In May 2012, only five years after the international, white shoe law firms of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae had merged, the resulting mega-firm, Dewey & LeBoeuf, filed for bankruptcy. It was the largest law firm collapse in the history of the profession and well-documented in the legal and mainstream press. The events leading up to Dewey & LeBoeuf’s implosion read like a Grisham novel, except more over the top.
The Dewey debacle was, of course, exceedingly complicated and multifaceted. But it appears that the core was the managing partner’s aggressive, indeed, reckless, recruitment of lateral partners to maintain the merged firm’s competitive edge and market share. Of course, in that legal environment, laterals, especially those with books of business, do not come cheaply. One securities litigation star demanded — and received — a $16 million fully-funded pension and a guaranteed annual salary of $1.6 million. For reasons that are difficult to comprehend, Dewey & LeBoeuf, which had an office in Hartford, attracted laterals by guaranteeing them such annual incomes — without regard to the revenue they produced.
Of course, when those laterals failed to meet expectations, their guaranteed salaries still had to be satisfied. That meant reducing income paid to other partners who did not enjoy such guarantees; hardly a formula for enhancing firm harmony and loyalty. The situation was further aggravated when the Great Recession hit Big Law in 2009 and 2010. Disenchanted partners started to jump ship in waves, which triggered default provisions in Dewey & LeBoeuf’s very, very substantial debt arrangements. The rest, as they say, is history.
Except there is an epilogue, which in many respects is more tragic than the main act.
Early this month, the Manhattan District Attorney released a 106-count indictment charging the chairman, executive director, chief financial officer and client relations manager of the Dewey firm with grand larceny, fraud and other felony charges. They are accused of using accounting gimmicks and fraud to cheat lender banks and investors in an unsuccessful effort to keep the law firm afloat when the financial house of cards started to crumble. Separately and simultaneously, the U.S. Securities and Exchange Commission filed civil fraud charges against those defendants and two other former Dewey officers. The SEC case focuses on the defendants’ misleading offering statement used in a private offering to raise $150 million from thirteen insurance companies.
Ironically, it is important that key evidence against the defendants will include their own internal e-mails between and among the alleged conspirators that include such gems as the CFO complaining he did not want to “cook the books anymore;” the partners planning the creation of a “Master Plan” to falsely inflate revenue and decrease expenses; and the CEO expressing his satisfaction at fooling the firm’s “clueless auditor.”
So what are the lessons learned from this debacle that has left legal careers ruined, lenders unpaid, and lives destroyed? If they include only the obvious admonitions that one ought to avoid such stupid, one-sided deals with laterals, and lawyers especially should not be so foolish as to send incriminating e-mails, then a terrible price in human tragedy will have been paid with little benefit to the legal profession. No, the takeaway from the Dewey & LeBoeuf saga has to be much deeper.
We must ask ourselves how lawyers — sworn to uphold the law, bound by obligations to the courts and society, and regulated by an exacting code of professional responsibility — can allow themselves to be caught up in such Enron-like behavior? Did unbridled arrogance and hubris make them believe they were above the law, instead of its servant? Most significantly, is the Dewey & LeBoeuf catastrophe the result of a few misguided lawyers who, along the way, forgot the lofty principles on which their firms were founded? Or is it really just a manifestation of what too much of the public believes are the true core values of the legal profession: greed, self-interest, and deceit? The real lessons to be learned from this case are in the answers to those questions. •