Thursday, March 6, 2014

Big, Big Law Firm's Chair Indicted for Cooking the Books in a Big, Big Way

We already knew that Dewey & LeBoeuf LLP, a "Real Big" law firm with offices in 28 cities from Tbillsi to Doha and everywhere in between, went bankrupt in 2012 amidst reports of huge upfront, undisclosed bonuses to supposed rainmakers and partner "defections" when word got around of who was sacrificing for the team and who wasn't. For a no-doubt whitewashed discussion of this wonderfully inspiring example of partnerships in action, read the truly dry discussion of the demise of the firm at pp.  19-21 of the January 7, 2013 Disclosure Statement accompanying the firm's second amended plan of liquidation.

Now truly a "Really Big Shoe" has dropped. Steven Davis, the Chair of Dewey & LeBoeuf, and the firm's top administrators, have been indicted by the New York County DA for grand larceny. They are charged with cooking the books of Dewey & LeBoeuf for four years to keep the firm afloat, during which time it borrowed hundreds of millions of dollars, which it used to pay the light bill and  secret bonuses to "laterals" who would make rain by the lake-full. The indictment reads like virtually every accountants' liability case I have ever worked on: make bookkeeping entries to turn expenses into assets, over, even better, revenues; get clients to backdate checks to make it appear that the bucks were made in year 1, not year 2 (thereby making it that much harder to make the numbers in year 2); restore previously written-off uncollectible receivables (thereby decreasing expenses and creating phony assets); reclassify of counsel salaries as partner compensation (thereby decreasing expenses); etc. 

What are we as lawyers to make of this? Yawn and move on? Well, besides that...

Do we chalk it up to a bunch of really crooked lawyers and staff who would go to great lengths to keep up the charade that this was a profitable enterprise that could afford sky-high compensation?

Or do we look deeper and see the source of this apparent crookery in the overwhelming  greed that has so infected our profession?

Let me reminisce. I graduated from Harvard Law School in 1971. This was a time of great ferment on the campus of this staid and hide-bound institution (at least then). Students demonstrated to abolish grades. When the SDS occupied University Hall on the college campus, twelve HLS students (me included) mockingly seized the library. The dean at the time, Derek C. Bok, sent in doughnuts and cider to the library "occupiers". Shortly thereafter, he became President of the University. There were many more (and more serious) indications that the social and political changes that were sweeping the nation between 1968 and 1971 had reached HLS.

On our twenty-fifth graduation anniversary, Derek Bok sent a letter to each of the Class of 1971. In it, he excoriated us for having contributed to the monetization of the law practice. The movement to force out or lower the compensation of "non-productive" partners is a very complicated phenomenon, but for this former BigLaw lawyer, now safely ensconced in solo practice, the breakup of the old model (or at least myth) that law firms were partnerships, that professionalism was the benchmark, and that pursuit of the almighty dollar, while important, was not the be-all and end-all of law practice -- that if you wanted to get really, really rich practicing law, do PI work and latch on to the biggest-paying accidents -- is a sad story all around.   

Somewhere in the 1970s, probably beginning with hostile takeovers, New York deal lawyers got damned envious looking at their banker clients get huge fees for doing not that much in issuing fairness opinions or manufacturing poison pills. The lawyers said "We want to get rich too!" So, slowly but surely, the worship of the Dollar became the accepted cultural norm. It spread like wildfire throughout the nation's big law firms, and, of course, some not-so-big.

Now it's one thing to do this with your money. Find or develop rain-makers. Have them make rain. Bill the crap out of the files. Ride your associates to bill, bill, bill. (And make sure to judge them only on their "hours." Look the other way when they cheat and put down hours they didn't really incur. Don't pay that much attention to young lawyers who can write and think and have good judgment if their hours don't meet their quota. And never, ever treat them as individual human beings.) Collect a ton of money. Pay the lawyers at the top of the pyramid huge amounts of money. And move on to the next year of that never-ending treadmill. If that's your version of a happy, fulfilling life, and you're not using anyone else's money to achieve this version of bliss, then God bless.

But it's a far different thing to do this with someone else's money. This is not new stuff. I represented the Miami partners of a national accounting firm that was devastated by changes in Wall Street in around the 1987 crash. (Yes, children, there was a crash in 1987.) The firm had borrowed money to pay the partners their accustomed compensation. (They also had two large offices in New York. But that's another story) Guess what? R.I.P. There are so many others. Finley, Kumble, for one. There was a firm that, thirty years ago, knew how to live (at least for a while) on borrowed money.

Repeat after me: Borrowing money to pay expenses is not the same as borrowing money to build a building or buy equipment. Borrowing money to pay compensation is an invitation for disaster, because if you can't earn enough to pay your partners what they "expect," and have to borrow money to make up the slack,  the margin of error before the bank calls the loan is very small. It's what the indictment said happened at Dewey.  

The real question is how much distance separates (i) making billings and collections the sole measure of a lawyer's worth, (ii) borrowing money to pay the alleged superstars, and (iii) making a few phony accounting entries to boost revenues and lower expenses so that the merry-go-round can continue to round-and-round for another year? If you think that this is alarmist, read the article in the Washington Lawyer a few years ago by Abe Krash, a veteran partner of the firm still known as Arnold & Porter (f/k/a Arnold, Porter & Fortas, for those with a long memory). It remains a dire warning to the dozens of law firms that fancy themselves as BigLaw worthies but are in a struggle to survive. And see last year's more sensationalistic article in The New Republic, which drily noted that "no relationship in the legal profession is more fraught than the one between partners and their money.").

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