Fat guarantees helped weaken Dewey & LeBoeuf

NEW YORK Fri May 4, 2012 3:45am EDT

A woman walks by the Dewey & LeBoeuf LLP headquarters on 6th avenue in New York April 20, 2012. REUTERS/Shannon Stapleton

A woman walks by the Dewey & LeBoeuf LLP headquarters on 6th avenue in New York April 20, 2012.

Credit: Reuters/Shannon Stapleton

NEW YORK (Reuters) - In its race to become one of the world's biggest law firms, Dewey & LeBoeuf doled out rich compensation guarantees to attract and keep top-shelf legal talent.

Now, as the firm bleeds partners and clients on an almost-hourly basis, these guarantees -- which Dewey appears to have issued more widely than other firms -- are being blamed for the firm's unraveling.

Compensation guarantees are promises to pay attorneys a certain dollar amount no matter how the firm or the individual performs. They came of age about a decade ago, when the economy was strong and competition for lateral hires -- essentially partners from other firms with a book of business -- was intense.

Firms used the offers as a carrot to convince star lawyers to leave their firms and to provide a cushion as they set up a new practice.

Dewey appears to have taken the practice to an extreme. The firm not only used guarantees to lure new talent, it also extended them to existing partners, according to former Dewey lawyers.

Earlier this year, partners with financial guarantees were asked to take a haircut to help Dewey & LeBoeuf avert a financial crisis, according to Stuart Saft, a real-estate partner in New York who left the firm this week to join Holland & Knight.

The picture did not brighten for Dewey, however. What started as a trickle of defections has accelerated quickly, with more than 27 partners leaving this week alone. On Thursday, mergers and acquisitions rainmaker Morton Pierce departed for White & Case, bringing the total number of partners lost to north of 100 since the start of the year.

The firm as of Thursday evening listed about 700 partners and associates on its website, down from nearly 1,300 lawyers at the time of the 2007 merger that created Dewey & LeBoeuf.

Until recently, Dewey partners themselves had no idea how many financial guarantees the firm had handed out. At a question-and-answer portion of a partners' meeting last October, firm Chairman Steven Davis was asked how many guarantees the firm had made, according to a former Dewey partner who was there.

Davis said guarantees had been extended to about a third of the firm's roughly 300 partners. The number shocked some lawyers.

"It was dropped like a bombshell," said a former partner.

In a follow-up question, Davis was asked whether he knew how much the contracts cost. Davis said he didn't know, according to another partner.

Davis is no longer a member of the executive committee or chairman. Dewey's executive committee voted in late April to strip him of all his leadership positions after the firm disclosed that the Manhattan District Attorney had opened a preliminary investigation of Davis.

The inquiry was prompted by a group of partners who asked the district attorney to examine "financial irregularities" at the firm. The precise nature of these allegations could not be determined.

Davis has denied any wrongdoing. Neither Davis nor his attorney, Barry Bohrer, responded to a request for comment.

MULTIFOLD RISKS

The risks of large cash guarantees are multifold. For starters, if the new hire doesn't bring in as much business as expected, the firm and its existing partners must make up the difference.

Guarantees can also cause divisions among firm lawyers on fairness grounds. For example, firm managers who offer a guarantee to an incoming lateral open themselves up to pressure from the current partnership for compensation bumps, said Alan Hodgart, managing director of Huron Consulting Group, which advises law firms.

"What you end up with is this danger of an escalation when you haven't actually got the profit to pay for it," said Hodgart.

LONG-STANDING PRACTICE

Dewey & LeBoeuf's practice of offering financial guarantees has its roots in the early 2000s, when the New York-based firm known as LeBoeuf, Lamb, Greene & MacRae was seeking to upgrade its sleepy insurance and energy image. As part of that effort, then firm Chairman Davis began using financial guarantees to attract marquee talent.

Davis's biggest coup came in 2004, when LeBoeuf announced it had hired Ralph Ferrara, a former general counsel at the Securities and Exchange Commission and a long-time rainmaker at white-shoe firm Debevoise & Plimpton.

It was a costly acquisition. The firm guaranteed Ferrara $2 million to $3 million for three years, according to The American Lawyer magazine. It also promised to pay Ferrara an additional $16 million to make up for his pension at Debevoise in which he was fully vested.

The expenses didn't stop there. To welcome Ferrara, who was still at Dewey & LeBoeuf on Thursday, LeBoeuf also recreated his old offices at Debevoise down to the placement of framed photos, The American Lawyer reported.

The hunt for key laterals continued after the 2007 merger that tied LeBoeuf with Dewey Ballantine, a storied Wall Street firm that bore the name of former New York Governor Tom Dewey.

The merger gave Davis a new platform to pitch to new recruits, and Davis predicted Dewey & LeBoeuf would be a "premier New York law firm with global reach." A press release noted the combined firm would have more than 1,300 attorneys in 12 countries and revenues approaching $1 billion.

Among Dewey & LeBoeuf's biggest catches were Martin Bienenstock, a highly-regarded restructuring lawyer who came from Weil, Gotshal & Manges, and Richard Climan, who had been the chair of the mergers and acquisitions practice at Cooley. Climan's guarantee was $3.5 million a year, according to The Recorder, a California legal publication.

Since the onset of the recession, law firms have treaded more carefully with guarantees, according to recruiters. Many have shortened the period of time covered by the guarantee and also added conditions that would protect the firm if the partner did not meet certain performance goals, said law firm recruiter Mark Jungers.

It is unclear who at Dewey was making the decisions to offer the financial guarantees. But former partners say the firm continued to give them out during the recession and also began making them to existing partners who threatened to leave.

Some top rainmakers even were offered guarantees without asking, according to one former partner who said the firm's management wanted to make lenders comfortable that the Dewey's key revenue generators were staying.

"They wanted to give us a disincentive to leave," said the former partner.

(Additional reporting by Leigh Jones; Editing by Steve Orlosky)

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