Law Firms

Former Dewey Partner's Suit Compares Firm Leaders' Lateral Partner Recruitment to 'Ponzi Scheme'

Updated: A former partner of Dewey & LeBoeuf has filed suit against leaders of the now-bankrupt law firm, contending that they engaged in a multiple acts of deceit after the 2007 merger that created the firm and misrepresented its revenue in an effort to persuade incoming lateral partners to contribute the funds to keep it running. At the same time, says plaintiff Henry Bunsow, the defendants knew the firm was in financial trouble that would likely mean lateral partners would not be able to get their capital back as promised if they left the firm.

The alleged pattern of deceit by the defendants, which Bunsow says in the suit amounted to “running a Ponzi scheme in order to enrich themselves and select partners of the firm,” amounted to a “conspiracy and scheme to deprive partners of their capital investment in Dewey,” the suit (PDF) alleges. The suit, filed Tuesday in San Francisco County Superior Court, is linked to a Legal Week article about the suit that relies on information from the Am Law Daily.

According to the suit, which follows Dewey’s dissolution and Chapter 11 bankruptcy filing last month, incoming partners were expected to pay their full capital contribution—equal to 36 percent of the partner’s estimated annual income—by Dec. 31 of their first year with Dewey. Thus, Bunsow, who says he was guaranteed $5 million annually in 2011 and 2012 when he was recruited to join Dewey in late 2010 and early 2011, was required to pay $1.8 million.

“Defendants promised through the firm’s partnership agreements to return said capital investments to departing partners, in three equal installments, beginning on Dec. 31 of the year of their departure, and continuing on Dec. 31 of the next two successive years,” the suit says. “In fact, defendants never intended to return the departing partners’ capital investments, but rather intended to selectively distribute said capital investments to themselves and others, thereby denying the return of capital to most of the departing partners. In this way, defendants used partner capital investments as a form of revenue to enrich themselves and to hide the dire condition of the firm from the public and from plaintiff.”

The suit says that Dewey had failed to meet budget in every year since the 2007 merger and, contrary to what Bunsow was told before he joined, was not expected to exceed budget in 2011 but instead was teetering on the brink of bankruptcy. It also alleges that Bunsow, although he asked about any firm debt obligations before he joined, was told nothing about some $300 million owed for partner pay guarantees and bonuses from prior years.

In addition to incorrectly reporting to the Am Law 100 survey that gross revenue for 2011 was $935 million (it was actually $781.5 million, the suit says, and profit per equity partner was not $1.7 million but less than $1 million), the firm also provided “similarly false figures” for 2009 and 2010, Bunsow alleges.

He asserts claims of fraud and deceit; negligent misrepresentation; breach of fiduciary duties; unjust enrichment/restitution; intentional interference with economic advantage/prospective economic advantage; and unfair business practices against the defendants. They include Steven H. Davis, the former chairman of the firm, Jeffrey L. Kessler, who was an executive committee member and global litigation chair; Joel I. Sanders, chief financial officer; Stephen DiCarmine, chief operations officer; James R. Woods, who was a member of the firm’s executive committee; and 200 unnamed “Doe” defendants.

The five named defendants either declined to comment or did not immediately respond to requests for comment made to them directly or through their counsel, Legal Week reported.

However, Kessler told Reuters the suit’s allegations against him are “sad” and without merit, as detailed in a subsequent post.

In addition to compensatory and punitive damages and attorney fees, the suit seeks a clawback of what it describes as “illegally distributed firm profits” and an accounting.

Updated on June 14 to include information about Kessler response.

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