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2004 was a tough year for Swidler Berlin. The firm’s head count shrank significantly. It tried and failed to merge with both Orrick, Herrington & Sutcliffe and Dickstein Shapiro Morin & Oshinsky. Key rainmakers in its antitrust and white-collar defense practices and in its D.C. lobbying subsidiary jumped ship. And on New Year’s Eve, virtually all the lawyers in Swidler’s Manhattan office bolted to Dechert. So how on earth did a firm with that many problems manage to score one of its best financial years ever in 2004, with profits per equity partner climbing above $1 million? In part, by capitalizing on its failures, sources with knowledge of the firm’s finances say. The firm bailed out of its top-of-the-market Chrysler Building lease. It also booked a multimillion-dollar check from Dechert as part of the deal that sent 57 New York attorneys and eight D.C. lawyers to that firm. And as Swidler shrank, so did its equity partnership. The number of partners fell from 60 to 55 — allowing the firm to divide profits among a smaller group. And by other, more standard measures, Swidler had a strong financial year. The law firm grossed $22.2 million lobbying, according to data compiled by Influence, Legal Times‘ sister publication. That figure was driven in large part by work from a business coalition called the Asbestos Study Group. And former partners report that business at Swidler, which has a well-regarded telecommunications practice, was strong in a number of different practice areas. The firm, which recently released its 2004 financial data as part of an annual survey conducted by Legal Times and its sister publication The American Lawyer, reported profits per partner of $1.07 million — a 14 percent increase from 2003. The firm’s gross revenue fell 2 percent to $154.6 million. Swidler managing partner Barry Direnfeld did not respond to repeated phone messages for this article. But in January, soon after the departure of the New York attorneys, Direnfeld touted the firm’s financial strengths in an interview with Legal Times. “We’re doing great,” Direnfeld said at the time. “We’re market leaders in a number of practice areas. We’re very profitable.” Yet interviews with sources familiar with Swidler reveal that the firm’s profitability was also helped by money realized from the New York partner exodus and the way the firm dealt with its pricey Manhattan real estate. TOWERS IN THE SKY In 1998, the Washington-based firm then known as Swidler & Berlin expanded to New York through a merger with 65-attorney Shereff, Friedman, Hoffman & Goodman. Less than two years later, with hopes of significantly expanding its New York presence, the firm leased the 11th, 12th and 13th floors of the landmark Chrysler Building. The deal was inked near the top of the real estate market, and the firm took on 100,000 square feet at a time when space in the Art Deco tower was renting annually for more than $60 per square foot. That left the firm with a lot of room to grow, but the growth never materialized. In large part, that’s because the newly merged firm’s D.C. regulatory practices never jelled with its newly acquired New York corporate group, and the merged firm continued to operate like two separate entities. “The Chrysler Building is a very nice old building that’s a premium rate, and there’s a fair amount of prestige,” says one former partner. “But you’ve got to have a fair amount of work to make it go, and you need some integration to make that happen.” By late 2004, it was clear that much of the New York office wanted to leave the firm. Client conflicts between Swidler’s D.C. office and San Francisco-based Orrick Herrington had prevented the firms from consummating a full-scale merger, but Swidler’s New York office remained interested in breaking off to join the San Francisco-based firm. By December, the Manhattan attorneys were also considering a new suitor, Philadelphia-based Dechert. But the 10 years remaining on Swidler’s Chrysler Building lease remained an expensive problem. As the former Shereff Friedman attorneys prepared to exit en masse, Swidler sought to strike a deal with its landlord to vacate more than 80 percent of its New York space. But ending the lease proved no simple matter. Rates for commercial real estate in Manhattan had slid considerably since the Sept. 11, 2001, terrorist attacks. That meant the firm’s landlord would be reluctant to let the firm out of a lease signed near the top of the market without charging a hefty premium. Eventually, the firm agreed to pay between $13 million and $16 million to get out of the space, according to those familiar with the deal — an obligation it shared with its departing partners. (Swidler has retained a portion of one of the floors, but the remainder of the space has since been leased to 78-attorney Moses & Singer.) That settlement represented roughly a quarter of the firm’s net income. But softening the blow, according to former Swidler partners, was a payment from Dechert for as much as $10 million for the work-in-progress and accounts receivables of the 65 attorneys joining that firm. For his part, Dechert Chairman Barton Winokur says that the lateral acquisition has not “had any impact on the income of Dechert in 2004 or 2005.” Winokur declined to discuss the size of any payment to Swidler. PRESTIGE AND PROFITS That windfall from Dechert didn’t entirely resolve Swidler’s financial problems stemming from the Chrysler Building lease. As a result, profit distributions to partners for the last quarter of 2004 were slashed in order to help pay for the lease charge, say three sources with knowledge of the matter. Despite the turmoil, Swidler remained conscious of how the accounting of the money from Dechert and the lease termination payout would affect its profit figures. “A lot of people were scared to death the [profits per partner] would fall,” says one former partner. That didn’t happen. But whether the firm can report record profits next year may depend on how successful it is in attempting to rebuild its New York office, whose eight lawyers currently occupy Swidler’s remaining half-floor in the Chrysler Building. It also may hinge on whether the 145-lawyer firm decides to seek another merger partner. One thing seems certain: Swidler Berlin won’t soon overextend its Manhattan real estate commitments. “If you’re fortunate enough to be in New York, then expansion makes sense when it’s an expansion of your practice groups,” Direnfeld told Legal Times in January. “You need to be disciplined and selective.”

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