As Bingham McCutchen engages in merger talks in an effort to reshape its future, the firm is still coping with the fallout from one of its many past combinations.
Five years ago this month, Bingham joined with McKee Nelson in a deal that saw every partner from the latter firm receive a guaranteed contract. The deal—the latest in Bingham’s robust acquisition history—now raises questions as to what role it played in the lead-up to the firm’s current financial state, with revenue and profits plunging in 2013 to mark its worst financial performance ever.
Bingham began discussions in 2008 with McKee Nelson, a former high-flying, 200-lawyer tax and structured finance shop once profiled by sibling publication Legal Times as “The Richest Guys in Town.” By the time it merged with Bingham the following July, McKee Nelson had already lost about 30 structured finance lawyers to big British firm Ashurst, leaving the former with some 120 lawyers.
Bingham has now acknowledged the McKee Nelson guarantees after The Am Law Daily brought them to light, having interviewed a handful of former partners who confirmed the information. Historically, guaranteed contracts to Am Law 100 partners are not uncommon, but in more recent years have become an issue following the collapse of large firms like Dewey & LeBoeuf, a record-setting spate of consolidation among U.S. firms and an increasingly tight market for high-end legal services.
That’s not to say McKee Nelson is the source of all Bingham’s problems. Indeed, a May feature story by The American Lawyer described how Bingham prepared for an annual partners’ retreat in Bermuda late last year as the firm grappled with a steep drop in profitability as countercyclical practice areas slowed down.
Nonetheless, the size and scope of the McKee Nelson guarantees led to internal fissures at Bingham that caused at least some partners to leave the firm over the past few years, according to interviews over the past week with several former Bingham partners.The largest of the guarantees given out by Bingham after its July 2009 merger with McKee Nelson expired in 2013 and are no longer on the firm’s books.
At the time of the McKee Nelson merger, Bingham’s management informed its partnership about the total value of the guarantees, which sources briefed on the matter say totaled $59 million in 2010 and $70 million in 2011. The sums decreased thereafter as smaller deals expired, although the larger guarantees to individual McKee Nelson partners remained undisclosed on Bingham’s internal compensation schedules as part of the firm’s merger agreement with McKee Nelson.
Bingham agreed to keep the acquired firm’s closed compensation system for the duration of the guarantees, in part, to assuage the concerns of some legacy McKee Nelson partners switching over to a new system. That didn’t go over well with some Bingham partners, who under the firm’s open compensation system could normally see what their fellow colleagues earned. As Bingham’s string of strong annual financial performances began to peter out in late 2012, internal distaste for the McKee Nelson guarantees grew, according to four former partners.
Bingham partners curious about the compensation being granted to legacy McKee Nelson partners could still obtain the information from members of Bingham’s governing executive board, according to Bingham and former partners familiar with the matter. As a result, the size of payments to individual McKee Nelson alums began to trickle out. The Am Law Daily has learned about the five-largest guarantees to McKee Nelson partners in discussions with former Bingham partners, all of whom are in different cities and left the firm at different times. Our sources described guarantees that ranged from shorter deals for service partners to multiyear arrangements for rainmakers further up the partnership tier.
The five largest annual payments to McKee Nelson partners were as follows: $4.7 million to McKee Nelson co-CEO Reed Auerbach, now cochair of Bingham’s corporate practice; $4 million to McKee Nelson co-CEO William Nelson, now cohead of Bingham’s tax practice; $4 million to McKee Nelson cofounder and tax partner Bill McKee; $4 million to McKee Nelson tax partner John Magee; and $5 million to senior partner and financial institutions rainmaker Jeffrey Smith. All are based in Washington, D.C., except for Auerbach and Smith, who work out of New York. None responded to requests for comment about their compensation. (Three years ago, The Wall Street Journal pegged Nelson’s hourly billing rate at $1,095.)
The Am Law Daily’s sources say that the guarantees expired in 2013 and that a decision on whether or not to renew them spurred significant internal debate at the firm last year. Bingham confirmed the expiration of the McKee Nelson deals and acknowledged that as with any merger, not all of its rank-and-file were happy with the agreements. The firm declined further comment on payments made to top McKee Nelson partners in a statement issued to The Am Law Daily.
“We do not comment on individual partner compensation,” Bingham said in its statement. “The McKee Nelson combination was an extraordinarily successful one for Bingham and our clients. We added several market-leading practices and tremendous lawyers to our firm. The partners mentioned in this article are senior lawyers who are leading practitioners in their fields and who have highly successful and profitable practices.”
Bingham describes the deals given to McKee Nelson partners as being in one-, two- and three-year durations, which began in 2010 following the completion of McKee Nelson’s absorption into Bingham. McKee Nelson went through a period of rapid downsizing following the financial crisis of 2008, and Bingham claims that as a result of the deleveraging process, partners from the acquired firm incurred enormous expenses that Bingham would compensate them for in the form of guarantees as cost savings were realized in the period after both legacy firms combined their operations.
Under Bingham’s partnership agreement, partners are guaranteed 75 percent of what they earned the year before. As a result, the firm claims that the total “guaranteed” compensation numbers provided for 2010 and 2011 by former partners are misleading in that only an additional 25 percent of the guaranteed sums should count as true guarantees. (Using Bingham’s logic, a group of McKee Nelson partners hypothetically due $20 million in compensation would have had $15 million of that amount protected under the firm’s partnership agreement, so all they would really be guaranteed beyond that is the $5 million that Bingham would have otherwise been able to cut.)
In any merger, reconciling various compensation schemes and schedules is a difficult process, and Bingham claims that its deals with McKee Nelson partners—which two sources say paid service partners at the latter more than their Bingham counterparts—were done over a relatively short period of time as Bingham sought to determine which of its new partners fit into its own compensation scheme. The payments made to McKee Nelson partners included an annual base amount followed by a first-quarter bonus the following year, according to Bingham.
As with many Am Law 100 firms, Bingham has a long history of handing out contracts as an incentive to lure in lateral partners—such as its 2008 hire of Schulte Roth & Zabel bankruptcy practice coleader Jeffrey Sabin, now cohead of Bingham’s global financial restructuring group—and finalize merger deals.
Bingham itself, as chronicled in a 2005 feature story by The American Lawyer and a 2011 Harvard Law School study, grew rapidly over the past two decades by acquiring smaller firms. Bingham confirmed to The Am Law Daily that it had previously agreed to give guaranteed contracts to all the partners the firm picked up through its merger with Washington, D.C.’s Swidler Berlin in 2006 and Los Angeles-based Alschuler Grossman the following year.
The largest of the deals emanating from Bingham’s acquisition of Alschuler Grossman was a five-year, $3.5 million guarantee given to firm cofounder and entertainment litigation rainmaker Marshall Grossman, who left Bingham earlier this year for Orrick, Herrington & Sutcliffe. Most of the other Alschuler Grossman deals expired at the end of 2008.
Grossman’s contract made him one of the highest-paid Bingham partners, according to former partners who reviewed the firm’s internal compensation schedules. Bingham’s longtime chairman Jay Zimmerman, who stepped aside from day-to-day management of the firm on June 1, also made roughly $3.5 million in 2013, according to sources briefed on the matter.
Last summer Zimmerman informed Bingham’s partnership that the firm had only four to five guaranteed contracts still outstanding. Two of those were to legacy McKee Nelson tax partners Christopher Bowers and Raj Madan in Washington, D.C., both of whom left Bingham in June for Skadden, Arps, Slate, Meagher & Flom. (Both lawyers, who did not respond to requests for comment, left Bingham as a result of a client conflict, according to two sources briefed on the matter.)
Another guarantee given out by Bingham was to James Dragna, cochair of the firm’s environmental, land use and natural resources group in Los Angeles, and the lead lawyer for the firm representing energy giant Anadarko Petroleum in litigation related to the massive 2010 oil spill in the Gulf of Mexico. Bingham maintains that monies promised to Dragna are less a guarantee than retroactive bonus payments for past years in which he was by far the highest-performing partner at the firm.
Bingham has confirmed to The Am Law Daily that it has some other outstanding guarantees, but declined to get into specifics. The firm is now being led by managing partner Steven Browne—a former head of the firm’s Boston office—and a troika composed of tax practice head and New York managing partner Anthony Carbone, administrative partner and labor and employment expert Debra Fischer in Los Angeles and Hartford office head and transactional finance cochair Daniel Papermaster.
The leadership team reports to Browne, himself part of Bingham’s 12-member executive board that includes Auerbach; Dragna; Zimmerman; financial institutions regulatory, enforcement and litigation cochair Timothy Burke; M&A partner Laurie Cerveny; environmental, land use and natural resources cochair Ella Foley Gannon; former financial services cochair Roger Joseph; telecommunications, media and technology partner Andrew Lipman; financial restructuring cohead and London, Hong Kong and Frankfurt office managing partner James Roome; litigation partner Richard Taffet; and telecom, media and technology cohead Catherine Wang.
The individuals with the largest books of business include Auerbach, Dragna, Joseph, Lipman, Roome and Taffet, say those familiar with Bingham’s internal finances. Taffet, Roome and Gannon were all lateral hires by Bingham, while Lipman and Wang joined the firm from Swidler Berlin in 2006. Dragna is a holdover from San Francisco-based McCutchen, Doyle, Brown & Enersen, which merged back in 2002 with Boston-based Bingham predecessor Bingham Dana & Gould.
Browne and Cerveny joined Bingham from Testa, Hurwitz & Thibeault, a Boston-based Am Law 100 firm that collapsed in 2005. Zimmerman, Joseph and Burke are all lifers at Bingham, which says that it is doing better financially this year even as the firm’s attorney ranks have slipped below 800. (Bingham is currently advising holdout bondholders in Argentina’s sovereign debt crisis, and the firm represented virtual reality startup Oculus VR earlier this year on its $2 billion sale to Facebook.)
Reuters broke the news earlier this month that Bingham has reached out to Morgan, Lewis & Bockius, Morrison & Foerster, O’Melveny & Myers and Winston & Strawn about a potential merger. Just before Bingham’s last big merger with McKee Nelson in 2009, the former saw an 11-lawyer banking practice in Boston led by banking and leveraged finance cochair Jonathan Bernstein decamp for Morgan Lewis, the latter of which also raided Bingham earlier this year for partners in Boston, New York and Washington, D.C.
In 2010, the first year after the McKee Nelson merger and one in which Bingham saw gross revenue and profits per partner soar, the firm saw Latham & Watkins poach longtime private equity partner Johan “Hans” Brigham to open its own office in Boston.