UPDATE, 8/8/12, 3:20 p.m. EDT: The fourth paragraph of this story has been revised to with an updated statement from Greenberg Traurig CEO Richard Rosenbaum. The story has also been revised to reflect the fact that the capital affects all of the firm’s shareholders, not just equity shareholders.
For the first time in more than a decade, Miami-based Greenberg Traurig has issued a capital call to raise $24 million from its shareholders. The 1,700-lawyer firm said it took the action as a safeguard against “uncertainty” in the U.S. and international markets, and that it is not facing any immediate cash needs.
The capital call, which was announced last month during a telephonic partner meeting, requires shareholders to contribute 1 percent to 5 percent of their salaries, according to a Greenberg lawyer who asked not to be identified. The contributions will be based on salary levels, with lesser-paid shareholders paying 1 percent and the highest-paid principal shareholders paying 5 percent.
Dividing the number of shareholders by the capital call works out to an average payment of $76,923. The average profit per partner was $1.42 million last year, up 7 percent from the year before. The capital call would likely wipe out most of that increase.
In a statement issued Wednesday, Richard Rosenbaum, Greenberg’s chief executive officer, said, “”We requested that our shareholders approve a capital call of between 1 and 5 percent of one year’s total compensation, payable over two years. Our revenues have been stable through the 4-plus years of economic downturn, and our first half revenues for 2012 were ahead of the same period last year, allowing us to finish the first half with no outstanding debt and able to make our usual midyear distributions to our shareholders last month. We have very low to no debt most of each year though we have significant credit availability, require modest capital compared to our peers and have not raised any capital from our shareholders in over 10 years. So while there was no current cash need, bank or other requirement giving rise to this decision, it was a prudent move to create a further equity cushion which is fully consistent with our conservative financial management approach and with what other well-managed businesses are doing given the uncertainties in today’s global economic climate.”
Sources inside and outside the firm say the move — and its timing — were not well-received. Many shareholders were on vacation when the call was made and found out about it later. One partner reportedly uttered a profanity under his breath during the call led by Rosenbaum. Greenberg initially asked shareholders to make the contributions by year-end but, after some shareholders balked, the firm agreed to accept payments in two installments, one by the end of 2012 and the other in early 2013, according to the partner. Firm executive chairman Cesar Alvarez is in the process of drawing up the documents, sources said.
Greenberg ranked 10th on the latest Am Law 100 survey with $1.24 billion in revenue, up 0.6 of a percent in a year. The firm’s 312 equity partners shared $442 million in net income last year.
Greenberg is not the only law firm to ask for capital contributions from partners in recent years. DLA Piper, one of the nation’s largest law firms, issued a first-time capital call for its U.S. partners in 2009. At the time, the firm said the move was designed to decrease its reliance on bank credit during the recession and require partners to “have some skin in the game.”
Bill Brennan, a law firm consultant with Pennsylvania-based Altman Weil, said he recommends that firms require capital contributions from partners. ”It’s not uncommon,” he said. “Thirty percent of law firms have regular capital calls. It increases the firm’s financial stability and reduces the risk so that if something unexpected happens, the firm has money in the till to address the problem and carry it through difficult times. Firms that rely heavily on debt are taking very significant financial risk.
Capital calls also can be required by banks as a condition of renewing lines of credit, although Rosenbaum firmly denies that.
Greenberg, like many other firms, banks with Citibank, which also dealt with failed law firm Dewey & LeBoeuf and is out millions of dollars after Dewey filed for bankruptcy. Brennan said Citibank could be tightening its restrictions on other law firms. ”I wouldn’t be at all surprised if the bank required this,” Brennan said. “Partners are the last in line to collect if something happens.” (Greenberg was also one of the firms that was potentially interested in acquiring much of Dewey before it filed for bankruptcy.)
Greenberg is still highly profitable, generating $1.2 billion in revenue last year. But the firm has faced a number of financial and ethical issues in recent years. Greenberg laid off dozens of secretaries earlier this year and cut expenses by moving its Miami operations to smaller space last year.
U.S. District Judge Marcia Cooke on Friday sanctioned Greenberg Traurig and TD Bank for discovery lapses in a case brought by investors with Ponzi-scheming ex-lawyer Scott Rothstein.
In June, Greenberg and Quarles & Brady agreed to pay $88 million to settle a suit by investors who claimed losses in an alleged $900 million Ponzi scheme by a mortgage company.
In June, Alvarez said the firm is “conservative” about borrowing and expressed disappointment with the slow recovery of the legal market.
“I feel disappointed for the firm because we would all like to be doing better than we are doing,” he said. “People got used to a growth rate that has not been achievable since 2008.”
Julie Kay can be reached at (305) 347-6685.