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Brobeck, Phleger & Harrison, a San Francisco legal institution that just two years ago stood at the pinnacle of the technology law firm boom, announced Thursday that it will dissolve, crushed by debts and the collapse of merger talks with Philadelphia’s Morgan, Lewis & Bockius. The 518-lawyer firm is expected to file for bankruptcy protection, according to staff and associates, and they said the dissolution will probably take effect in 30 to 45 days. “Brobeck will likely wind down its operations according to a process that will be defined in the next few days,” John Pachtner, Brobeck’s director of communications, said. “The reason for this is that the continued down economy, the troubled technology sector and the departures of partners make it unlikely that Brobeck can generate sufficient revenue to continue as a free-standing law firm.” The decision stunned lawyers and staff at the firm, as well as many of the players in the Bay Area legal community. “It’s a shock,” one Dockers-clad staffer said as he left the firm’s San Francisco headquarters. In 2000, Brobeck grossed more money than any other Bay Area firm and became the first to hit the $1 million-mark in per-partner earnings. By its collapse Thursday, revenues had dropped by a quarter and profits per partner tumbled to $555,000. [ See related charts.] The deal with 1,100-lawyer Morgan Lewis was regarded as a lifeline for Brobeck, which has lost more than 60 partners in the past year and has seen its lawyer ranks shrink from a height of 921 in September 2000 to 518 today. Morgan Lewis Chairman Francis Milone could not be reached for comment late Thursday afternoon, but clearly, the departure of key rainmakers in recent days — including the head of the firm’s litigation department, Steven Zager — helped kill the deal. Milone apparently made a last-ditch effort to try to keep the litigation chief by visiting Zager’s Austin, Texas, office on Monday for discussions. “Morgan Lewis probably had a threshold below which they wouldn’t go” in terms of the lineup of partners, said legal consultant Peter Zeughauser of The Zeughauser Group in Newport Beach, Calif. KILLER DEBT But the real killer may have been Brobeck’s debt. Sources familiar with the firm’s finances said the firm’s debt load at the end came close to $90 million and that Citibank had declared the firm in default. One of those sources said under Brobeck’s loan agreement with Citibank, the firm would be in default if its partner count fell below a certain number. He said he understood the firm had technically been in default of that provision last summer, but was able to resolve the issue with the bank. He also said the $90 million debt figure sounds feasible and was principally related to the acquisition of office space and the cost of building out that space. The number was not unreasonable for the firm when it was at its height, he said. Partners, he said, are personally liable for a percentage of the debt, though it’s not clear how much. “[Their] financial situation just kept deteriorating,” the former employee said. “It was revenue. That was the real problem.” Pachtner said the firm would be meeting with its banks today “to define the transition period” and that the firm would know within a few days how long that process will take. Negotiations with Morgan Lewis ended Wednesday. Partners, associates and staff in the firm’s suite of offices in the One Market Street tower gathered in three separate meetings Thursday to learn the fate of the firm. Afterward, staffers and lawyers trickled out of the building, some carrying boxes. Others appeared visibly shaken; a few hugged and exchanged telephone numbers. One of the staff members said he and his co-workers would report to work for the last time today to gather details about severance and how the firm will proceed in the next several weeks. A skeleton crew will probably be retained as the firm’s operations wind down, he said. A Brobeck accounting staff member said his department had seen the problems coming for months. The firm, he claimed, hadn’t paid many of its bills in the past two months. He said partners told the firm’s staff and associates they will be filing for bankruptcy protection and that the merger with Morgan Lewis was called off because of too much instability in the partnership ranks. The firm told staff members it intends to transition practice groups to other firms if it can. The staff member seemed skeptical. “It’s just a little too hard to believe it all,” he said. “It’s too rosy a picture.” That Brobeck staffers would be exiting One Market with boxes in tow seemed almost inconceivable a few years ago. Though battered by the collapse of the tech-fueled economy, the firm’s downward spiral began in earnest in November 2001 when former Chairman Tower Snow Jr., facing opposition from a group of partners unhappy with his management style, said he would not seek re-election to a third term. He was immediately replaced by Richard Odom and in May 2002 was expelled from the firm in retribution for his plans to take several partners with him in a move to London’s Clifford Chance. His ouster created a domino effect as dozens of partners exited Brobeck in the following six months. A group of 17 partners went to Clifford Chance and another group of 11 intellectual property partners, led by rainmaker James Elacqua, defected to Dewey Ballantine. Elacqua said the demise of Brobeck is “a real tragedy.” “It’s a casualty of the war of the dot-coms,” he said. “It’s also a product of honest disenchantment with the vision of the firm.” COMPETITORS REACT San Francisco Bay Area competitors said they were going to mourn Brobeck, but they were also going to try to pick up talent and clients from the firm’s wreckage. “It’s a very sad day for all lawyers in the Bay Area,” said Morrison & Foerster Chairman Keith Wetmore. “Brobeck is a fine firm with a grand tradition. Although they were a formidable competitor, we feel deeply for the loss of the institution and have the highest regard and concern for the individuals who were part of that firm.” On Thursday, San Diego corporate partners John de Groot and Steven Rowles jumped to MoFo. The deal was put together by the San Diego recruiting firm Watanabe Nason & Seltzer. Wetmore said MoFo has been talking to Brobeck lawyers about the possibility of joining his firm and will probably be initiating conversations with additional attorneys. “This is an unusual opportunity to acquire talent,” he said. While Morgan Lewis decided it was not in its interest to hook up with Brobeck, the firm would now be free to cherry-pick the most desirable lawyers at Brobeck. “I suspect that Morgan Lewis will be interested in picking up whatever good partners they can,” Zeughauser said. Brobeck had taken steps to get Morgan Lewis to the altar. Last week the firm revealed that it had paid $26 million to reduce its debt to Citibank. A former Brobeck partner said the firm did so by withholding partner distributions for three months. The firm was also seeking to get key Brobeck partners to agree to stick with a merged entity. But those efforts ultimately proved futile. “I’m in shock,” said recruiter Larry Watanabe. “I think it will make every law firm pinch themselves. … It can happen to anyone.” American Lawyer magazine senior writer Susan Beck and Recorder editorial assistant Jason Dearen contributed to this story. See related charts

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