory like the names Enron or Bernie Madoff. But in the rarefield world of Big Law, the ignominious end of Dewey & LeBoeuf was a traumatic event.

If you were following the news 10 years ago you might remember the death watch that surrounded the firm as partners steadily abandoned ship, culminating in bankruptcy and the largest law firm collapse in history.

Dewey’s demise had all the stuff of high drama: ambition, greed, and hubris—plus criminal indictments against the firm chair, chief financial officer, and executive director by an ambitious Manhattan DA. If there had been a sexual component to the scandal, it might give Showtime’s “Billions” a run for its money.

Documentary: The Rise and Fall of Dewey & LeBoeuf

The collapse of Dewey is cast as a “cautionary tale.” But I’ve often wondered, a cautionary tale of what?

Theories abound as to why Dewey collapsed. One of most-oft cited is that the firm pursued a rash expansion strategy of luring star lawyers with multiyear guarantees—around 100 partners reportedly were assured $5 to $6 million annually—that was unsustainable.

“They were borrowing against the future, and each year got worse and worse,” said former Kirkland & Ellis partner Steven Harper, the author of “The Lawyer Bubble,” who’s studied Dewey over the years.

What’s striking about much of the criticism of Dewey and the legal profession at the time is how quaint it sounds today.

‘Commonplace and Ordinary’

At the time of Dewey’s collapse, The New York Times eulogized: “Not every corporate law firm has embraced these prevailing ‘Big Law’ trends. There remains an elite tier of firms—a group including Davis, Polk & Wardwell and Wachtell, Lipton, Rosen & Katz—that adheres to a so-called lock-step model of compensation, meaning partners are paid based on seniority, and within a narrow band. These firms also rarely recruit from other firms, but groom talent from within.”

Those glory days of lock-step partnerships, home grown talent, and partners staying put are gone. If nothing else, Dewey was ahead of its time.

What Dewey was lambasted for doing—poaching big-name partners from competitors and paying them obscene amounts of money—is now the industry standard.

In fact, one of the biggest successes in the legal industry—Kirkland & Ellis—has embraced that very model. According to Leopard Solutions, Kirkland won the prize for hiring the most lateral partners—114 of them in a 12-month period, as of this April. In recent years, the firm has picked up some very expensive talent from the likes of Cravath, Swaine & Moore and Wachtell Lipton. One of its most famous acquisitions was former Cravath partner Sandra Goldstein, who reportedly was promised $11 million a year for five years.

“Guaranteeing lateral comp is something nearly all firms do—commonplace and ordinary,” said law firm consultant Peter Zeughauser.

What’s different, said Zeughauser, is that firms have gotten more disciplined.

“The guarantees are now tied to performance metrics,” he said. “That is part of the Dewey LeBoeuf legacy. Its undoing wasn’t so much that they made guarantees to laterals, but that they made guarantees to too many existing partners.”

Former Dewey & LeBoeuf partner Stuart Saft, who now leads Holland & Knight’s real estate group, agreed.

“In most firms, but not D&L, the star lateral’s compensation was reduced after that ramp up period if they do not meet everyone’s expectations,” Saft said in an email.

“At D&L there were star laterals who were making more than existing partners but producing less,” Saft continued. “There was a fear by management that if the star lateral left, it would look bad for the firm. There were also pre-existing partners who got their comp boosted to star lateral levels once the star laterals started to arrive because they threatened to leave.”

Bad Timing?

All that said, Saft added: “Steve Davis has taken too much blame over the years. This was a business strategy that just didn’t work and the timing was off.”

Davis barreled through the merger between Dewey and LeBoeuf despite warnings of trouble, said former Dewey management committee member Martin Bienenstock, now head of bankruptcy at Proskauer.

“At the closing of the merger—before I arrived—Steve discovered the projections included very large accounts receivable from [Dewey’s] clients that should have been written off,” said Bienenstock. “Therefore, the firm started with much larger debt than it anticipated. It was at that juncture that Steve could have called a halt, but he was determined to handle the debt because both firms were relying on the merger.”

Bienenstock suggested that Davis should have been more forthright. In an interview this week, Davis declined an offer to respond on the record.

“The lessons learned start with the need for transparency at the outset when it it turned out the merger had been negotiated without a rigorous examination of the accounts receivable, until the closing,” said Bienenstock. But he also noted that “in normal times” Davis could have gradually paid off the debt.

“Without the Great Recession,” Bienenstock said, “it would have worked.”

‘MBA View of the World’

Poaching star lawyers to build a powerhouse firm might be accepted as sound business strategy nowadays but what is it doing to the profession?

“It’s all part of the bigger transformation of the legal profession—an MBA view of the world,” said Harper.

One result of the profession’s embrace of the Dewey model is that there are now wild differentials in what partners make in the same firm, creating class divides among partners.

“You now have huge equity spreads—20 to 1,” said Harper. “When I joined Kirkland in 1979, the top guy—Fred Bartlit—was making just four times what the entry equity partner made.”

“The biggest casualty [from firms adopting Dewey’s strategy of paying laterals outsized sums] is the destruction of the mid-level partners who could impose some kind of check on partners on the top,” he said.

“Firms are engaged in massive lateral hiring but they don’t spend time on building loyalty,” said consultant Melissa McClenaghan Martin. “Firms aren’t thinking long term; they’re focused on how that star hire can help the short term picture.”

Davis doesn’t seem to disagree. “We hadn’t built that loyalty and glue in the organization to keep people together to see their way through the hard times,” he said in the documentary.

So what’s the parable of Dewey? That folks will stick around so long as the money is flowing? That Big Law is too smart for another implosion like Dewey?

“Firms think failures happen to other firms,” said Martin.

“Law firms think Dewey was a one-off,” added Harper. “Lawyers are very good at drawing distinctions. They’ll give you an endless list of reasons of how their situation is different.”

And what does Davis have to say about all this?

He demurred when I asked him whether he feels vindicated now that his much maligned growth strategy has become the norm. But surely there must be some kind of moral to the story—some lesson learned.

“In my heart of hearts, I’m not sure there is a cautionary tale,” said Davis after a long pause. “We may have tried to do too much, but I’m saying that with the benefit of hindsight. In my view, law firm leaders should be visionaries and be ambitious to make firms the best they can be.”

To contact the reporter on this story: Vivia Chen in New York at vchen@bloombergindustry.com; or on Twitter

To contact the editor responsible for this story: Gregory Henderson at ghenderson@bloombergindustry.com