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The Washington, D.C., law firm that drew national attention for its unprecedented branding alliance with a Big Five accounting giant in 1999 is entering a new phase. McKee Nelson, Ernst & Young expects to soon drop the Ernst & Young brand from its name. The change comes as the firm, which started out as primarily a tax practice, is expanding dramatically — pushing into high-end corporate finance and transactional work. Last week, McKee Nelson poached nearly the entire capital markets team from the D.C. office of newly minted Sidley Austin Brown & Wood, and signed four more corporate lawyers from other firms. The influx of 16 elite lawyers expands McKee Nelson’s ranks by 50 percent. The acquisition also positions the firm to open a New York office. The startup of McKee Nelson — financed by Ernst & Young — has been closely watched in legal business circles. Ernst & Young and other accounting and consulting firms are seen by many big law firms as a major competitive threat. The controversial venture was hatched when the American Bar Association was debating an ultimately failed proposal to lift the rules that restrain lawyers from going into business with nonlawyers. Many lawyers viewed McKee Nelson, Ernst & Young as an innovative solution to the regulatory dilemma: how to closely align a law firm and an accounting firm without running afoul of ethics rules. Name partner William Nelson says the venture has already proven successful. The firm brought in $26 million in revenue in 2000 — its first full year in business — and expects to clock in at about $40 million this year, Nelson says. The firm has ambitious New York plans: opening an office with four lawyers this summer, and then taking a full floor of Ernst & Young’s new 5 Times Square office building a year later. The decision to drop Ernst & Young from its name is a response to regulatory constraints, leaders at both firms say. New York’s bar rules, unlike those in Washington, D.C., prohibit law firms from adopting trade names, Nelson notes. The law firm is also uncoupling from a formal financial relationship with Ernst & Young: McKee Nelson is close to inking a deal to pay off the loan that Ernst & Young provided to finance the venture, according to Nelson. Nelson, 54, insists those moves “in no way signal a backing away from the alliance.” Says William Lipton, Ernst & Young’s vice chairman for tax services, “It never was the intention that we would be a lender other than to get them up and running. We’re in it to be their alliance partner.” “It is ironic that we have to get further apart to get closer together,” Nelson adds. FIRM OUT FRONT Launched in November 1999 by high-profile former King & Spalding tax partners Nelson and William McKee, McKee Nelson, Ernst & Young immediately won attention — and criticism from some legal ethicists — for its very public embrace of a major accounting firm. Other members of the Big 5 have struck up referral relationships with law firms. But Ernst & Young has been the only one to engrave its name on the law firm stationary. McKee Nelson has structured its relationship with Ernst & Young to comply with bar rules prohibiting fee sharing with nonlawyers and payment for referrals, Nelson says. Ernst furnished a loan to the firm, but at market rates — “two points above prime, with no kickers,” he adds. As of early last week, McKee Nelson boasted 33 lawyers, nearly all of them tax lawyers. By the end of the week, the firm employed 45 and had signed four more. Most of the newcomers are structured finance and M&A lawyers from the Brown & Wood side of recently merged Sidley Austin Brown & Wood. The pick of the litter was John Arnholz, who had been the head of Brown & Wood’s structured finance group in Washington — and the co-head of the New York firm’s D.C. office. Arnholz, 41, has spent his 17-year career at Brown & Wood and won a reputation as one of the very few D.C.-based lawyers with a large, and lucrative, securitization practice. Arnholz declined to name clients, but Brown & Wood has been a perennial leader in rankings of firms that represent both issuers and underwriters of asset- and mortgage-backed securities. Lehman Bros. has been “a major client” of Arnholz’s, along with Fannie Mae and the U.S. Postal Service, according to an in-house lawyer at a Wall Street financial services firm. Arnholz also would not disclose his fees, or the value of his book of business, other than to say it was “multiple millions.” Nelson approached Arnholz on Jan. 19, while Arnholz was in the midst of merger discussions with Sidley & Austin. That deal was consummated late last month, but for Arnholz and his group, which includes four other partners, an of counsel, and six associates, it clearly didn’t work out. “Although I think the merger will be an outstanding success for both firms, it wasn’t a good fit for the capital markets practice in D.C.,” Arnholz says. “McKee Nelson is trying to build a true capital markets practice and is devoting the resources to do that,” he adds. Arnholz’s capital markets group had been the largest and most profitable in Brown & Wood’s D.C. office before the merger, a New York partner confirms. But Sidley’s large litigation practice appears to have tipped the scales toward litigation. Sidley’s high-profile appellate litigator, Carter Phillips, now heads up the combined firms’ D.C. operations and sits on the firmwide management committee. Edward Fine, who led Brown & Wood’s firmwide structured finance practice and now co-heads the merged firm’s team, says he’s “obviously disappointed” by the defections. But, he adds, “with a bench of 150 people [still in the practice group], we continue to be the dominant securitization practice in the world.” Two partners — a mergers and acquisitions lawyer and a corporate lawyer — remain in Sidley’s D.C. capital markets group, according to Fine. He says the firm is discussing how to “rebuild” the group in the District. OPPORTUNITY KNOCKS Arnholz says he is persuaded that Ernst & Young’s relationship with McKee Nelson will remain fruitful. Arnholz says that on May 14 he met in New York with Stephen Howe, Ernst & Young’s national director of capital markets, and left the meeting “feeling there were more opportunities than I realized when I decided to join.” He declined to be more specific. Nelson, meanwhile, says his decision to pursue Arnholz’s capital markets team was driven by the firm’s Ernst & Young relationship. Capital markets work “in particular” involves “areas where various professionals, including lawyers, are always teamed together to do deals,” he says. But, at the same time, the law firm’s formal relationship with Ernst & Young is clearly becoming less overt. By dropping the Ernst & Young name, McKee Nelson eliminates one of its most distinctive intangible assets. By paying off its loan to the accounting firm, McKee Nelson separates itself in a very tangible way. Nelson says the firm no longer needs the recognition boost of the Ernst & Young name. When the firm first launched, he explains, “we wanted to be sure it would be understood that the firm has a different kind of vision. The most effective way to do that was to stick the brand name in [the firm's] name.” Now, Nelson claims, “I think the alliance will carry itself.” On a more practical level, the firm has to remove Ernst & Young from its nameplate in order to open a New York office. The name, Nelson says, “was the only thing our ethics counsel said we really had to change” to comply with New York Bar rules. Thanks to an introduction from Ernst & Young, the firm secured in December a line of credit from London’s Barclays, Nelson says. And now Nelson expects the London bank to sign off on another loan — “eight figures of credit” — that will, in effect, serve to pay off the law firm’s debt to Ernst & Young, as well as to finance operations.

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