11:47 p.m. | Updated
Dewey & LeBoeuf, the New York law firm crippled by financial mismanagement, an exodus of partners and a criminal investigation of its former chairman, encouraged its partners on Monday evening to look for another job, according to an internal memo.
The firm’s leadership has been scrambling in recent days to stave off failure by merging with another law firm and persuading its lenders not to push it into liquidation. “All partners,” said the memo, which was reviewed by The New York Times, “are encouraged to seek out alternative opportunities.”
The memo represents the latest chapter in a tumultuous period for Dewey, which has come apart after disappointing profits forced its leadership to slash partners’ compensation. An accelerating wave of partner defections since January — more than 85 of its 300 partners have left, including at least 11 on Monday — imperiled the firm.
Last week the firm announced that the Manhattan district attorney had begun a criminal investigation into allegations of wrongdoing by Steven H. Davis, the firm’s former chairman, who was stripped from his leadership posts this past weekend.
If Dewey were to file for bankruptcy, it would most likely lead to the firm’s dissolution, industry experts say. Unlike an operating company with physical assets that can reorganize in a bankruptcy, Dewey — a private partnership whose only real assets are lawyers — will be left with nothing to restructure once its lawyers walk out the door.
“There are no plans to file bankruptcy,” Martin Bienenstock, the head of Dewey’s restructuring practice and a member of the office of the chairman, said late Monday. “And anyone who says differently doesn’t know what they’re talking about.”
Before the recent departures, Dewey employed about 2,000 people — roughly 1,000 lawyers in 25 offices across the globe and the other half support staff including legal secretaries, mailroom clerks and paralegals.
Dewey was formed through the 2007 merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae. The two firms created a 1,300-lawyer behemoth with about 25 offices across the world and revenues of about $1 billion, making it the largest law firm merger in history.
Driving the deal was Mr. Davis, a Yale-educated energy-industry lawyer who had spent his entire career at LeBoeuf and had ascended to its chairmanship. A genial and low-key leader, Mr. Davis had a vision to create a firm with the size and international footprint to compete in an increasingly competitive marketplace.
“You have to be bigger,” Mr. Davis said in an interview at the time.
They called the new partnership Dewey & LeBoeuf, honoring a commitment that Dewey Ballantine had made to the estate of Thomas E. Dewey, the former New York governor who once ran the firm. When Mr. Dewey died in 1971, his will said that the firm could no longer use his name. The firm struck a deal with the estate to continue to use “Dewey,” so long as it always appeared first.
When the combination was struck, the partners had a saying that “LeBoeuf married up, and Dewey married rich.” The century-old Dewey, a storied firm with a strong mergers-and-acquisition practice, was hurting financially after numerous partners left after a failed 2006 merger with Orrick, Herrington & Sutcliffe. LeBoeuf, on the other hand, was financially sound, churning out lucrative work in its leading practices representing utilities and insurers.
Despite the old-school name, Dewey jettisoned traditional notions of a law firm partnership. Instead, Mr. Davis promoted a star system where top-producing partners had guaranteed contracts paying them millions of dollars a year. Some partners, the so-called rainmakers who brought in the business, made more than 10 times Dewey’s lowest-ranking ones, the service partners who earned a salary of about $300,000 drafting legal briefs and proofreading merger agreements.
The timing of the merger, struck in August 2007, could not have been worse. Just as the firms were combining, the credit markets seized up. A year later, Lehman Brothers collapsed, setting off the global financial crisis and a precipitous decline in the demand for legal services. Dewey, like other large law firms, struggled through the deep recession.
Yet in 2010, anticipating a business recovery, Mr. Davis began a hiring spree, snaring partners from other firms by luring them with huge multiyear contracts. Last year alone, Dewey brought on 37 lateral partners. On just one day in January 2011, the firm brought on seven partners from three firms.
The problem was that Dewey could not afford to pay its existing partners, let alone these new ones.
Cash was already running low; partners were already owed tens of millions of dollars in back pay. The firm had fallen so behind on collecting unpaid legal bills that management sent out an e-mail offering partners free iPads and iPhones if their clients paid them on time.
Last October, as it became clear that Dewey was not going to meet its lofty projections for 2011, Mr. Davis held a partners’ meeting to discuss the firm’s finances. He dropped a bombshell: The firm had extended guarantees to nearly 100 of its lawyers, creating compensation commitments that it could not possibly meet. Partners with large contracts who were already owed millions of dollars would be asked to take additional pay cuts.
By March, Dewey’s partners were already in revolt when they crammed into a conference room for another meeting. Jeffrey L. Kessler, a top sports-industry lawyer who represents the National Football League players’ union, took the microphone and delivered, according to people present, the law firm equivalent of a locker room pep talk.
Yet the partners had already lost confidence in management’s ability to save the firm. Groups of partners continued to jump ship, and the steep decline in its partnership ranks caused Dewey to breach covenants on its loans.
A dissolution of Dewey would be expected to result in ugly legal battles over money between creditors, bondholders and the partners owed back pay. In a bankruptcy proceeding, Dewey’s partners could also be on the hook for millions of dollars in so-called clawback claims brought by creditors seeking to recover money.
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