May 30, 2012

Big Dewey Falls

When I graduated from law school, my first job was on Wall Street with the law firm Dewey, Ballatine, Bushby, Palmer and Wood, then the largest firm in New York City and the country as far as I know.

Largest again.  The successor to Dewey Ballantine, after a 2007 merger,  is Dewey & Leboeuf and it filed for Chapter 11 bankruptcy protection Monday in the biggest collapse of a law firm in U.S. history

Negative economic conditions, along with the firm's partnership compensation arrangements, created a situation where its cash flow was insufficient to cover capital expenses and full compensation expectations, Dewey said.

With the bankruptcy, comes Big Dewey Debts

The beleaguered New York law firm Dewey & LeBoeuf LLP owes millions of dollars to thousands of creditors, including legal headhunters, legal-research vendors and a dining service that kept Dewey's lawyers fed, according to papers filed in federal bankruptcy court.
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The entire unwinding could take years. In addition to the hundreds who were laid off and the big creditors who are owed money, including secured lenders, bondholders and federal pension regulators, Dewey's demise leaves holes in the balance sheets of enterprises large and small whose services are essential to big law firm functions.
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"I would say it is the worst possible result for everyone," said Brad Hildebrandt, the chairman of Hildebrandt Consulting LLC. "Now the creditors will have to fight over what's left, and the partners will inevitably have to contribute."

At Above the Law, people comment on why the firm failed in Gone Dewey Gone.

The ‘Steves’ are to blame, but ‘ineptitude’ is too kind a word to describe what they did at Dewey. Greed and unchecked power proved to be a lethal cocktail.”
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Debt is what killed Dewey. Debt is what killed most other firms the past few years. It will kill many more. I’ve heard that just three of the AMLAW100 operate without incorporating debt into their operations. Three!  Many of them distribute all their cash to their partners at the end of the year, and then operate in the red until October or November. All it takes is a few partner departures or a collapse of one or two practice groups to destroy most firms.”

The biggest winner in the reader poll was the Guaranteed compensation deals for certain partners.

“An absolutely insane idea, especially in a shaky economy. What motivation does a rainmaker partner with a multi-million dollar guarantee have to hustle to increase his book of business? Likewise, what motivation does a service partner making $300k have to work harder when all (and I mean all) of the big money is being funneled to the rainmaker partners? And, how was this plan supposed to work unless revenues kept skyrocketing?”

The New York Times reports Dewey's Collapse Underscores a new reaity for law firms

Dewey collapsed under the weight of a toxic combination of high leverage, lavish financial guarantees to many partners and faltering revenue. This makes it, in many ways, the Lehman Brothers of the legal profession, although perhaps that’s unfair to Lehman Brothers. Though highly leveraged, Lehman Brothers had enormous assets on its balance sheet — while Dewey, like law firms generally, had scant tangible assets. Nonetheless, that didn’t stop the firm from heavy borrowing of about $225 million, both by issuing bonds and by drawing on a large line of credit.

“This absolutely falls into the category: What were they thinking?” Bruce MacEwen, a lawyer and president of Adam Smith Esq. and an expert on law firm economics,

I left after a year because I was completely bored with the work and didn't want to get used to the money.

Posted by Jill Fallon at May 30, 2012 10:45 AM | Permalink