The New York Times reports that Manhattan DA Cyrus Vance, Jr. is investigating the recently displaced Chair of troubled New York law firm Dewey LeBoeuf, Steven Davis, for financial “misconduct,” and that the firm is also contemporaneously conducting its own internal investigation. Beyond the schadenfreude some will be tempted to indulge, so what? There is nothing new about a large law firm overextending itself in one way or another, and losing the confidence of its key partners. We’ve seen that with some regrettable frequency in the last ten years: Brobeck, Heller, Thelen, WolfBlock, Thacher Proffitt, and Howrey to name a few. There is also nothing new about a rogue managing lawyer using his firm as an instrument of fraud: Scott Rothstein and Marc Dreier are two especially audacious recent examples, both involving tens or hundreds of millions of dollars.
But this is neither of those. The Times does not report what kind of “misconduct” the DA is investigating, so we need to guess. It is possible that the concerns relate to the 2007 merger between Dewey Ballantine and LeBoeuf Lamb, and the representations that the merging firms made to one another in that transaction (which, if knowingly false, could conceivably amount to securities or other criminal fraud on one partnership or the other). This is long enough ago that there may be limitations issues.
It is possible that the DA’s concerns have to do with Dewey’s unusual recourse to a privately placed debt offering in 2010 to borrow $125 million to sustain firm operations. (See here.) Law firms virtually always borrow from commercial banks; in fact, many of the larger firms borrow from Citibank, which has widely recognized expertise in lending to large law firms. Dewey’s debt offering was, if not unprecedented, extremely uncommon and raised some eyebrows at the time. (Aside: Is any reader aware of any other private or public debt issue by a law firm? Please post in the comments if you are.) Perhaps the DA is investigating the disclosure accompanying the private placement or the use of its proceeds.
Dewey’s partners have also complained bitterly of late that the firm squandered its birthright on salary guarantees to certain managers and key “rainmaker” partners, including a number of laterals recruited with such guarantees. When times got hard, partners without guarantees suffered the brunt of the firm’s disappointing performance so that it could honor the guarantees. Perhaps the DA is investigating firm management’s authority to have extended such guarantees (particularly to themselves, if in fact they did), or what kind of disclosure to the partnership was or wasn’t made regarding them.
The point for right now is that we don’t know what conduct people suspect may have crossed the line from plain old bad management to financial or securities fraud. But if any crime was committed, it does not appear to be the more recurrent one of a single partner or small group of partners stealing clients’ or third parties’ money, with predictable spillover effects on other partners depending on their degree of notice or knowledge. This investigation sounds more like a Tyco (management looting the company’s own assets) or Worldcom (accounting fraud on investors).
Sadly, there’s nothing particularly unusual about this kind of financial or securities fraud—lawyers defend issuer, underwriter, officer and director clients in these kinds of cases every day of the week, and have done so since there were securities laws. Some of those clients are exonerated, and some are not. But what’s different and, I think, unusual about this situation is that here the prosecutor may eventually contend that the Tyco or the Worldcom is a large, old, white-shoe New York law firm (two, actually); that the Dennis Kozlowski or Bernard Ebbers (so few Bernies in the world, Lord, and two of them have to be Bernie Ebbers and Bernie Madoff!) is the law firm’s managing partner; and that the victims of any fraud that may be alleged are owners (partners, or in the case of institutional debt holders, we could say investors in a sense somewhat different from a commercial bank) in a large law firm. Can any reader remember another case in which financial fraud of this particular kind by large law-firm management may have been at issue? Please enlighten us in the Comments.
In fairness to all involved, I want to stress that all we appear to know at this point is that the Manhattan DA is investigating. No charges may be laid, and if they are, they may not be proved. But if proof of foul play does emerge, does it tell us anything new or interesting?
One possible insight is that we as lawyers are subject to the same flaws and follies as our clients. That’s nothing new, of course, but this is the first time of which I’m aware that the principle has penetrated in this way and to this degree at a large, white-shoe New York firm. Why now? It seems likely that, whatever other principles are at play, the astronomical compensation expectations by large-firm partners and the frank competition for rainmaking talent among large law partnerships have eroded the more detached managerial long view that may have been more prevalent in a different age. For reasons I have no space to explore here, this kind of competition is inevitable in contemporary markets for legal services and legal talent. But if, as Richard Abel and others have convincingly argued, “professionalism” is a bulwark against competition, competition’s ascendancy spells professionalism’s decline. Our responsibility at this point is not to waste time wringing our hands and eulogizing les neiges d’antan, but to figure out how best to manage here and now.
Another possible insight from these events is that it illustrates the continuing decline of “real” law partnerships, or to put it in more conventional jargon, the increasing disconnection of ownership from management in larger law firms, and the predictable agency risks and costs that result. With the profoundly increased size and concentrated management power at larger law firms (and larger accounting firms, for that matter), law partners are less and less partners, and more and more nonmanagerial owners more analogous to shareholders in larger companies. And a quick look at any securities litigation advance sheet is all the reminder you need about what happens to them from time to time.