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How a Big Law Firm Went Bust: Dewey Chair Talks Stunning Demise

Aug. 3, 2022, 11:30 AM

Steven Davis was on the verge of turning his Manhattan law firm into a powerhouse. Then a recession hit, the firm went down in a highly publicized ball of flames and Davis gave up his law license while facing criminal charges.

A decade after the stunning fall of Dewey & Leboeuf, the mega firm’s former chairman wants to tell his side of the story.

“I feel an immense sense of, really, that I owe all these people an apology,” Davis said in an interview, his first time on camera discussing the firm’s downfall. “At the end of the day, it was my responsibility. I have to accept that and I have to live with it.”

But Davis pushed back on the narrative of the firm’s demise that’s emerged in the intervening years: It was the product of a merger of firms that overpaid star rainmakers even in the face of increasing financial troubles.

“A lot of people pointed to these [compensation] agreements and said, ‘This is the reason the firm collapsed,’” Davis told Bloomberg Law for the short documentary, “Steven Davis and the Rise and Fall of Dewey & LeBoeuf.” “I don’t believe that. The concept I think is actually what held the firm together. It’s when people became concerned about whether these agreements would be honored that the firm collapsed.”

Davis was among a group of Dewey executives hit with criminal charges after the firm’s 2012 bankruptcy, accused of falsifying financial information. He agreed to give up his law license temporarily to avoid being prosecuted a second time after the case ended in a mistrial.

He now lives in London, where he works as a litigation finance consultant, and he has no plans to practice law again. Still, Davis will forever be associated with Dewey, a 1,000-lawyer firm that once ranked among the 25 largest in the country and whose collapse is now considered a cautionary tale.

VIDEO: Steven Davis and the Rise and Fall of Dewey & LeBoeuf.

No ‘Loyalty,’ No ‘Glue’

Davis spearheaded the 2007 combination between Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, with ambitions for the New York-headquartered firm to rival big players like Skadden and Cleary Gottlieb. He drew inspiration from the 1980s merger that formed UK “Magic Circle” firm Clifford Chance.

Davis claimed that a pre-merger report from consulting firm McKinsey & Co. supported his vision, finding the two firms compatible when it came to billing rates and recruiting. Consultants also noted that the pair had relatively few client conflicts, limiting the negative impact of the tie up, according to Davis

The Great Recession came crashing down less than a year later. The financial crisis brought work to a halt across a number of areas and stopped Dewey’s rise in its tracks.

Dewey’s lack of an established culture across the still newly-combined firm made it particularly vulnerable in an environment of declining revenues and cost-cutting, Davis said.

“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.

Much of the blame has been targeted at Dewey’s strategy of luring high-powered partners with big compensation packages—a feature that added more challenges as the firm looked to tighten its belt.

Davis said the firm’s deals with rainmakers mostly involved “target compensation agreements,” rather than guaranteed money. But he felt like he had to honor the targets, even in the face of growing profit concerns, given the amount of business that those lawyers were bringing in.

“Five percent of the partners produced almost 50% of the revenues and that group of 5% we could not lose,” he said.

“Now with the benefit of hindsight, people could attack that and say that, you know, it wasn’t fair,” Davis continued. “Everyone should have been treated equally. But we felt, as a brand new firm, we didn’t have that luxury.”

A spree of partner defections followed, stemming in no small part from deepening fears about whether the firm could honor its financial commitments. Davis acknowledged the partner salary dynamics also created “hostility” within the firm about the haves and have-nots, and that attorneys headed for the exit as concerns grew about pay.

Dewey filed for bankruptcy in May 2012—just five years after the merger that created the firm—listing debt of $245 million and assets of $193 million. Davis was removed from his leadership post a month prior, after word spread that a criminal investigation was underway.

LISTEN: The directors of the documentary about Dewey & LeBoeuf, the largest law firm to collapse in U.S. history, talk about the film.

Davis and former Dewey executives Joel Sanders and Stephen DiCarmine were later charged with more than 100 criminal counts stemming from an alleged scheme to deceive lenders.

Several former top Dewey partners declined interview requests.

In a 2015 trial, a jury deadlocked on fraud and larceny charges against the three executives and cleared them of falsifying business records. Sanders was the only one convicted, for separate fraud and conspiracy crimes, but he avoided prison time.

Davis called the prosecutions “absolutely inappropriate and unnecessary” and said the resulting reputation damage is “frankly irreparable.”

“I think in its brief existence, the firm did some good things,” Davis said. “But it’s a reality that all that has disappeared in the chaos and turmoil that resulted from the bankruptcy.”

Josh Block and Andrew Satter contributed to this report.

WATCH: Steven Davis and the Rise and Fall of Dewey & LeBoeuf

To contact the reporter on this story: Justin Wise at jwise@bloombergindustry.com

To contact the editors responsible for this story: Chris Opfer at copfer@bloomberglaw.com; John Hughes at jhughes@bloombergindustry.com