(Reuters) - Law firms rushed to secure government aid early in the coronavirus pandemic, borrowing nearly $12 billion from the U.S. Small Business Administration’s Paycheck Protection Program as their revenues were threatened by court closures and a freeze in corporate deals.
The program, created by Congress in March to save jobs and help small employers weather the COVID-19 crisis, has faced criticism that too much of the $525 billion in approved aid went to big businesses in high-wage industries like law. Not only did law firms obtain billions of dollars through the program, but the loans didn’t always ensure jobs and paychecks would be protected, a Reuters analysis found. At least 10 firms that took in a combined $68.5 million in forgivable, government-guaranteed loans under the program went on to cut positions, salaries or both.
To identify those firms, Reuters analyzed SBA data involving 126,779 PPP loans to law firms and compared it with media reports on firms that adopted austerity measures amid the pandemic.
The firms include:
• Day Pitney, which borrowed $10 million, the maximum PPP loan amount. The firm, which has about 300 lawyers, said in April it was cutting pay for attorneys and staff.
• Hughes Hubbard & Reed borrowed nearly $8.7 million under the loan program. The 250-lawyer firm announced associate and staff layoffs in July.
• Davis & Gilbert, which borrowed $4 million, said in April that it was reducing salaries for attorneys and some staff. It has about 100 lawyers.
• Pond Lehocky Giordano borrowed $2 million. It said in a May regulatory filing that it was laying off 76 employees, about 25% of its total headcount, on June 1. It has about 25 lawyers.
• Stroock & Stroock & Lavan, which has about 300 lawyers, took out a nearly $8.7 million PPP loan but said in late May it would reduce attorney and staff compensation.
With some exceptions, applicants for PPP loans had to have 500 or fewer employees to be eligible and had to certify in good faith that “current economic uncertainty” made the loan necessary to support “ongoing operations.”
Loans for $1 million or more accounted for 32% of the over $11.9 billion in total loans issued to law firms under the PPP, but more than two-thirds of the loans were for $50,000 or less, according to Reuters' analysis of complete loan data the SBA released on December 1.
It’s likely that many more PPP borrower firms than the 10 Reuters identified made cuts that went unreported, because they involved smaller firms or because the cuts were less substantial. And, at least 10 firms that received a combined $48.4 million in PPP loans and cut staff or pay were not included in Reuters’ analysis because they announced those cuts before SBA data shows they were approved for the aid.
Other firms may have cut jobs for reasons unrelated to the pandemic. Boies Schiller Flexner, which received $10 million, terminated workers this spring but wasn’t included in Reuters’ count because it attributed those cuts to partner departures.
Reuters reached out to all the law firms it identified, but only two provided comment.
“The beginning of the pandemic was a time of great uncertainty, and we anticipated a substantial reduction in revenue. The loan our firm received allowed us to retain 100% of our attorneys and staff and avoid any furloughs,” said Ron Urbach, Davis & Gilbert’s managing partner, in a statement. He added that the firm reduced salaries in May to be conservative but that it has since reversed cuts and made employees whole.
Hughes Hubbard & Reed chairman Ted Mayer said the firm waited until the “prescribed period” to preserve jobs under SBA rules had passed before it announced layoffs in July.
“After that period had passed, we took a renewed look and took appropriate personnel measures for a changed work environment and demand patterns,” Mayer said in an email.
The outlook for the legal industry was grim in the spring, when law firms, plagued by uncertainty, were applying for PPP aid, slashing pay for lawyers and staff and cutting jobs. With some predicting a new Great Depression, firms budgeted for massive drops in revenue.
But 2020 hasn’t been as dire as expected for the industry. Recent reports from the law firm lending and advisory units of Citi Private Bank and Wells Fargo showed relatively healthy year-over-year revenue growth in 2020, especially for the richest firms. Average revenue grew 5% for the first nine months of the year among the law firms surveyed by Citi, which noted that some firms had feared a median decline of 15%.
The improved outlook led many firms that made pay cuts in the spring to reverse those measures, including some, like Day Pitney, that took PPP funds.
The better-than-expected performance could also complicate efforts to get those loans forgiven. The PPP’s forgiveness provisions, which in effect turn the loans into government grants, are complex and have evolved over time. Borrowers must have used at least 60% of their loan amount for payroll costs, and generally they must have paid or incurred those costs in a covered period of up to 24 weeks to be eligible for loan forgiveness. Shrinking headcount or pay could reduce how much of the loan is forgiven.
The SBA has said it will scrutinize applications for loan forgiveness from borrowers that received more than $2 million, seeking information on changes in revenues and access to liquidity, questions that have worried some law firms, financial advisors have said.
SBA data shows 610 firms took out loans for more than $2 million.
Tom Clay, a principal and law firm advisor at Altman Weil Inc, said most firms that took PPP loans didn’t cut pay or headcount, but that many also didn’t use the aid. “They just banked it, and it’s being looked at as liquidity [headed] into the next year,” he said.
“It wasn’t a lifesaver, because law firms weren’t going to die anyway, like some other businesses may have, or will,” Clay said.
Large law firms’ use of the low-interest loans has rankled critics outside of the legal industry.
Liz Hempowicz, director of public policy for the Project On Government Oversight, noted that even law firms that repay their loans benefited from a low-interest capital infusion during a time when small businesses were desperate for cash.
“Maybe those dollars would have been better spent on a small business that couldn’t get funding and went under,” Hempowicz said.
(Note: This story has been updated with comment from Davis & Gilbert.)
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