Victor J. Blue/Bloomberg NewsThe headquarters of Dewey & LeBoeuf in Manhattan.Dewey & LeBoeuf, the law firm crippled by financial miscues and partner defections, filed for bankruptcy on Monday night, punctuating the largest law firm collapse in United States history.
The filing, made in Federal Bankruptcy Court in Manhattan, marks the final chapter in a turbulent period for the New York-based Dewey, which unraveled after disappointing profits and prodigious debt forced it to slash partners’ salaries. The partners, already owed millions of dollars from prior years, grew concerned over the firm’s finances and their ability to get paid. A partner exodus destroyed the firm.
“This is a very sad day for the legal profession,” said Richard J. Holwell, a former federal judge in Manhattan now in private practice. “Dewey is a fabled firm with a lot of great lawyers and a demise of this magnitude is unprecedented.”
With historical roots stretching back a century, Dewey – the product of a 2007 merger between Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae – employed at its peak more than 2,500 people, including roughly 1,400 lawyers in 26 offices across the globe, from Boston to Brussels to Beijing.
Unlike other bankruptcy filings in which a company restructures, Dewey announced Monday that, as expected, the firm plans a wind-down of its affairs, followed by a liquidation.
Dewey’s dissolution has generated a debate across the legal profession: Was its failure an isolated event or emblematic of bigger problems in the corporate-law industry?
Many observers say that the root causes of Dewey’s fall are not unique. Several of the country’s largest firms have adopted business strategies that Dewey embraced: unfettered growth, often through mergers; the aggressive poaching of lawyers from rivals by offering outsized pay packages; and a widening spread between the salaries of the firm’s top partners and its most junior ones.
These trends, they say, have destroyed the fabric of a law firm partnership, where a shared sense of purpose once created willingness to weather difficult times. Many large firms have discarded the traditional notions of partnership – loyalty, collegiality, a sense of equality – and instead transformed themselves into bottom-line, profit-maximizing businesses.
“Because the partnership lacks any shared cultural values or history, money becomes the core value holding the firm together,” said William Henderson, a law professor at Indiana University who studies law firms. “Money is weak glue.”
Some legal-industry experts say that, in many ways, the turmoil at Dewey reminds them of Finley Kumble, a large, fast-growing New York law firm that imploded in 1987. The causes of Finley Kumble failure – expanding too quickly, borrowing heavily, and paying dearly for high-profile talent – mirror the reasons for Dewey’s woes.
“Finley Kumble was the canary in the coal mine that now seems forgotten,” said Steven J. Harper, a retired partner at Kirkland & Ellis and adjunct law professor at Northwestern University.
Dewey’s bankruptcy follows a handful of other big law firm collapses in recent years. In 2008, two large San Francisco-based firms, Thelen and Heller Ehrman, imploded in part because of a business slowdown.
Last year, Howrey, a Washington firm with more than 500 lawyers, disintegrated after running into financial difficulties.
“Some big law firm whose leaders think that disaster can never befall it will be next,” Mr. Harper said. “We’ll be talking about that firm next year.”
This year, everybody is talking about Dewey. Its origins date to 1909, when three young Harvard Law School graduates, Grenville Clark, Francis W. Bird, and Elihu Root Jr., started their own firm. Known for years as the Root Clark firm, the lawyers parlayed their connections — Mr. Root’s father was the statesmen and senator Elihu Root — into a thriving practice.
In 1955, Thomas E. Dewey, the former New York governor and presidential candidate, came on board, and the firm, whose name changed over the years as various prominent lawyers joined the partnership, was renamed Dewey, Ballantine, Bushby, Palmer & Wood. Mr. Dewey died in 1971.
LeBoeuf, Lamb, started in 1929, was best known for its representation of insurers and utilities. About a decade ago, LeBoeuf began expanding rapidly under the leadership of Steven H. Davis, an ambitious energy-industry lawyer who pushed it into new practice areas and international markets.
In 2007, Mr. Davis approached the leadership of Dewey Ballantine about a merger. The combination created one of New York’s largest firms with a powerful global business, but it was struck just as the booming economy started to turn. The 2008 financial crisis and subsequent recession crushed Dewey’s results. Adding to its woes was a heavy debt load.
Even as Dewey’s performance flagged, the firm doled out lavish multiyear, multimillion-dollar guarantees to its top partners and star recruits. The guarantees – there were about 100, with several more than $5 million a year – created compensation obligations that the firm could not meet.
The firm had success in the legal arena despite its financial issues. t worked on major litigations and corporate deals, including representing the players’ unions in their court battles with the National Football League and National Basketball Association. It advised MetLife in its $12 billion acquisition of Travelers Life and Annuity. Dewey’s real estate group represented the Lower Manhattan Development Corporation in the World Trade Center redevelopment.
Dewey’s collapse has had a devastating effect on its lawyers and staff. Hundreds of junior lawyers and support staff are out of work. The partners are collectively expected to lose tens of millions of dollars they had tied up in the firm. Along with Dewey’s retirees, they could lose much of their pensions. And the partners will likely be tied up in firm-related litigation for years and face “clawback” suits from creditors seeking to recover money.
Those without jobs are looking for work in a difficult market. Law-firms have experienced flat revenue growth since the financial crisis. And large corporate clients, also buffeted by the volatile global economic conditions, have become vigilant about reducing legal expenses. They frequently demand discounts from their outside law firms, which charge, at the high end, more than $1,000 per hour for a top partner’s services.
Yet nearly all of Dewey’s partners – about three-quarters of its roughly 300 – have landed at other firms. Thirty-six, for example, have joined DLA Piper, the world’s largest firm by headcount with more than 4,200 lawyers. DLA is the result of more than two dozen mergers, acquisitions and joint ventures over the past dozen years. It has also been a leader in recruiting top producers away from other firms with lucrative pay deals.
DLA Piper is the biggest of a handful of mega-firms that, over the past decade, have transformed themselves from regional practices into global behemoths. These include Greenberg Traurig, a 1,800-lawyer firm with 35 offices worldwide that was started in Miami. A decade ago, Greenberg had 17 locations and about 800 lawyers. Greenberg has picked up dozens of Dewey lawyers in recent weeks.
The managing partners of these firms are quick to differentiate themselves from Dewey. Frank Burch, the chairman of DLA, said that, unlike Dewey, the firm has not extended any multi-year salary guarantees to its partners, whose pay floats up and down with the performance of the firm. DLA also does not have any long-term debt, he said.
“We have conservatively managed our finances so that we can sustain and grow our business,” Mr. Burch said. “Our strategy is to have a presence in key practices and sectors across the globe where our clients need us to be. Growth isn’t the strategy; it’s a consequence of the strategy.”
Not every corporate law firm has embraced these prevailing “Big Law” trends. There remains an elite tier of firms — a group including Davis, Polk & Wardwell and Wachtell Lipton, Rosen & Katz — that adheres to a so-called lock-step model of compensation, meaning partners are paid based on seniority, and within a narrow band. These firms also rarely recruit from other firms, but groom talent from within. This group also remains among the most profitable in the country.
“Cravath and others succeed in part because corporate clients are always going to want the opinion of the leading expert in the field and they will be willing to pay top dollar for it,” said Michael H. Trotter, a lawyer in Atlanta who has written two books about law firm economics. “They’re also culturally strong institutions with partners who are loyal to the firm.”
Other successful practices have remained decidedly small. The grandson of Thomas E. Dewey, for example, has his own firm, Dewey Pegno Kamarsky, a litigation boutique in Manhattan that he started in 1998.
Thomas E.L. Dewey’s 14-lawyer shop, which represents large corporate clients like Credit Suisse and Time Warner, markets itself as a cost-effective alternative to large, pricey firms.
Mr. Dewey, 48, and his relatives no longer have any connection to Dewey & LeBoeuf. Reached earlier this month, he declined to comment on the calamity that befell the firm bearing his grandfather’s name.
“Sorry,” Mr. Dewey said. “I know you will understand.”
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