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This wasn’t the way it was supposed to work. Sure, it all sounded good at the time: an unprecedented alliance between a small law firm and a Big Five accounting firm, a deal industry watchers tabbed as a model for the 21st century legal practice. But that all went up in flames years ago. Yet the phoenix that arose from those ashes may well be more spectacular than the original model. After almost a decade of exponential growth, McKee Nelson is the orange in Washington’s legal apple crate: an upstart, small-sized, high-end tax and capital markets outfit, targeted directly at Wall Street, that thrives in a town dominated by gray-suited appellate and regulatory behemoths. And while its competition works furiously to get bigger, ever bigger, the 210-lawyer McKee Nelson has been able to do what most Washington firms have not: build a New York outpost that is the equal of, if not superior to, the home office — in only five years. And their lawyers get paid like Manhattan natives, not out-of-towners struggling to make it in the big city. Its profits per partner there are far and away the highest among D.C.-based firms. Moreover, it’s all been built from scratch in less than a decade. “We’re about being nimble and being focused,” says Reed Auerbach, a securitization and structured finance lawyer who serves as managing partner of McKee Nelson’s New York office and is the acknowledged heir apparent to become firm chairman. “It goes back to the idea of empowering our partners.” It was not organic, unchecked growth that made McKee Nelson into such a dynamic moneymaker. Instead, it was the targeting and acquiring of a litany of top-tier tax and capital markets partners, all with large books of business. Firms who’ve lost key lawyers to McKee Nelson include Fried, Frank, Harris, Shriver & Jacobson; King & Spalding; Miller & Chevalier; Orrick, Herrington & Sutcliffe; Sidley Austin; Stroock & Stroock & Lavan; and Swidler Berlin. “They achieved in a short period of time what few other firms have achieved over a much longer period,” says Jonathan Lindsey, managing partner of recruiting firm Major, Lindsey & Africa’s New York office. “And now they’re punching above their weight. They’ll clean your clock.” FEW THINGS TO FEW PEOPLE McKee Nelson has a focused vision of how it wants to run. “We know what we are,” says founding partner and firm managing partner William Nelson. “We’re going to be the best at what we do, and we’re not going to allow practices to cannibalize each other.” For that reason the firm has largely avoided branching outside of its core capital markets practice. For example, until recently the firm offered little in the way of litigation services, largely for fear of the conflicts it might create. That changed, though, in February, when Jeffrey Smith joined the New York office from King & Spalding. In Smith the firm found the kind of litigator who specializes in defending the institutions McKee Nelson already has as clients, a list that includes Sallie Mae, Citibank, General Electric Co. and many of the denizens of the Fortune 100. Smith also brought with him five partners, 19 associates, and $20 million in billables, most from current McKee Nelson clients such as Credit Suisse Inc., Lehman Brothers, and Deutsche Bank. The addition of Smith is indicative of how McKee Nelson makes its lateral hires (last month Major, Lindsey & Africa recognized McKee Nelson in a national survey as being the best firm at integrating lateral partners). Another good example of their lateral hiring process involved John Magee, who in 2000 was brought in from Miller & Chevalier, where he was head of the tax department. He brought along two other partners, as well as health care giant GlaxoSmithKline. The Internal Revenue Service had begun inquiries into Glaxo in 1992, saying that the company owed $7.8 billion in back taxes and interest. Last September, McKee Nelson negotiated a $3.4 billion settlement of that claim for Glaxo, believed to be the largest in U.S. history. The firm won’t provide its take from that deal. But even before that fee was deposited, the firm was already looking ahead. “With Glaxo, we started planning for it being over someday almost as soon as we got the work,” says Nelson. “While it was a nice boost, we didn’t want it to be anything the firm would depend on.” Although the firm has shown impressive growth, some observers have wondered if its winning streak can continue. To date, the firm’s bottom line shows little weakness. In 2006 McKee Nelson’s gross revenue was $202 million — the third consecutive year that number has increased by more than 30 percent. The firm was one of four in The American Lawyer‘s Second 100 firms, with revenue per lawyer of more than a million dollars. And in the all-important category of profits per partner, McKee Nelson delivers a roundhouse to the Washington market with an average of $1.7 million — in the Legal Times D.C. 20, only Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom are higher, and neither of them are native fauna. “They picked a practice area that was booming and is essential to the U.S. economy,” says Avery Ellis, a recruiter at Mestel & Co. “It shows you don’t necessarily have to be in an enormous law firm to build a substantial capital markets practice.” WILL MEETS BILL Competitors say McKee Nelson’s current success is largely the result of the talents of two men. William Nelson and William McKee don’t lack for confidence — at least when the conversation pertains to their firm or field of law. Both have their defined roles. Nelson, 60, is the effervescent manager of personalities, McKee, 63, the matter-of-fact businessman. The duo met at the University of Virginia School of Law in 1969 before working in government. McKee was tax legislative counsel at the Treasury Department from 1981 to 1983. Nelson tserved as chief counsel at the IRS from 1986 to 1988. Then, as partners at King & Spalding, the two constructed a high-end tax practice. It was in 1999 that William Lipton, the vice chairman for tax services at Ernst & Young, came calling, asking if the two would start their own firm with ties to the accounting giant. “We thought being a beachhead for Ernst & Young would be great leverage,” says McKee. “But that work never materialized.” With Ernst & Young’s financial backing, McKee Nelson Ernst & Young was launched in 1999. Immediately, the firm attracted blue-chip tax lawyers, including David Curtain, a partner at King & Spalding, and Magee, from Miller & Chevalier. But McKee Nelson’s connection with Ernst & Young was crumbling. The firm dropped the Ernst & Young name in May 2001, partly as a pretext to moving into New York, where state bar rules prohibited a law firm’s relationship with an accounting firm. Later that year came the Enron bankruptcy and — more significantly to McKee Nelson — the resulting Sarbanes-Oxley Act, legislation designed to rein in accounting firms’ conflicts of interest and compensation practices. By 2004, only 10 percent of McKee Nelson’s revenue came through referrals from Ernst & Young, and the firms decided to completely part ways. The experiment was over. “We’ve had some very interesting times at this firm,” says Nelson. “That was one of them.” But McKee and Nelson were already making moves to outflank the original scheme. With a strong stable of tax lawyers, the firm saw securities work as a natural extension. At the same time that the relationship with Ernst & Young was dissolving, the firm brought in John Arnholz, who was then the head of the structured finance group in the D.C. office of Sidley Austin. And in the following years, McKee Nelson raided the cupboards of several of its competitors, adding securities partners Auerbach and Robert Wipperman from Stroock & Stroock; Orrick tax chairman David Nirenberg; Orrick securities chairman Edward De Sear; Michael Voldstad, head of Orrick’s New York office; and Laurence Isaacson, head of the structured finance practice at Fried, Frank. “It was a risk,” says Arnholz, now a member of the firm’s powerful, five-member executive committee, which also includes McKee, Nelson, Auerbach, and Magee. “What really sold me on the place were two things: I loved the idea of trying to build something. The second thing was Will and Bill. They’re superb lawyers. It hit me like a bolt that this was a once-in-a-lifetime opportunity: this was my only chance to build a firm.” BUILDING A BLACK BOX One thing that is not part of the McKee Nelson vision is the kind of transparent, all-inclusive, “Kumbaya” management style in vogue with some firms these days. Here, not everyone has a voice. “The decision-making is less democratic than it may appear at other firms, but the amount of information we share with partners is more than other firms,” says Auerbach. “We run top-down. We make strategic decisions with a relatively small number of decision-makers.” And above every other firm commandment rests the management’s belief that compensation should never be open for public discussion within the partnership. McKee Nelson is strictly a black-box system. “I was initially not a fan — and found it somewhat offensive — that we had a closed-book compensation system,” says Arnholz. “Now I couldn’t be a bigger fan. It takes compensation off the table for our partners. We pay people what management and the partner agree they’re worth. We could not have built the firm without that system.” Beyond New York, the firm’s management says the only other city that would interest the firm is London, the burgeoning locus for capital markets (currently the firm has an alliance with London-based Ashurst). “Because we’ve built this firm from scratch with laterals, we’ve held a lot of money back in order to smooth out variations in income that can occur in the middle of a downturn,” says Nelson. “You have to learn to discipline yourself — to stay away from the short-term hit in favor of the long-term gain.” That idea is partly a nod to the Glaxo tax case. The windfall the firm received, Nelson says, was largely squirreled away in what management calls its “rainy-day fund.” And it contributed little to the firm’s robust profits last year. Critics from other law firms contend that such a fund might be a prudent move given the lending market’s current instability. Lawyers at McKee Nelson acknowledge that third- and fourth-quarter firm profits may be slowed by the subprime lending crisis, but they maintain that the firm is diversified enough among tax and securities work to weather some turbulence. “At this point I don’t anticipate a major downturn, unless the capital markets were to totally swoon,” says Nelson about this year’s revenue. “I’ve told my partners this might be a rebuilding year, but it’s also not a year where our numbers will slip.” Which leaves moving that top-down decision-making to a second generation as the tallest hurdle the firm faces. To smooth the inevitable transition of power, McKee and Nelson have made Auerbach’s eventual ascension to the firm’s chairmanship an open secret. “We’re a first-generation law firm, and so there’s no deadwood,” says Auerbach. “That’s something we’re going to have to see if we can maintain.”
Nathan Carlile can be contacted at [email protected].

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