(Illustration by Alex Williamson)
Several partners at Bingham McCutchen, the 123-year-old firm that is Big Law’s latest flameout, recall exactly when they knew it was the beginning of the end. It was noon on Jan. 30, during the monthly partner teleconference call.
They were hoping to hear about a bold change in course: Countercyclical restructuring and big-ticket litigation had dried up, and many partners were facing 20 percent cuts in their 2013 compensation, the second hit in two years. But Bingham chair Jay Zimmerman didn’t have a new plan. Instead, he reminded partners that the firm would soon begin to reap millions of dollars in savings from a new administrative support center in Lexington, Ky., and told them the firm would continue its practice of “active waiting” for the next growth opportunity.
It was a practice he had advocated since 2009, when Bingham completed its 10th and last merger, with Washington, D.C., tax and structured finance specialist McKee Nelson. Zimmerman “had very successfully executed a strategy for 15 years of acquiring other law firms, and everything about the firm was set up to execute that strategy,” says one partner who was on the call. “But the firm stopped pursuing that strategy. There was complete strategic drift. And law firm economics don’t permit you to do that.” (He and more than a dozen other former partners and high-level staff who agreed to speak for this article asked not to be identified, citing a confidentiality agreement with Morgan Lewis & Bockius, which took on most of Bingham’s partners as laterals, and other concerns.)
Bingham’s story has elements that are familiar to many large law firms: the limits of acquisition as a growth strategy; the danger of overreliance on countercyclical practices; the cutthroat nature of the lateral market. But in Bingham’s case, those challenges were intensified by an overly centralized, opaque management, headed by an entrenched, ambitious leader who, relatively unchecked, made a lot of good decisions—and a few colossally bad ones. By the end, the firm was held together by little beyond individual partners’ financial self-interest and was too fragile to withstand two years of economic headwinds.
“They had a good reputation and very good clients. It’s just amazing to me to see such good talent screw up,” says a veteran consultant who is familiar with the firm. And when a good institution fails, he says, “the fault must be placed at the leadership’s feet.” Zimmerman, who spoke at length to The American Lawyer for this article, doesn’t dispute that: “If you lead and make decisions,” he says, “of course you have to take responsibility.”
A Man With a Plan
For the past two decades, Bingham’s story has been that of Zimmerman, a charismatic corporate lawyer who ascended to the firm’s chairmanship in 1994 at age 40. The firm, then called Bingham, Dana & Gould, was in crisis: At the time, a third of its business came from the Bank of Boston, and “it was clear that the bank was going to disappear,” says Hank Shafran, a public relations expert whom Zimmerman brought on in 1995 as head of marketing. (Bank of Boston was acquired by Fleet Bank in 1999 and was eventually absorbed into Bank of America.)
Zimmerman had given up his practice to run the firm full-time, and such was the partners’ commitment to the firm that in his first year he convinced them to take a 25 percent pay cut to provide him with the means to diversify the firm beyond the Bank of Boston. Zimmerman moved quickly, acquiring a series of smaller, distressed firms in places where he thought Bingham needed to be, concurrently diversifying the firm’s practices and clientele, and establishing footholds in New York, Washington, D.C., and Tokyo. In each case, the target was a second-tier firm experiencing a down business cycle or succession problems.
“When Jay started doing mergers 20 years ago, it was absolutely a necessity,” says Ropes & Gray chairman R. Bradford Malt, who has known Zimmerman for decades. “Then he did some more, and they worked.”
Between 1994 and 2010, Bingham’s top-grossing year, the firm recorded a tenfold increase in revenue and a steady rise in profits per partner. Growth slowed after 2002, when it undertook its biggest merger ever, with San Francisco’s McCutchen, Doyle, Brown & Enersen. Still, revenue doubled between 2002 and 2010, from $434 million to $873 million, and PPP surged 77 percent, from $920,000 to $1.625 million. (The Am Law 100′s average PPP grew 69 percent during that time.)
Bingham’s early conquests were relatively seamless. Integration was handled in an almost cookie-cutter fashion by experienced nonlawyer operations and marketing professionals whom Zimmerman had hired early on to manage the process. Typically, Zimmerman appointed the acquired firms’ leaders to head offices or to serve in other leadership roles where they could command respect and be provided compensation sufficient to earn their loyalty. But Zimmerman “was also very, very clear that the processes would be Bingham processes, and that the acquired firm would be fitted into Bingham’s platform,” notes former Harvard Law School professor of practice Ashish Nanda, author of a glowing 2011 monograph, “Combinatorial Mathematics,” which charted Bingham’s growth into a national firm with global aspirations.
Too Big To Swallow?
Zimmerman’s template worked well in acquiring much smaller, distressed firms. But Nanda, who has studied law firm management and written several monographs on the subject, says it didn’t work as well when applied to a near-equal in size like McCutchen, nor did it fit with a higher-billing one, such as McKee Nelson. In each case, the acquired firm’s partners’ expectations regarding compensation or a greater say in decision making created complications.
The 2002 merger of McCutchen, with 343 lawyers, and Bingham, with 514, to form the newly renamed Bingham McCutchen created a major bicoastal firm and, for the first time, a player in litigation. Like Bingham’s earlier conquests, McCutchen had been in financial distress, but it was a large, diversified firm with a proud, tightly knit culture, and its partners viewed the deal as a union of equals.
They would quickly see otherwise. “As soon as they merged, [Zimmerman] clamped down on expenses, without having much discussion about it, and McCutchen folks started peeling off,” says one consultant familiar with both firms. Many McCutchen partners found Bingham’s management of their offices and practices heavy-handed. Though Bingham McCutchen brought many partners into firm governance—putting them on a 12-member management committee that vetted major initiatives and compensation, and a 22-member firm committee—many partners, especially in California, say they saw little discussion or debate. “Everyone here grew up under a system where there was a lot more transparency, more discussions. I mean, McCutchen folks would get ‘high consultative’ about switching bagel suppliers!” recalls one San Francisco partner. “In Bingham, there was hardly any of that. The governance structures didn’t govern. Decisions on compensation, mergers—they were all made by Jay.”
Zimmerman didn’t do much to discourage this perception. He and a large group of C-level executives, which he called the “Office of the Chair,” occupied half of the penthouse floor inside the firm’s Federal Street headquarters.
There were other complaints. “Bingham was not a litigation firm,” says a senior partner in San Francisco. “Conflicts were never resolved in legacy McCutchen partners’ favor.”
Especially after 2008, many partners thought management was spending too freely, a perception felt keenly in California, where the litigation practice felt squeezed. Zimmerman’s income, always at or near the top of the firm’s compensation tiers, hit $3.5 million in 2012. Meanwhile, the firm rented several apartments in New York and one in San Francisco for Zimmerman and two other senior partners to use. There were no cutbacks in marketing and leadership events, which were splashy affairs; to celebrate the opening of a tiny office in Beijing in July 2012, for example, Bingham hosted for clients and the media a private showing in Discovery Times Square Museum of China’s Terracotta Warriors.
For a variety of reasons, attrition in California escalated after 2009. Lawyer head count in the state fell from 288 in 2009 to 178 in 2013. By November 2014, it was 141.
Gambling on Securities
In 2009 and 2010, while the rest of the industry was grappling with the recession, Bingham’s profits continued to surge, thanks to its busy insolvency practice, and Zimmerman saw an opportunity to invest again. The target, 173-lawyer McKee Nelson, had three prized practices in New York and Washington, D.C.: a tax litigation and planning group, led by William Nelson and Bill McKee; a structured finance practice, led by Reed Auerbach; and a banking litigation practice, led by Jeffrey Q. Smith. The collapse of the asset-backed securities market had devastated Auerbach’s group. Still, Mc­Kee’s rate structure was on average 20 percent higher than Bingham’s, according to several sources. Betting that the structured finance market would rebound, Zimmerman “figured it was a great catch and put a lot of money on the table,” says one partner involved in the negotiations.
In exchange for joining Bingham, McKee’s leaders demanded, and obtained, multiyear compensation guarantees at or above Bingham’s top tier. Zimmerman also agreed to withhold individual McKee compensation information from the general partnership for several years, though Zimmerman says that the management committee signed off on the compensation agreements.
Bingham continued to do well in 2010 and 2011. The firm’s work representing Anadarko Petroleum Corporation, a defendant in the Deepwater Horizon oil spill litigation, kept as many as 75 lawyers busy, which accounted for 7-8 percent of 2011′s revenues. The London-based insolvency group was also going full-tilt, representing noteholders in cross-border restructurings involving Ireland’s Quinn Group Inc., Petroplus Holdings AG and Wind Hellas Telecommunications S.A., among others, while its Tokyo office was juggling two major insolvencies.
Zimmerman told partners in 2010 that the firm would commit a total of $59 million to compensation for legacy McKee partners for that year—about 25 percent of the previous year’s record earnings of $233 million. He also allowed legacy McKee management to set compensation for the legacy McKee partners, at least for a few years.
For the first time, top partners pushed back. “The McKee Nelson deal posed an enormous amount of risk,” says one. “But it was something [Zimmerman] personally determined to push through. And he stared everyone down to do it.”
By then, Bingham’s financial picture had darkened. Insolvency work and the Anadarko matter were petering out. Bingham was experiencing its first declines in profits per partner in 18 years, with some partners reporting a 2012 compensation drop of 10 percent. And for the first time, multiyear compensation guarantees looked truly dangerous, having played a major role in the collapse of Dewey & LeBoeuf that year.
While other guarantees ended after a few years, the five richest deals lasted through 2013, when a few asked for extensions. They included guarantees of $5 million to Smith, $4.7 million to Auerbach and $4 million to the three top tax partners, McKee, Nelson and John Magee. (In an email, Auerbach said his pay “was significantly lower than what has been reported,” but did not elaborate.)
The guarantee information proved corrosive. Some top partners demanded that their compensation be boosted to match the legacy McKee group, though it’s unclear how many succeeded. “There was this ‘us and them’ dynamic” between the McKee lawyers and the rest,” says a longtime Bingham staff member. It didn’t help that the McKee group was closely identified with Auerbach, who was deeply disliked, according to several lawyers and staffers at the firm, including some legacy McKee partners. Confirming some partners’ suspicions that the McKee lawyers were only in it for the money, three tax partners, including Raj Madan, who was a next-generation practice leader, left in May 2013, just after their guarantees had expired.
For years, Zimmerman had conducted annual finance meetings with Bingham’s various offices; in early 2013, the subject of the meetings was “why we are not like Dewey,” according to two partners and a senior staffer. “It was becoming more apparent that partners didn’t understand how the firm was run and the peculiarities of our system,” says a top staff member.
Each year, rather than requiring partner capital to counter the slowdown in business, the firm deferred 25 percent of partner compensation to the middle of the following year; additional bonuses were distributed in the third quarter of the following year. Also, partners’ base compensation was pegged to the previous year’s compensation. Both of these moves had the unfortunate effect of magnifying the impact on individual partners’ cash flow in years when earnings were weak. Further diminishing earnings, Zimmerman had sunk $22 million, spread over 2012 and 2013, into a new back-office center in Kentucky.
As Bingham’s core practices continued to slump, other firms had recovered and were now in a position to pay more for talent. In April 2013, an 11-lawyer securities enforcement and regulatory group headed by Neal Sullivan went to Sidley Austin, after disagreements with Zimmerman. By the time Zimmerman spoke about “active waiting” nine months later, 34 more partners had left. At least 73 more, about a third of the partnership, would leave over the next nine months.
The promise of money “is a very weak glue,” says Nanda, the former Harvard professor. “If you try to grow by acquiring premium assets with the promise of significant economic reward, it takes basically two down cycles and you’re out.”
Zimmerman says that during the recession, he did not fully appreciate how sheltered Bingham was, as a beneficiary of financial crisis-related work, that “no one is immune to down cycles” and that by adding partners at higher pay scales, the McKee Nelson merger created psychological divisions and insecurity within the partnership that he didn’t anticipate. “In hindsight,” he says, “I probably underestimated the difficulty of taking some of our practices up-tier.”
As other firms cut costs and refocused practices to adjust to the recession, Zimmerman, who’d made his name as a nimble strategist, found himself unable to pivot. Says Malt, of Ropes & Gray: “At a time when the rest of us were asking, ‘How do we need to respond? How do we become faster, leaner and deliver a more cost-effective product?’ some firms continued to reach into the same playbook. But those plays were designed for a game that didn’t exist anymore.”
Nanda says Bingham’s management strengths eventually became liabilities. “The firm’s visionary, charismatic and centralized leadership was very good in the early years, when they were trying to find a way out of where they were,” he says. “As the firm became bigger and more complex, it needed a management team with a deeper bench, more robust, with people who are able to challenge the leadership.”
Prompted by intensifying complaints from top stakeholders, the firm in late September 2013 installed 49-year-old Steven Browne, Bingham’s Boston-based corporate cochair, in a newly created position as managing partner. By the following March, Zimmerman was completely out of firm management.
The Dominos Fall
During the early spring, as Browne and several top partners sought wider partner input on the structure of firm governance and firm direction, defections continued, and faith in management eroded. For one thing, the abrupt transition to Browne from Zimmerman had not inspired much confidence, particularly in the firm’s lucrative global insolvency practice, which was based in London, Frankfurt and Hong Kong. Zimmerman “had spent a lot of time around the world cultivating the partners there,” says a former partner. “He understood their business and had helped to build it. [The group] didn’t feel Browne would make their practice a priority.” According to a partner and top staffer, Browne had offended the leader of that practice, London office managing partner James Roome, by failing to visit the office during a family visit to London in December 2013. In late spring, those two sources say, Roome signaled to management that his group would soon depart.
Zimmerman now says he wishes he had thought about succession earlier. “It was a fundamental mistake,” he says. He was only 60, but he had steered the firm so long that it was hard to identify a natural successor. Though he had begun in 2011 to send younger partners, including Browne, to a special Harvard Law School management boot camp, none were obvious successors, he says.
Nanda says that because leadership had been so centralized for so long, there was a huge gap in experience and knowledge between Zimmerman and potential successors. Zimmerman “had begun to recognize that,” Nanda says. “He said, ‘I want to nurture the next generation of leadership.’ He had begun to work on it. Unfortunately, events overtook him.”
In May, Browne was weighing two strategies: retrenchment and a slow return to growth, or a merger with another firm. The now roughly 750-lawyer firm was carrying overhead appropriate for a much larger one, and though work had picked up, several top partners insisted that Bingham could no longer go it alone. After developing a list of a dozen target merger partners, Browne, along with Auerbach and finance partner Daniel Papermaster, began serious discussions with four: Dechert, Greenberg Traurig, Morgan Lewis and Winston & Strawn.
Greenberg and Dechert dropped out by June after weighing potential benefits against the financial liabilities. Those liabilities, says one of the counterparties involved in negotiations with Bingham, included a $100 million drawdown in the firm’s revolving credit line, excess lease capacity and substantial administrative overhead. Also, many partners hadn’t been paid deferred 2013 compensation, and there were still some outstanding guarantees. Zimmerman “saved that firm,” says that lawyer, who says he saw Bingham’s books as part of the negotiations. “But he got way out ahead of himself, whether it was space, guarantees to people or jumping $22 million into an outsourcing center in Kentucky.”
By July, management was “basically in sell-at-all-costs mode,” says one Bingham senior staff member. The situation reached a crisis point in September, when Roome’s global insolvency practice group officially left, for Akin, Gump, Strauss, Hauer & Feld. That, combined with other departures, breached a loan covenant with the firm’s three lenders, this staff member says; the banks’ lawyers were circling.
By the end, says one former partner, Browne “was really coming into his own as a leader.” The deal he struck turned Morgan Lewis into a 2,000-lawyer behemoth. It also saved Bingham’s lawyers from the darker fate that befell Dewey & LeBoeuf, Heller Ehrman, Howrey and Thelen: the race for the door and the dislocation for those left behind. Almost all the Bingham lawyers kept their jobs, their offices—even their phone numbers. But now, it would be Morgan Lewis’ name on the door. Bingham now is only a corporate shell, with enough assets to cover any potential legal liabilities. “It’s a wonderful thing that Bingham partners found a new home in Morgan Lewis,” says a former Bingham practice head. “But none of this had to happen.”
With reporting from Brian Baxter.