“I don’t want to cook the books anymore. We need to stop doing that.”
–Joel Sanders, former Dewey & LeBoeuf chief financial officer, in a Dec. 4, 2008, email
Query: was it the changing business model or something deeper that brought down Big Law “superfirm” Dewey & LeBoeuf? And what can a company’s in-house legal department learn from the firm’s demise to better inform their selection of outside counsel?
The headlines have been flowing fast and furious on the spectacular collapse of Dewey & LeBoeuf (including in Corporate Counsel’s affiliate publication, The American Lawyer), once one of the world’s largest law firms with a pedigree reaching back to two-time former Republican presidential candidate Thomas E. Dewey—yes, the “Dewey Defeats Truman” guy. The story by the numbers is a tabloid editor’s dream: seven unnamed employees pleading guilty, three former top execs (and one 29-year-old former client relations manager) doing the perp walk of shame to their arraignment in New York state court, and 106 counts of grand larceny, securities fraud, conspiracy and falsifying business records.
Enron and WorldCom, BigLaw Style
Slammed by the Manhattan district attorney for running their former firm “as a criminal enterprise,” Dewey’s ex-execs are accused of carrying out a “wide-ranging campaign to manufacture fake revenue,” leading to the largest law firm bankruptcy in history. The messy publicity is an unwelcome spotlight on Big Law, already struggling under increasing financial pressures, with one chairman of another megafirm admitting to being “embarrassed to be in the same profession.” As another Big Law partner summed it up: “Not a happy day for the profession.”
Many legal observers have attributed Dewey’s stunning implosion to a changing Big Law business model, explaining that the firm “collapsed under the weight of a toxic combination of high leverage, lavish financial guarantees to many partners and faltering revenue.” Some have drawn parallels to Lehman Brothers and Bear Stearns, for which they remind us that Dewey had a “front-row seat.” And in the “What Were They Thinking?” category, many have chronicled the trail of emails only a prosecutor could love, careless exchanges about a “Master Plan” for “false income” and “accounting tricks” to “get paid” and fool their “clueless auditor.”
Culture, Compliance and the C-Suite
But the eye-popping details of the Dewey story are symptoms of something deeper. Seen through a compliance lens, the story points to an ethical culture and compliance gap in the highest ranks of the now-defunct firm, extending to others down below who assisted in the alleged misconduct.
By now, everyone has probably read James Stewart’s detailed New Yorker account of Dewey’s downfall, “The Collapse: How A Top Law Firm Destroyed Itself.” The chain of events meticulously documented by Stewart will surely be dissected for the next decade in business and management schools. But what should really make it into the curriculum (and probably won’t) is a study of the corporate ethical culture in Dewey’s top ranks, including the groupthink and slippery slope that infected their decision making in a desperate attempt to save the firm.
At a May 2013 RAND symposium, “Culture, Compliance & the C-Suite,” Bryan Cave partner and invited RAND white paper author Scott Killingsworth noted that the C-suite environment is characterized by “high stakes, strong temptations, vast power, extreme pressure, a fast pace, complex problems and ambitious people” operating under few effective external controls. Without the right culture and compliance safeguards in place, the C-suite can develop a “compliance gap” and an illusion of invulnerability that can imperil the entire organization. Other observations from the room: “If you wanted to design an incubator for generating misconduct, it would look a lot like the C-suite.” And this: “The C-suite is a cookie jar without a lid.” Dewey know anyone who fits that bill?
Do Law Firms Need Compliance Programs? Duh
Here’s hoping that Big Law takes more away from the Dewey scandal than “never put it in an email.” Can we now dispense with the notion that a law firm is somehow too “special” to need a compliance program, because “ethics is at the core of all we do”? And the argument that the lawyer’s code of professional conduct is even remotely a substitute for a robust compliance program that identifies and addresses the particular risks of the legal partnership? Let’s also agree: a general counsel is not a compliance program. Here’s a refresher: “10 Inconvenient Truths About Law Firm Compliance.” But really, it all boils down to:
- Fact 1: People create risks.
- Fact 2: Law firms have people.
What’s also clear is that the indicted Dewey execs did not act alone. Any scheme to “cook the books” would have required others to actually implement the fraud. Reportedly, plea agreements have been struck with seven members of the firm’s accounting and financial staff, dubbed the Dewey “Secret Seven.” A compliance program, tailored to the law firm structure, could have given those seven Dewey employees a safety valve. If just one of them had sounded the alarm at the beginning instead of quietly acquiescing, the story might have taken a different turn.
A compliance-risk assessment of the law firm partnership model would also have raised the issue of organizational transparency. If firms approached compliance with the same energy they employ pursuing high-margin business, they would be injecting more checks and balances into their organization, providing more transparency and risk assessment, and boosting the ability of others to challenge bad or ill-advised actions. This is easier said than done and requires dedicated resources and management commitment. But based on the lessons from Dewey, it’s worth serious consideration.
Unlike corporations, where the board of directors arguably has the power to demand information and is tasked with oversight of the C-suite, the oversight in a law partnership has to be performed by the partners themselves. Although this argues for partners outside the management committee to remain curious about the handling of their firm’s business, the larger the firm, the less transparent the process becomes. This may be the single most serious risk of the megafirm structure. For added complexity, an increasing number of megafirms, such as DLA Piper and Baker & Mackenzie, have adopted a Swiss “verein” model, or an association of legal entities operating under a single brand. As one pundit warns: “Be Afraid, Be Verein Afraid.”
Finally, one bedrock principle law firms can learn from the compliance profession is that incentives drive behavior and impact culture, for better or worse. This is underscored by Stewart’s observation that none of The American Lawyer’s top 10 law firms (based on profits per partner) has grown by merger, and more than half of them, including Cravath, Swaine & Moore, adhere to the old-style lockstep (or near-lockstep) compensation model. These firms, explains Stewart, still attract the top law school graduates and groom most of their partners from within, sustaining a collegial culture and providing stability despite the financial upheavals of the market and changes in the legal profession. “What these firms seem to have—and what Dewey & LeBoeuf so manifestly lacked—is a culture that fosters cooperation and mutual respect,” Stewart says.
What This All Means for In-House Counsel
Ironically, it was former Dewey Chairman Steven Davis who observed at the end: “[I]f it is only money that holds a firm and its partners together, then there is really no glue at all.” And the takeaway for in-house counsel? When selecting your outside counsel, culture and compliance should be the No. 1 nonnegotiable on your checklist.
Donna Boehme is an internationally recognized authority in the field of compliance and ethics, designing and managing compliance and ethics solutions for a wide spectrum of organizations. Principal of Compliance Strategists, a N.J.-based consulting firm, Boehme is the former chief compliance and ethics officer for two leading multinationals. She has been named to The Top 100 Thought Leaders in Trustworthy Business 2014 by Trust Across America, and can be reached at email@example.com.