How appeasement and high partner guarantees led to Dewey's downfall
Posted Oct 08, 2013 11:39 am CDT
Today Dewey & LeBoeuf’s onetime chairman is out of a job and liable for $1.8 million he borrowed to make his capital contribution to the firm. He may also owe more than $500,000 in Dewey’s bankruptcy, if his future income allows for the payment.
The former chairman, Steven Davis, is spending a lot of time with lawyers who worked on the bankruptcy settlement of the fallen firm, and with lawyers representing him in a criminal investigation that is now before a grand jury, the New Yorker (sub. req.) reports. (Prior reports said the probe reportedly concerned statements made to lenders.) He had surgery for prostate cancer last year.
The firm’s former executive director, Stephen DiCarmine, is taking fashion design classes and earning mostly As.
The New Yorker reports on the downfall of their firm and the high partner guarantees that became impossible to fund after the economic downturn in 2008. The story also explains why the firm that Davis initially led—LeBoeuf, Lamb, Greene & MacRae—sought to merge with Dewey Ballantine, resulting in Dewey & LeBoeuf.
Two precipitating events in the firm’s downward spiral were a disgruntled partner’s emails and a $16 million payout to win a lateral recruit.
Davis began working as an associate at LeBoeuf Lamb in 1977, getting a job offer the same day he interviewed. He became co-chair of the firm in 1999 and the sole chairman in 2003. DiCarmine, who attended California Western School of Law so he could hang out on the beach (yet did well there), joined the firm in 1998 to help oversee its expansion. He eventually made $2 million annually at the merged firm.
The team brought in 23 lateral partners in a year’s time, leading the American Lawyer to dub the firm in 2006 a “rainmaker magnet,” the New Yorker recalls. One of them was Ralph Ferrara, paid $16 million to compensate him for his expected pension at his former firm, Debevoise & Plimpton.
The story recounts conflicts between Alexander Dye, the head of LeBoeuf’s compensation committee, and other firm leaders. Dye had expected to replace Davis as co-chairman, but lost the 2007 vote. After a night at a restaurant with Scotch to drink, Dye exchanged emails with two lawyers in the firm’s insurance practice, criticizing Davis and other lawyers whom he described as “pathetic,” a “little prick,” and a “f—wad. The emails somehow came to light, spurring the firm to search firm servers for Dye’s messages. Davis opted not to fire Dye, instead deciding he could remain a partner if he gave up his executive position. (Dye told the New Yorker the emails were inappropriate and dumb, and he should never have sent them.)
Yet Davis feared Dye and others who worked with him on insurance matters would leave, “leaving a gaping hole that might be impossible to fill,” the story says. Davis began shopping for a merger partner and found a willing target. One problem: Dewey Ballantine chairman Morton Pierce, a valuable rainmaker, had heard about the Ferrara deal and wanted a guarantee of $6 million a year, the story says. Davis gave him a five-year contract worth $35 million in combined salary, profit payouts and signing bonus. Fearful that Dye would leave, scuttling the merger, Davis decided to offer $3 million annual contracts to Dye and two other insurance lawyers.
The firms merged in October 2007. “To say that the merged firm lacked a cohesive culture was an understatement,” the story says. “Not only did the lawyers in the respective firms not know each other; there were lingering suspicions on the Dewey side that LeBoeuf lacked prestige, and on the LeBoeuf side that unproductive Dewey partners would be siphoning off profits.”
The law firm saw less work after the economic downturn as corporate deals stalled and collections proved difficult. In 2008, the law firm’s income fell $100 million below its targeted budget. The firm essentially paid its 2008 compensation by borrowing against 2009 revenues, the story says. But revenues fell in 2009 as well. In 2010, Pierce began talking to other law firms, leading to a promise to pay Pierce $8 million to keep him, the story says.
Word of the new pact got out, leading other lawyers to make demands. Many of those demands were met.
But as the firm’s cash crunch got worse, Davis and DiCarmine began asking lawyers to defer compensation, the story says. Pierce didn’t want to accept lower pay. According to an email he sent to Davis, he turned down significant offers in 2010 when he signed the new agreement, yet Davis “knew today was coming.” Pierce resigned as vice chairman, hired a lawyer, and demanded payment of the full amount due under his contract.
“Under Pierce’s agreement,” the story says, “the firm had 30 days to hand over the $60 million check.” Meetings were held, and Dye resigned, taking 12 partners with him to Willkie Farr & Gallagher. Davis, it was announced, would be one of five managers overseeing the firm.
“It took just six weeks for Dewey & LeBoeuf to disintegrate,” the story says. “With the loss of the core insurance practice, headhunters descended on the firm, seeking to hire its most productive partners. Every week brought new defections.” Davis was removed, and Dewey filed for bankruptcy.
“The firm failed,” Davis told the New Yorker. “But it didn’t fail for want of me trying. I worked like a dog. I did the best I could under the circumstances.”