Press conference to announce fraud charges of executives of Dewey LeBoeuf.
Press conference to announce fraud charges of executives of Dewey LeBoeuf. (Rick Kopstein)

I don’t want to cook the books anymore. We need to stop doing that.”
— Joel Sanders, former Dewey & LeBoeuf chief financial officer, in a Dec. 4, 2008, email.

Query: Was it the changing business model or something deeper that brought down Dewey & LeBoeuf? And what can a company’s in-house legal department learn from the firm’s demise to better inform selection of outside counsel?

Dewey once was one of the world’s largest law firms with a pedigree reaching back to two-time Republican presidential candidate Thomas E. Dewey — yes, the “Dewey Defeats Truman” guy. The story by the numbers: seven unnamed employees pleading guilty, three former top executives (and one 29-year-old former client-relations manager) arraigned in New York state court, and 106 counts of grand larceny, securities fraud, conspiracy and falsifying business records.

Slammed by New York County, N.Y., District Attorney Cyrus Vance Jr. for running their firm “as a criminal enterprise,” Dewey’s former executives stand accused of carrying out a “wide-ranging campaign to manufacture fake revenue,” leading to the largest law firm bankruptcy in history. The publicity focuses an unwelcome spotlight on large law firms, already struggling under financial pressures, with one chairman of another major firm admitting to being “embarrassed to be in the same profession.”

Many legal observers have attributed Dewey’s implosion to a changing business model, explaining that the firm “collapsed under the weight of a toxic combination of high leverage, lavish financial guarantees to many partners and faltering revenue.” Observers have chronicled the trail of emails only a prosecutor could love — careless exchanges about a “Master Plan” involving “false income” and “accounting tricks” to “get paid” and fool their “clueless auditor.”

But the details of the Dewey story are symptoms of something deeper. The story points to an ethical culture and compliance gap at the highest ranks of the now defunct firm, extending to others down below who assisted in the alleged misconduct.

During a May 2013 Rand Corp. symposium, “Culture, Compliance & the C-Suite,” Bryan Cave partner and Rand whitepaper author Scott Killingsworth argued that the corporate-suite environment is characterized by “high stakes, strong temptations, vast power, extreme pressure, a fast pace, complex problems and ambitious people” operating under few effective external controls. Without the right culture and safeguards in place, the C-suite can develop a “compliance gap” and an illusion of invulnerability that can imperil the entire organization.

Here’s hoping that large law firms take more away from the Dewey scandal than “never put it in an email.” Can we now dispense with the notion that a law firm is somehow too “special” to need a compliance program, because “ethics is at the core of all we do”? And the argument that the lawyer’s code of professional conduct is even remotely a substitute for a robust compliance program that addresses the particular risks of the legal partnership? Let’s also agree: a general counsel is not a compliance program.

NOT IMMUNE

But really, it all boils down to: Fact 1: People create risks; and Fact 2: Law firms have people.

What’s clear is that the indicted Dewey executives did not act alone. Any scheme to “cook the books” would have required others to actually implement the fraud. Reportedly, plea agreements have been struck with seven members of the firm’s accounting and financial staff. A compliance program, tailored to the law firm structure, could have given those seven employees a safety valve. If just one had sounded the alarm instead of quietly acquiescing, the story might have taken a different turn.

A compliance-risk assessment of the law firm partnership model also would have raised the issue of organizational transparency. If firms approached compliance with the same energy they employ pursuing high-margin business, they would inject more checks and balances into their organizations, provide more transparency and risk assessment, and boost the ability of others to challenge bad or ill-advised actions.

Unlike corporations, whose boards of directors arguably have the power to demand information and are tasked with oversight of the C-suite, the oversight in a law partnership has to be performed by the partners themselves. Although this argues for partners outside the management committee to remain curious about the handling of their firm’s business, the larger the firm, the less transparent the process becomes.

Incentives drive behavior and culture, for better or worse. This is underscored by New Yorker magazine writer James Stewart’s observation that none of The American Lawyer’s top 10 law firms (based on profits per partner) has grown by merger, and more than half of them, including Cravath, Swaine & Moore, adhere to the old-style lockstep (or near-lockstep) compensation model. These firms, Stewart said, still attract the top law school graduates and groom most of their partners from within, sustaining a collegial culture and providing stability despite the financial upheavals of the market and changes in the legal profession. “What these firms seem to have — and what Dewey & LeBoeuf so manifestly lacked — is a culture that fosters cooperation and mutual respect,” he said.

It was former Dewey Chairman Steven Davis who observed: “[I]f it is only money that holds a firm and its partners together, then there is really no glue at all.” And the takeaway for in-house counsel? When selecting your outside counsel, culture and compliance should be the No. 1 nonnegotiable.

Donna Boehme is principal in Compliance Strategists, a New Jersey consulting firm.