As 2011 continued, Davis and DiCarmine continued to convey optimism. In a memo to partners in December, DiCarmine said that Dewey had several major bills to collect by year-end, “and if we get them in, we can have a pretty great year,” as one partner put it. But by January, this partner says, DiCarmine “was crestfallen. He said, ‘We didn’t get it.’”
In some cases, compensation guarantees had backfired: Some rainmakers sent bills late or were not persistent in collecting them. “Davis was never good at taking his star business-generators to the woodshed,” says one partner. “He did not say no to them.” And clients had continued to hold back on legal spending. Insurers, in particular, demanded additional discounts on rates that had already been frozen at prerecession levels.
Because the firm’s obligations to partners under the contracts had ballooned, the revenue shortfall was devastating. Unknown to the partnership, Dewey’s obligations for current and deferred compensation exceeded its earnings by at least $250 million. And the firm was approaching the limit on what it could borrow under its $100 million credit line, which was up for renewal in April 2012. (Ultimately, the firm took about $75 million from the line prior to its bankruptcy filing.)
Partners learned of the full extent of the problems on Jan. 27, 2012, at an all-partner videoconference meeting that firm leaders traditionally used to announce the previous year’s financial performance. The meeting, usually held in early January, had been twice delayed, leaving many partners to suspect that something had gone wrong.
Their fears were confirmed. Davis, leading the call, said that the firm had “achieved great things [in 2011], but it wasn’t good enough,” noting that the firm had earned only $280 million in profits on revenues of about $780 million. In fact, he said, the distributable income was far smaller than that, because about half the firm’s profits had to be used to pay debts owed to partners from prior years. There would be no profit distributions for 2011. “It was a real shock wave,” recalls one partner.
Nonetheless, notes another partner, “people were still being told not to worry.” As of January 2012, the firm had about $250 million in accounts receivable less than 180 days old, DiCarmine told partners, as well as $400 million in older uncollected bills. And in early February, Davis wrote in an e-mail to partners that revenues and billings were running 30 percent ahead of a year earlier. But, ominously, a trickle of partners began to leave, including the former head of the firm’s insurance practice, William Marcoux, who went to DLA Piper.
Starting in January 2012, a group of senior partners, who came to be known as the operations committee, began meeting in an effort to adjust compensation expectations and to come up with a more conservative budget. The intention, says Washington, D.C., legislative partner L. Charles Landgraf, who was a member of the group, was “to try to fit the compensation schedule into a realistic estimate of what we thought the net profits would be.”
In addition to Landgraf, the group included global litigation head Jeffrey Kessler, global project finance head Joseph Tato, U.S. co-head of litigation Ellen Dunn, corporate securities partner Michael Fitzgerald, London M&A partner Stephen Horvath III, and, eventually, corporate head Richard Shutran. The committee concluded that the problem was just a matter of timing; members were encouraged that the firm was still taking in about $60 million per month.
In February 2012 — soon after the contentious Feb. 13 meeting — the committee announced that the firm’s highest-compensated partners, with only a few exceptions, had agreed to compensation caps of $2.5 million in 2012. The committee also proposed a long-term plan to repay about half the $250 million in deferred compensation owed to partners and write off the rest. Under the plan, the firm would allot a portion of annual profits to fund a trust. After a two- or three-year breather, the trust would begin paying down deferred compensation over a seven-to-eight-year period.
Just as the group was trying to gain support for the plan, disaster struck. In early March, DiCarmine learned that the firm’s insurance transactional team, led by Dye and Schwolsky, was considering offers from other firms. The operations committee tried to prevent the team from bolting, promising more money and offering Dye a seat on whatever governing group would succeed Davis. Dye and Schwolsky proposed a more far-reaching plan to repair the firm that included moving to a lockstep compensation system, eliminating the trust plan and all compensation guarantees, and capping compensation at $2 million, including for new laterals. On March 17, with its younger members threatening to leave, Dye and Schwolsky’s group announced that it would move to Willkie Farr & Gallagher.
At that point, “the bells really started ringing,” says a LeBoeuf-side partner. “That was too much. That was the moment when the partners began to take their calls from the headhunters.” The insurance practice had always been a fundamental piece of the firm, “one of the planks of the ship,” says another partner. “When they left, that was a sign for everyone else to go.”
The reactions of Davis and the operations committee heightened the anxiety: Though the firm was sorry to see the group go, the committee asserted in a statement, the firm would not be hurt by its departures. “To say you can take $40 million out of an enterprise and that it has no impact is just silly,” says one partner. “It immediately undercut their credibility.”
As the pace of departures sped up — 22 partners left in March — a group of the 30 highest-paid and most senior partners met. Out of that meeting came a proposal on March 27 for a five-partner “office of the chairman” intended to stabilize the firm. The team included Kessler, Shutran, Landgraf and Bienenstock. Davis was also named to the five-member team. Stephen Horvath, a London corporate partner, was appointed the day-to-day manager, replacing DiCarmine. The idea was to restructure Dewey as leaner and stronger, and to seek combinations with other firms.
By early April, members of the office of the chairman were talking to about six firms that expressed interest in taking parts of Dewey. Greenberg Traurig was the most serious.
In the midst of the merger talks, the firm was renegotiating its $100 million credit line. Lead lender JPMorgan Chase and three other banks had given the firm an extension until April 30 to come up with a repayment plan. That debt and the bond liability, however, continued to be an obstacle to an outright merger, several partners close to the talks say.
Greenberg Traurig executive chairman Cesar Alvarez and CEO Richard Rosenbaum spent two days in Dewey’s offices reviewing lists of partners. By late April, Greenberg was within days of sealing a deal to acquire at least 100 Dewey partners, including most of the firm’s New York and Washington, D.C., offices, its Silicon Valley office, and a few international offices, such as Warsaw, according to Dewey sources close to the negotiations.
Under a plan proposed by Bienenstock, who was handling the negotiations on the Dewey side, a mechanism would be built into the deal in which Dewey’s debt would be paid off as part of the transaction. (Bienenstock wouldn’t describe the mechanism, but others say that in essence it required Greenberg to agree to pay a sum up front, which would then be used to pay off creditors.) What remained of Dewey would then file for Chapter 11.
On April 23 Greenberg publicly confirmed its interest in a large-scale deal. In the first 23 days of April alone, 31 more partners had announced their departures.
The final straw came four days later, on April 27, when the newswire Law 360 broke the story that, at the urging of a group of Dewey partners, the New York district attorney’s office had begun a criminal probe into Davis’ conduct as chairman. Davis was removed from his position in the office of the chair within 24 hours. The next day, Greenberg Traurig said it had called off the merger talks. “They were spooked,” says one partner. “If the Davis article had not broken, people would have swallowed hard and done the Greenberg deal,” says another.
The next day, the firm’s remaining managers opened the floodgates, announcing to all partners that they were free to go elsewhere. In May, 214 partners left. Among the first out the door was Pierce, who announced on May 3 that he was headed to White & Case with seven other partners. The New York Times reported that in his resignation letter, Pierce asserted that Dewey owed him $61 million. (Pierce declined to comment on that assertion.)
During Dewey & LeBoeuf’s four years of existence, Davis and a handful of other top managers had maintained offices on the forty-third floor of their building, 10 floors removed from the rest of the partnership. By mid-May, Davis’ corner office there was empty, except for two matching framed advertisements trumpeting the merger of Dewey Ballantine and LeBoeuf Lamb on Oct. 1, 2007. The ad touts the two firms’ “shared cultures, values, and visions.”