Dewey & LeBoeuf going Bust

http://finance.fortune.cnn.com/2012/04/30/wall-street-layoffs-21k/

more Bullish news!!!

This isn't bullish or bearish. It's bad management and poor business model doing in a venerable firm. Chairman essentially bet it all on an economic recovery more speedy and robust than has occurred so far. The firm geared up as if the roaring times were just around the corner and committed itself to outrageious compensation contracts to lure in dozens of lateral partners. It was an all-or-nothing gamble...not prudent and without an alternative if the economy/recovery remained slow.

The firm also made a move that is frought with risks for a law firm: the moved toward an "eat what you kill" model with rain makers taking home huge spoils and other partners taking home associate-type money. This breeds resentment and works against any true sense of "partnership" in the partnership. It creates an every-man-for-himself environment. Sometimes it works, but tellingly it is also the model of virtually every failed firm we've seen since the 1980s.

Lawyers at large firms are an odd bunch. Very smart on the law. And yet most have no business training or experience whatsoever. Despite this, they believe they are outstanding business people and resist investing in robust non-legal finance staff to help them understand, shape and develop their businesses. That means CFOs and Exec. Directors with outstanding business credentials and finance departments with stellar MBA-types to analyze, report, model... Those firms that are most successful and stable tend to invest in such people and departments.

don't be a party popper! both news are bullish for NYC RE.

on a serious note though, i read the article too. decision makers that "bet it all on an economic recovery" that's really not there, so out of touch with reality. guess they should be tested for addictions that impair judgement. weird how many low level employees are tested for drugs, but not the decision makers, who's impaired judgement has even more dire consequences.

What only gets discussed once a decade when one of these big firms capsizes is the personal liability of the partners in all this and how a partnership is NOT a corporation. These guys at Dewey can be on the hook for astronomical sums. I suspect that those who went to the Manhattan DA to report wrong-doing at the firm were actually partners seeking to perhaps insulate themselves from potentially crushing liability for firm debts. If the DA finds criminal fraud by some at the firm in securing loans or whatnot, others may try to argue the partnership as a whole should not be liable. They are all very clever attorneys and if there's an angle to work, I'm sure they will. Was there criminal conduct or just bad judgment or something else? Well, the mere fact that the DA is investigating mean nothing, really. Anyone can bring something to the DA's attention and the office's response would likely be "we are looking into it." That response alone does not mean there is smoke, let alone fire.

Kyle, did you stay at a holiday inn last night?

Shea and Gould were the first.
Former Gov. Carey and Mayor Wagner were partners.

boeuf = meat from an adult domestic bovine.

It will always be Dewey, Ballantine to me!

Beef and Lamb.

JButton--nope, just stumbled on something I know a little about. Ah...let me count the ways: Finley Kumble; Coudert Bros.; Lord Day; Mudge Rose; Shea & Gould; Thacher Proffitt ... All once giants, now they've gone the way to dusty death.

I'm not sure it's not bearish... certainly doesn't say much for legal fees / lawyer earnings.

oh, Finley Kumble Wagner was the firm where Gov.Carey and Mayor Wagner were partners.
Thanks kyle.

somewhere: part of the issue was Dewey geared up like M&A was going to explode like 1000 nuclear bombs. It wasn't their fees they were charging clients that were the problem--it was that they didn't have clients doing deals. And when you promise some people a gad zillion $$$ no matter what, you screw all your other partners if the partners with assured salaries don't produce. In a more lockstep system, everyone understands that united you stand, divided you fall. Some partners bring in less, but what they add builds the prestige of the firm, or provides an important side service to clients doing big deals (say you have a big corporate deal that requires a new HQ, while the corporate lawyers work out the merger the firm's RE practice can step in to help negotiate ways out of existing leases and purchasing of new building for the merged co.). Similarly, as a hedge against down economies, a firm may build its litigation and bankruptcy departments. When the economy is sour, these units heat up and make up for the lower profits of the corporate department which isn't doing as many deals. In other words, everyone is part of a team--that is, partners. Not all will produce profits at the same rate or at the same time, but they play for the same team and share in its successes. The further you move from lock-step partner compensation and toward an eat what you kill model, resentments grow, attorneys become nasty about who the "billing" partner is for a new client and try to snatch business away from one another... And laterals are a whole other nightmare--they don't get the firm "culture" and don't give a sh-t about it. They come for the money and collegiality counts for little. Hire dozens of laterals and soon your firm will have no idea who it is anymore and can easily lose its way.

There's nothing terribly piercing about my observations. Hard to understand how virtually everyone of these classic mistakes that has lead to the demise of many firms was seemingly repeated by a firm as good as Dewey once was.

Truth: "Finley Krumble" everyone called it. Those partners were on the hook for millions each when that place imploded. What a mess.

couldnt happen to a nicer bunch of guys. here's to hoping each liar lost more than he cost everyone else.

"...most have no business training or experience whatsoever. Despite this, they believe they are outstanding business people and resist investing in robust non-legal finance staff to help them "

Very, very true indeed Kyle!

1. $230,000,000 in bond and bank credit line debt according to Wall Street Journal

2. wiggling out of liability will be touch under "faithless agent" rule of
agency and NY law re ratification and acquiescence explained in Pollitz
v. Wabash RR Co, 209 NY 113, 129, and rgw "constructive notice" doctrine

rb345, can you translate for the non-lawyers?

> 1. $230,000,000 in bond and bank credit line debt according to Wall Street Journal

hey, with around ~220 partners left, that's only $115k per partner. it's not small change, but doubt they cannot afford it.

meant around 200

auch, that's more like $ 1.5 M each... oh dear! being a partner is not always fun

A NY Times article on the topic, for those interested:

http://www.nytimes.com/2012/05/05/business/deweys-collapse-underscores-a-new-reality-for-law-firms-common-sense.html

Wait, this was a tier 1 "white shoes" law firm when it was Dewey Ballantine, correct?
This must be big news in law circles.

Dewey Ballantine was an aging "white shoe" firm that needed some more global heft, so they tacked on the meat and potatoes firm, or perhaps meat and meat firm of Beef and Lamb (LeBoeuf, Lamb, Greene & MacRae).

Yes pretty big news. Cautionary tail about stupid business decisions and tinkering with a model that works.

Not " pretty big news.". This is, in the large law firm world as big as news gets. I agree with asessment of "stupid business decisions.". See, my comments, supra (hat's fancy lawyer speak for " above"). But i disagree that they had a model that works. There is much debate about the long term viability of the old school business model of law firms. But one ing is clear: when you create an environment that erodes collegiality and a sense of joint purpose, and replace it with an internally competitive every man for himself arena, a law firm ceases to be a partnership and becomes a house of cards.

A law firm not being a "collegial partnership" does not make it a house of cards.

My guess is that kyle is a social worker. Maybe he was a second year big law firm associate when he gave up law for social work because it's more fufilling.

am I close kyle?

kyle: do you think the Manhattan law industry can absorb 200 partners with an equal pay structure? If not, that may mean retirement, moving out of NYC, or downsizing. Although that is only 200 families, that is a significant part of Manhattan's One per centers. Add to that the 20,000 plus layoffs coming in the NYC banking industry -- including many senior bankers, do you really believe these shake ups will not be reflected in the local real estate in the coming months?

oy gevalt!

apt23 has it right, Dewey and Leboef will finally be what causes the downturn in Manhattan real estate. None of her othre predictions have panned out (did you read the one about w67th going in her backdoor? or the recent one about how Bo in China will cause it all) but Dewey and LeBoef will be the end of us.

>Maybe he was a second year big law firm associate when he gave up law for social work because it's more fufilling.

Not sure why someone would give up a law career entirely when an alternative could be something as simple as Legal Aid Society or even a GC for one of the many NYC charitable organizations, or many other opportunities of like.

Truth: not even close. Fwiw, social worker ypes drive me nuts.

Apt: by equal pay structure, do you mean all take equal shares in profits? Thats never been the model. Strict lock step compensation based on seniority is the closest thing to that. But noone really does at. Most often it is a hybrid of lock step compensation with some recognition of business one generates. The trick is finding the balance. When it shifts too far to the latter, partners stop making decisions tempered by consideration of their partners. The loyalty and friendship and sense of membership in something worth preserving is what tempers partners from completely screwing each other. Bring in a zillion laterals who dont give a shit about culture of the firm or their partners and whom the original partners must subsidize and it can all go to hell very quickly.

Again. Lawyers have no business training. None. Many are very smart and think they can just puck it up. But they cant-- not to the extent hat they think at least. It is one reason why associates generally hate e partners ans the partners resent the griping associates: the partners are just awful personnel managers.

Truth: what do you think went wrong at dewey? What lessons are there in this? Do you think most firms adequately invest in finance departments to help guide their business decisions? Do you think most partners at large firms possess the same skills as a seasoned MBA-CFO type? If so, how exactly do they get those skills? Amazing that some peoplego tobusiness school and become financial experts ineir career. They do not however also become lawyers by osmosis. Yet attorneys think by going to law school and working at a firm they somehow also qualify for an mba.

>Truth: what do you think went wrong at dewey?

The guarantees were fixed cost obligations. Revenue was variable. When the variable revenue went one of the two ways that revenue can go (DOWN), they had a problem. Pretty simple: Costs > than supporting revenue; assets walk out the door every night.

Agree kyle. Most lawyers are not good business people and worse at managing.

I once worked at a firm where one of the partners had me order his lunch every day:
"2 large fruit cups from Viand, no grapes."
Every day I ordered those fruit cups without special grape instructions. (That guy wanted the counterman at Viand to remove the grapes?!) Every day he would call me and say "Truth -- there are grapes in my fruit cups!"
I would tell him: "Then don't eat them!"

Truth, love you, but I bet you wish you could untell that story.

Nope. It's a good example of how out-of-touch with reality those partners are.

Would you have wasted the time to remove the grapes to make the partner happy?
or would you have asked the Viand counterguy to remove them and the frickin' fruit cups would be delivered with the grapes anyway?

That partner got his license revoked anyway. He was an RE attorney. It was the early 1980's.
The other partners in that small firm were into tax shelters. Movie production tax shelters.
They had "Rambo-First Blood".
They went to prison.

Truth: agreedthat is what undid them. But why did they make that choice? What was their plan to preserve the culture and "partnership" of the firm while inteoducing three dozen lateral partners and how did they think they could preserve a sense of "all for one, one for all" ( or at least a pretense of that)? do you think e executive committee today would admit to grave errors that killed e firm. Probablynot.

Kyle: Interesting color on the legal community. And, yes it makes sense that they may not all be adept financial managers.

My question however was about whether you think that all the partners at Dewey can be absorbed into the legal machinery in manhattan at roughly the same compensation. Also, do you think this prime example of financial mismanagement will shake up other firms who might tighten up their compensation packages.

kyle: They would not admit to it, no way.

Apt: this fiasco may make others more sober when considering how much salary to promise a partner. But since no lawyer thimks s/he can be too wrong on business decisions, they will mostly find ways to "distinguish" dewey from their own firm and thus conclude here are no lessons for them and all is fine. Can the partners be absorbed? Of course. Hese are thte best of whats out there. They are clever. They have corporate contacts. Many have already landed on their fet. And they apparently were only drawing $300,000 last year. They may not make the same, and some may retire early, but the partners will be fine. The associates will have a harder time finding jobs in this market. Maybe harder for them than even the support staff.

kylewest, don't destroy apt23's dreams of gloom and doom.

But since no lawyer thimks s/he can be too wrong on business decisions, they will mostly find ways to "distinguish" dewey from their own firm and thus conclude here are no lessons for them and all is fine.

I think there is some real truth to that statement, Kyle.

notadmin:

1. constructive knowledge is knowledge that a person who has reasonable
cause to inquiry and learn more about a given situation would acquire
if they acted reasonably snd diligently to acquire such knowledge.

2. under the constructive knowledge doctrine which applies in all American
states and courts, a person is deemed to know what they should know under
the constructive notice doctrine, and is charged legally with all such
knowledge and facts, even if they dont have actual knowledge of those facts.

3. likewise in all American states and federal courts, the knowledge of an
agent is deemed as a matter of law to be known to the agent's partners and
principals, regardless of their actual knowledge. The one - and possibly -
only exception is the faithless agent doctrine, which holds that the know-
ledge of an agent does not attribute to its partners or principals. But that
doctrine only applies when the agent has completely abandoned his official
duties, not when he continues to perform but deviates from them

3. acquiescence is a form of waiver, and an alternative way to express waiver,
like ratification and estoppel. A person is deemed to have acquiesced in an
event, act or transaction when, with knowledge or it, he doesnt repudiate or
object to it in a timely manner.

4. there is an untold story behind Dewey's collapse. According to the Wall Street
Journal, 40% of major work for mega firms like Dewey is being doled out by cli-
ents using reverse auctions ites where firms have to agree to perform the work
in question for a fixed price. That development has placed severe pressure on
big frim billings and needs for attorney non-partner employees

Perhaps woth noting that constructive knowledge does not play much of a role in cri,imal law. It is pri,arily a civil concept.

Where he law being practiced is truly a commodity for a type of matter hat any number of firms could handle, there has been growing presure to contain costs and move to fixed prices for years. Premiums can only be charged and clients are only willing to pay them when the firm is offering something special. That is, something that is not a readily available commodity. That is very tough to do. 98% of legal transaction do not cut much new ground. And thus special service isnt required. For that tiny bit of legal work that truly is novel, there isnt enough to go around and frankly not every firm is up to the challenge.

The old partnership model is more an anathema than ever, but moving to a more corporate model can be deadly. What is a firm to do? Tough questions and no ready one-size-fits-all answers

Rb345 can you please link to the WSJ artcile regarding work being given by reverse auction? I am a partner at a big law firm and I have never heard of this, other than in rare situations or for firms further down the pay scale than Dewey.

interesting.

http://blogs.wsj.com/law/2011/08/02/firms-vie-for-corporate-clients-in-reverse-auctions/?blog_id=14&post_id=40543

> Add to that the 20,000 plus layoffs coming in the NYC banking industry -

Where do you get this from?

Dealboy -- it was in the second article link that OP posted.

Consultants and Wall Street recruiters say banks could eliminate nearly 21,000 jobs from their securities divisions in New York alone.

Jojo10:

1. I dont have links to any of those articles
2. the Wall Street Journal has run a number of articles in recent
months discussing that subject

3. there are also an increasing number of internet auction plat-
forms which have been set up to run those auctions

4. I would try googling for the sites or contacting the Journal
for articles copies or links

Kylewest:

1. the Second Circuit Court of Appeals has begun applying the constructive
knowledge doctrine to criminal cases under a "conscious avoidance" doctrine

2. under that doctrine, where knowledge of a particular fact is a necessary
element of criminal guilt, a defendant is deemed to know that fact if he or
she has consciously avoided expressly knowing it

Lest we devolve into utterly dull discussion of legal interpretations, what you describe is pretty close to actual knowledge. But regardless, there is no such trend at the state level.

Just a practice pointer for any SE-er thinking of emulating Bernie Madoff's
business model to be careful to avoid federal jurisdiction.

May 16 (Bloomberg) -- Lawyers from Dewey & LeBoeuf LLP
representing the MF Global Holdings Ltd. creditors’ committee
admitted this month that the law firm may never be paid.