They Aced the Stress Test

Last September, as the U.S. financial services industry skidded toward insolvency, Ricardo Anzaldúa sprang into action. Anzaldúa, who heads the corporate law unit at The Hartford Financial Services Group Inc., pulled in a few of his lawyers, along with underwriters and outside counsel, and started to prepare a public stock offering.

Then the bottom fell out of the market. An orderly process turned into a scramble for a deep-pocketed savior. The Hartford’s bankers at The Goldman Sachs Group Inc., spotted a potential investor — global insurance giant Allianz SE. And the lawyers found themselves rushing to put together a deal in four days.

Why so fast? The Hartford wanted a deal before another company was seized, or a second financial giant sank the way Lehman Brothers Inc. had. Four days is fast for a letter of intent. But the lawyers set a higher goal — they wanted to nail down a binding agreement. That meant figuring out what kind of deal they wanted, educating the board, negotiating terms and managing disclosures. And then structuring it to get the money before they got the approval of antitrust regulators, insurance commissions or shareholders.

Their wild weekend began on Thursday, Oct. 2. Anzaldúa put together a team consisting of his old firm, Cleary Gottlieb Steen & Hamilton, and in-house colleagues. They finished on Sunday, Oct. 5, and delivered the package before the market opened Monday morning. Though it took ten more days to fully document, and the deal gave the company additional time to get the insurance, antitrust and shareholder approvals, the signed agreement bound Allianz to provide a cash infusion of $2.5 billion.

“I’ve done a lot of deals,” says Laura Santirocco, a member of The Hartford’s in-house team, “but I think that was the fastest.” Not to mention crucial to the company’s existence. “If you take away the $2.5 billion of capital, it’s hard to see how this company would be functioning,” says Anzaldúa.

It didn’t end there. No sooner had The Hartford’s lawyers wrapped up the Allianz deal than the U.S. Treasury Department announced its Troubled Asset Relief Program (TARP) bailout plan. General counsel Alan Kreczko asked Anzaldúa: “What can we do to qualify?” And that’s when the lawyers decided that the company needed to buy a bank — preferably one that was distressed, but not too distressed. And it needed to close the deal by the Nov. 14 deadline, which gave them about three weeks.

As impressive as their dealmaking under the gun, a more important reason we chose The Hartford’s lawyers for Corporate Counsel’s Best Legal Department award is what they do when they’re not having a near-death experience. They have a multitude of systems to manage the work. For example, they teach in-house lawyers how to hire outside counsel, and how to manage the relationship. They have a mentoring program for new hires and veterans.

But their story isn’t just about systems. The Hartford’s lawyers challenge the stereotype of insurance companies full of stodgy, innovation-averse attorneys. Indeed, they are encouraged to experiment with new approaches. When parties in a massive asbestos case agreed to a settlement that would have required The Hartford to pay millions in claims, for example, the lawyers found creative ways to attack it. On the cost-cutting front, the department secured a discount on all the work one law firm does for it by agreeing to allow star associates to handle some appeals. And the ethics newsletter the compliance group launched contains more than just the usual tips and admonishments; it reports the results of misconduct probes.

The department prides itself on being hands-on, even when working with outside counsel. Cleary’s Victor Lewkow, the M&A partner on the Allianz deal, says of the in-house lawyers he worked with: “They were more heavily involved than in almost any other deal I’ve worked on-in both big-picture items and important details at all stages. Even when people were exhausted and up against a deadline,” he adds, “they were upbeat. They seem to have a team spirit that says, ‘We can get this done.’”

The legal team’s contributions have not been lost on management. Ramani Ayer, The Hartford’s CEO, praises both Kreczko, who has been GC since 2007, and his predecessor, Neal Wolin, who was nominated in March to be deputy Treasury secretary. The Allianz transaction alone was “a great contribution,” Ayer says. More generally, he adds, the lawyers excel not only in solving specific problems, but in offering strategic advice. And seldom has good business advice been worth more than it was last year.

The Hartford Fire Insurance Co. was founded in Hartford, Conn., in 1810. Early on, the company had more than its share of challenges. For one thing, it took it a while to figure out how to set policy premiums on the era’s wooden, fire-prone buildings. Consequently, the fledgling firm often flirted with going broke. By 1835 the patience of the company’s stockholders had been exhausted, and — shades of today’s shareholder activism — they threw the managers out.

But by the 1880s the company was on solid enough footing to expand nationwide. In the 1950s it added life insurance, and in 1969 it was acquired by the conglomerate ITT, which held on to it until a 1995 spin-off.

These days, The Hartford has offices in seven countries and sells a panoply of investment products. In addition to homeowner, life, automobile, and business insurance, it sells annuities, mutual funds and college savings plans. Headquarters remain in Hartford, and the executive offices are located in a stately building once home to the American School for the Deaf (the bronze stag that has long been the company’s symbol greets visitors from the entrance hall).

As the business expanded and employees swelled to 31,000, the company’s legal needs also grew. The law department is now home to about 210 lawyers, nearly all in the United States. Most arrive with government or law firm experience, or both.

Experience could not have prepared many for the shock of last year. Revenue slipped from $25.9 billion in 2007 to $9.2 billion, and a profit of $2.9 billion turned into a $2.7 billion loss. The company saw its stock price tank, and its credit ratings cut. The big losses came from the life insurance business, where the company held substantial investments in Fannie Mae, Freddie Mac and Lehman Brothers. In recent months, according to published reports, the company engaged in exploratory talks with Toronto-based Sun Life Financial Inc. about selling its life business. But at press time the talks had ended without a deal. (Company officials declined to comment.)

It was against this backdrop that the lawyers found themselves wheeling and dealing, and boning up on banking regulations. GC Kreczko calls 2008 “the most challenging year” — for the department and himself: “A lot of the issues we’ve had to wrestle with in the past year were new to me.” He didn’t know much about acquiring a bank, he notes. But help was in-house. “You need to make sure you have, and then rely on, talented staff,” Kreczko says. “I’m very lucky I have them here.”

In addition to the corporate governance unit, he expresses particular pride in the litigation group, which features all the elements of The Hartford’s approach. Its lawyers are aggressive, hands-on and systematic — and they also have room to experiment.

Take the company’s uphill fight against the Congoleum Corp.’s asbestos settlement. The ground-breaking case, which is still being litigated, involves a New Jersey-based floor tile company that was hit with thousands of asbestos claims. Plaintiffs lawyers convinced Congoleum that a prepackaged bankruptcy would serve the needs of both sides. Under their global settlement, proving claims would be fast and easy — and insurance companies would pick up the tab. The details were negotiated in advance and packaged, so all the judge had to do was sign off.

The Hartford and the ACE Group led several insurance companies in challenging the deal back in 2004. But first they had to leap the standing hurdle: They had to convince the court that insurers, which were neither debtors nor creditors, had standing as a party in their own right. It was not an easy sell. The Hartford put together a team of in-house and outside lawyers with both coverage and bankruptcy expertise to lead the briefings. They helped win a ruling that insurers may assert their own injury, and weren’t merely asserting those of third parties. The company also argued persuasively that the bankruptcy plan was discriminatory because the plaintiffs lawyers had favored their clients, their friends, and themselves to the detriment of other plaintiffs. These victories helped the insurers secure a perch from which to fight.

Not everything turned out as The Hartford wanted. In a move that many viewed as risky, ACE appealed a ruling by the bankruptcy judge and asked the 3rd U.S. Circuit Court of Appeals to disqualify Congoleum’s law firm — a move The Hartford’s lawyers opposed. But ACE’s gamble paid off, and turned the tide in the case, when the 3rd Circuit ruled in its favor. Despite the disagreement over strategy, ACE’s lead lawyer praises The Hartford’s litigation team. “The case probably wouldn’t have come out the way it did without them,” says Tancred Schiavoni, a partner at O’Melveny & Myers who has never worked for the company.

Unlike many in-house departments, The Hartford’s isn’t content to simply hand off cases to outside counsel. Litigation chief (and deputy GC) Elizabeth Sacksteder has been known to personally argue motions and examine witnesses. In the Congoleum matter, in-house lawyers have been fixtures in court, discussing strategy and preparing documents. “I know,” says Schiavoni, “because I saw it in the editing of the briefs.” Its lawyers, he adds, are “a cut above, and then some.”

The Hartford expects its outside counsel to be a “cut above,” too — and has put systems in place to enhance their performance. At the same time, the company expects its lawyers to experiment with outside firms when it’s appropriate.

Sacksteder, who was a litigation partner at Sidley Austin before she joined The Hartford in 2002, introduced the company’s systems for managing outside counsel. In-house lawyers actively direct all facets of cases, she says, and are responsible for ensuring that the company receives “the best possible representation for the least possible cost.” Most of the money goes to about 25 firms.

All firms that do a significant amount of work for the company are assigned in-house “relationship managers.” Similar to relationship partners at law firms, about 40 of Sacksteder’s 56 lawyers play this role. They keep track of how much work a firm is doing for the company, and help The Hartford keep costs down by insisting, for instance, that a firm use contract lawyers on document reviews, Sacksteder says. They also mediate disputes between in-house and outside counsel.

But this doesn’t mean that all the work goes to big firms. The litigation director encourages her lawyers to “experiment and explore.” Not on bet-the-company cases, of course, but she wants them to look for firms with fresh ideas and approaches. While big-city litigation boutiques have largely disappeared over the past decade, her lawyers have found bargains in New York in big-firm defectors like Menz Bonner & Komar (a spin-off from Simpson Thacher & Bartlett) and Dewey Pegno & Kramarsky (spun off from Cravath, Swaine & Moore). The Hartford has also tapped small-town litigation shops like Henke-Bufkin, based in Lyon, Miss. Dewey Pegno is the newest relationship, and Sacksteder is still working the firm into the rotation. She uses the other two firms regularly, she says.

The litigation group has also crafted innovative arrangements with appellate lawyers. Wilmer Cutler Pickering Hale and Dorr has a talented pool of young associates, Sacksteder says. In exchange for a favorable discount on the full range of matters the firm handles for The Hartford, Sacksteder provides the associates (with some partner supervision) five appeals each year-some with capped fees.

Systems are even more prominent in compliance, which employs a small army. The law department’s compliance group has a staff of 35 (13 of them lawyers); another 250 compliance officers, only some of them lawyers, are deployed in business compliance units.

The compliance team also oversees the system for investigating potential violations of the company’s ethics and compliance policy. And last year, according to corporate compliance director A. Scott Mansolillo, they began reviewing procedures to ensure that company investigators apply the policy uniformly.

Even here, The Hartford’s lawyers are creative. Last fall they launched a quarterly newsletter on ethics, compliance, and privacy. Called The Hartford Advantage and available only to employees (and only online), the first issue offered tips on such topics as how to protect against identity theft, and what to do if a customs official at a border crossing takes your laptop and demands your password.

It also included something that ethics gurus complain companies don’t do often enough: It told employees the results of investigations. The newsletter contained two short summaries of specific investigations that did not use names or other identifying information. One involved an employee who used a corporate credit card inappropriately. The second employee used a company laptop to “tunnel” to a personal account in order to conduct personal business during work hours.

The newsletter also reported the number of investigations and the results of those investigations. Mansolillo declined to make these public, but says last year the company conducted a “substantial” number of investigations into potential employee misconduct. Some form of discipline — ranging from counseling or a verbal warning up to termination — was imposed in 75 percent of those investigations. In 49 percent, employees were fired.

It wasn’t easy for the compliance team to convince the human resources department and their own employment lawyers that it was important to include so much information in the newsletters. But they persisted. Why? Not to scare employees straight. Rather, according to Ron Apter, Mansolillo’s deputy, to encourage employees to report violations.

With all this emphasis on systems, you might think that the human side of the law department is neglected. But you’d be wrong.

Amy Gallent, associate GC and chief of staff, manages a new career development program, and has begun a pilot project matching lawyers with mentors. Gallent encourages all lawyers who are interested to sit down and discuss their goals with her. She typically spends 60 to 90 minutes during the first session, talking about how employees are enjoying their present jobs, and where they would like to be in three to five years.

The program addresses a common sore point for corporate counsel: limited upward mobility and a fuzzy career path. But Kreczko has convinced managers that these dialogues, which could be perceived as a challenge to their authority, can help retain lawyers. When lawyers move laterally, they can explore different interests. And it’s good for the company, says Gallent, because “they can hit the ground running. It’s sort of like a utility player for a baseball team.”

Kathleen Timm has found the counseling valuable. Timm is one of the few attorneys The Hartford hired right out of law school; now 28, she’s still the youngest lawyer in the department. She works in compliance, but told Gallent during their meeting that she’s also interested in employment law. Within a month Gallent and Timm’s manager had worked out a project for her on the Fair Labor Standards Act. She’s also had meetings with mentors-both formal and informal-and found these helpful as well.

When Timm considers her future at The Hartford, something else appeals to her: flexible work arrangements. Lawyers can often change their schedules or work offsite to accommodate family or other needs. Flexible hours, Timm says, are “very important to someone like me, who will probably take advantage of that down the road.” It’s not unusual, she adds, for her colleagues to leave work early to pick up children and finish their work later from home.

That’s undoubtedly one reason the law department has been particularly successful recruiting and retaining women. Forty-two percent of its lawyers are women, and they have risen to some of the most important and visible jobs in the department (though not yet to GC).

The arrangements aren’t codified, however, nor do they work perfectly. Sacksteder says that one woman who became her direct report in 2006 had previously been working flex hours and part-time while reporting to men. She was consistently told that her schedule was impeding her career, and that to become a manager she had to be in the office. Sacksteder helped her rework her schedule, and the lawyer is now a vice president and doing well as a manager. The previous advice, Sacksteder says, “was a load of crap.”

No department is perfect, of course, and we found areas where there’s room for improvement. Despite its success recruiting women, The Hartford’s law department has had much more difficulty recruiting minorities — they’re 9 percent of The Hartford’s lawyers. Sacksteder, who co-chairs the department’s diversity committee, has struggled with this problem. The company has expanded its outreach efforts, she says. It hosted a diversity lunch last year. It’s worked with affinity bar associations, and it’s offered internships to minority students, hoping that after some law firm experience they’ll consider returning. But so far nothing has worked very well.

Sacksteder says the problem has less to do with the company than its location. Hartford “is not a destination city where you go to seek your fortune,” she observes. And the lawyers she’s trying to recruit “are not just looking at where they’re going to work, but where they’re going to raise their families and socialize.” They’re not interested in being suburban pioneers. “I’ve had candidates I’ve tried to recruit make that point to me explicitly,” Sacksteder says.

Pro bono is another area in which they could do better. It’s not that they don’t have good programs and policies. The Hartford cofounded a local pro bono partnership in 2003 to which its lawyers contribute needed services. Amy Gallent, who helps direct the company’s pro bono efforts, sits on the advisory board of the organization, now called The Pro Bono Partnership. Corporate law chief Ricardo Anzaldúa serves on the board of the Greater Hartford Legal Aid. And Gallent says all employees are offered paid time off for volunteer community service. “The view here is that, as lawyers, we have an ethical responsibility to do pro bono work,” she says.

But Gallent acknowledges that she has no real sense of how much they’re doing. The company does not measure hours of participation. It’s entirely discretionary, she says. In response to our questions, Gallent tried to conduct a quick survey. The best she could do was this: “More than 20 Connecticut-based lawyers and paralegals at The Hartford have been involved with pro bono projects with The Partnership.” The number is surprisingly low, considering that the company employs about 200 lawyers in the U.S.

These shortcomings pale, however, beside the accomplishments. The challenges of the past year may have been the ultimate test for a law department that thrives on the systems it builds. Because 2008 was the year of systemic failure throughout the financial services industry, lawyers were forced to adapt on the fly. And confronting the crisis required stamina and a deep talent pool.

The lawyers passed the stress test. The final proof was the bank.

When Kreczko told his lawyers to look into the bailout, acquiring a bank made sense to them. But management wasn’t so sure. Anzaldúa remembers that executives were concerned that the market might perceive the company as weak, so first they had to convince the boss.

Next, the lawyers needed a target. They contacted the Office of Thrift Supervision, which put out the word to distressed institutions. Two contenders emerged. The lawyers began their due diligence on a Florida thrift, then one in the Midwest suddenly looked less risky-until they discovered an off-balance sheet exposure with a potential liability in the billions.

That’s how The Hartford conditionally agreed to purchase Federal Trust Bank, based in Sanford, Fla., for $10 million on Nov. 14 — deadline day. It was contingent on several conditions, such as The Hartford’s qualifying as a savings and loan (which it has). Two big ones remain: The Treasury’s approval of the company’s participation in the bailout program (it’s applied for $3.4 billion); and the company’s acceptance of the deal (if the government imposes conditions that are less favorable than those available at the signing, the company can walk away).

In April the Treasury Department announced that it would offer aid to some life insurance companies (as with many other insurance companies, it was losses in the life insurance business that had pushed The Hartford to the brink). But Treasury didn’t say when it would decide which ones it will assist. “It will be interesting to see how it shakes out,” says Anzaldúa, with a lawyer’s gift for understatement.

No one is understating the contributions of the law department. “We really had a great year,” says Kreczko. “We knocked the ball out of the park.”

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