Two firms have this week received far more press attention than, one suspects, they counted on or quite know how to cope with:  Our own industry’s Dewey LeBoeuf, and of course the iconic (good and bad sense) Goldman Sachs.


Let’s take Goldman first.  Its moment—which is displaying a half-life far longer than the typical juicy media-fueled meme—began with the famous noisy withdrawal letter published on the Op-Ed of the New York Times Tuesday wherein Greg Smith, a 12-year GS veteran, an executive director (a notch below managing director) and head of its US equity derivatives business in Europe, the Middle East, and Africa, detailed a bill of particulars indicting the firm’s “toxic and destructive” culture, which brought him to the point:

when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

[…]  I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

He also colorfully reported that clients were referred to as “muppets,” “bobbleheads,” and “platinum trash.”

We will not stand in judgment over this exceptionally high-profile dustup other than to point to DealBook‘s coverage, which is wide-ranging and, for a one-stop site, as comprehensive as you can get.  Suffice to say Goldman’s damage control efforts have been, to be charitable, unconvincing.  The story has more legs than a caterpillar.


Now, far closer to home, as it were, are the widely reported travails of Dewey & LeBoeuf.  LeBoeuf was founded in 1929 and Dewey’s pedigree is older still, going back to its 1909 founding, then called Root, Clark & Bird.  (Yes, that’s Elihu Root, but Jr. not Sr.)

The coverage has become wall to wall since it gained national prominence over a week ago at Above the Law when managing partner Steve Davis’ internal memo about layoffs was published.

The volume reached something of a crescendo this morning when both The New York Times and The Wall Street Journal published leading articles:   “Lean Times for Dewey & LeBoeuf” and “Dewey & LeBoeuf Loses Partners.”  Across the pond, LegalWeek climbs aboard with “Dewey faces challenge to steady ship as cutbacks prompt unrest in the City.”

Here’s what we know:

  • Tens upon tens of millions—more than one source pegs it at around $100-million—in deferred compensation is owed Dewey’s partners.
  • Nineteen partners have left just since January 1 and dozens more are thought to be in the wings.  Dewey’s partnership rolls were recently about 190 equity and 115 non equity, so the attrition may swiftly exceed 10%.
  • The decamping partners include a member of the executive committee and heads of major practice areas.
  • In London, “the fact that there are at least 15 Dewey CVs currently circulating in the City speaks for itself,” said one recruiter: “We are anticipating a handful of senior departures in the coming weeks.”
  • The 115 non equity partners had their pay unilaterally cut from an average of $640,000/year to $499,000 (saving the firm over $16-million in cash, by the way).
  • 5% of lawyers and 6% of staff will be let go.
  • In April 2010 the firm issued $125-million in a private placement bond offering to refinance existing debt; the entire principal amount is believed to remain outstanding.
  • The firm has, according to multiple reports, an additional $100-million or so in revolving lines of credit with several banks.
  • All told, “Ex-partners estimate Dewey & LeBoeuf owes about $250 million.”  It’s not clear whether this includes the deferred compensation owed to partners, although the arithmetic suggests it couldn’t possibly.

Shall we do a little math, then?

2010 bond issuance $125 million
Revolving debt $100 million
Guesstimate of working capital or other debt (based on the above-mentioned ex-partners) $25 million
Deferred compensation owed to partners $100 million
“Hard” debt subtotal $250 million
“Soft” debt (deferred comp) $100 million
Indicated total $350-million


For context, the firm’s reported revenue last year (AmLaw 100 figure) was $910-million.

This omits unfunded pension liabilities.  We know from the aborted Orrick/Dewey merger talks in late 2006 and the LeBoeuf deal coverage in 2007 that legacy Dewey had very substantial unfunded pension liabilities to its partners.  No figure was ever released, to my knowledge, but the liability was substantial enough to help derail the Orrick deal and (reportedly) require special assurances for legacy LeBoeuf partners.

We don’t know what those unfunded liabilities might be today.  One could surely hope that they’ve been paid down aggressively, but the latest news about the firm’s pulling every lever in sight to raise cash casts doubt on that hope.  (Parenthetically, warm congratulations to The American Lawyer for publishing a thoroughly impressive cover story on unfunded pensions in the industry; Dewey is not specifically mentioned in that piece, however.)

The only clue we have to what the unfunded liabilities might be comes through the back door when the WSJ evidently asked Chairman Steven Davis about the firm’s debt levels:

Mr. Davis says the firm’s aggregate level of debt hasn’t changed since its inception, and that the bond issue was undertaken to take advantage of historically low interest rates. He says the firm isn’t in default on its loans.

“Our first debt payment is in April of 2013, and it would be odd in 2012 to say we’re in default.”

This implies the unfunded liabilities have not been diminished—or that if they have, offsetting debt has been incurred.  That the firm “isn’t in default,” of course, is a low bar to clear indeed.

Parenthetically, I wrote almost exactly five years ago (March 6, 2007) about the widely reported remark by Mort Pierce, then managing partner of legacy Dewey, that “Management is not my passion,” and I had a few hopefully enlightening comments on that.   The point is that these levels of liabilities do not arise overnight, or by accident.

Cultural Issues

Aside from debt—although joined at the hip—are the culturally acidic reasons much of this debt was incurred, and how the firm’s resources have been allocated.  Throughout all this coverage runs a thematic drumbeat of not a two-tier but a two-caste partnership at Dewey.  As one partner said:  “For years you had the haves and have-nots.  What’s happening now, is the haves are not getting paid.”

According to multiple reports, undenied by the firm, the ratio of highest to lowest paid partner (within the equity ranks) is easily 10:1 and could be 12:1.  We know that Mort Pierce has a $6-million/year (“at least”) guarantee.   Others, including Henry Bunsow, Jeffrey Kessler (head of litigation), Ralph Ferrara (securities/DC) and Richard Climan (Silicon Valley/M&A) have outsized packages.  If Mr. Pierce has the most valuable package and non equity partners are being paid $450,000, the math makes it 13.3:1.

A London recruiter notes (LegalWeek) that “People have doubted several US firms’ PEP numbers for years, but my understanding is that Dewey’s are even more meaningless than most because they are so inflated by the rainmakers’ pay packets.”

The legendary Francis Xavier (Fran) Musselman, for years chair of Milbank and trustee in bankruptcy of the estate of the unlamented Finley Kumble, commented years ago on that firm’s roughly 12:1 ratio shortly before its implosion:  “That’s lots of things, but it’s not a partnership.”  Now:  Finley Kumble closed its doors on a Christmas Eve in the late 1980’s when its bank refused to let it continue to draw down on its line of credit in order to pay staff Christmas bonuses.  That was at least in this regard a far more innocent time, when 12:1 was an unheard-of span, lying at least a few standard deviations out from the norm.

Ratios in the teens-to-one are not at all remarkable today, among firms large and small, global and boutique.  The issue is not the arithmetic, it’s the reason why the divide exists.  Among legitimate reasons are that some practice areas (think white collar crime vs. boilerplate real estate work) and some geographies (think New York and London vs. Salt Lake City) have intrinsically different economics. Or consciously chosen work/life balance tradeoffs.  Or recognition of the plain fact, driven by globalization and scarcity at the top (as any sentient economist would attest) that we increasingly live in a “stars win big” marketplace.

The problem is why the ratio is what it is.  If the perception is that there’s an in crowd and a not-in crowd, beware (NYT):

Lawyers say that the move toward a wide disparity in partner pay can lead to morale problems and infighting. In addition, big mergers and the rabid hiring of laterals can damage a firm’s fabric, they say. […]

“You go to the partner meetings and you don’t know who your partners are anymore,” said Steven J. Harper, a retired partner at Kirkland & Ellis [and author of The Belly of the Beast—Bruce].  “At a cultural level, you create problems because you lose a shared sense of community and a shared sense of purpose.”

and (WSJ):

To lure and keep their biggest earners, Dewey & LeBoeuf management struck payment agreements with dozens of partners in the years since the merger took place, according to interviews with former partners. The agreements said partners would get a certain amount of money each year—a fixed amount, instead of a certain percentage of firm profits.

“In the marketplace, a higher value is being placed these days on partners who have key client relationships and on key revenue producers,” said Mr. Davis …

When profits failed to meet expectations, money to meet the guarantees had to come from somewhere else, according to interviews with ex-partners.

Here the rubber meets the road.  Imagine you are a loyal Dewey lifer, or at least a Dewey long-termer, and in recent years, just as the economic environment has gotten more hostile, a few dozen newcomers have arrived with packages that are (a) above market (b) guaranteed; and (c) multi-year.  The impact on your morale will be _____?

The answer of course is that your morale, and that of all others like you, will be crushed:  You will feel like you’ve been exploited and words like “chump,” “schmo,” and “patsy” will come to mind.  Nor will you be wrong.  The rational, and predictable and correct, response from those with self-respect intact and at least a few options, is to start looking around.


Taking the news this week at face value, the leadership of both Goldman and Dewey have been playing with fire in close proximity to their one critical asset:  A cohesive culture, one that looked beyond the self-interested short term to the greater good of clients and the integrity and sterling repute of the firm as a whole.

We are witnessing a war between two passions described by Adam Smith over 200 years ago his Theory of Moral Sentiments:

We desire both to be respectable and to be respected.  But upon coming into this world we soon find that wisdom and virtue are by no means the sole objects of respect; nor vice and folly, of contempt.  We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent. To deserve, to acquire, and to enjoy the respect and admiration of mankind, are the great objects of ambition and emulation. Two different roads are presented to us, equally leading to the attainment of this so much desired object; the one by the study of wisdom and the practice of virtue; the other by the acquisition of wealth and greatness. […]

To attain this envied situation, the candidates for fortune too frequently abandon the paths of virtue; for unhappily, the road which leads to the one, and that which leads to the other, lie sometimes in very opposite directions.  But the ambitious man flatters himself that, in the splendid situation to which he advances, he will have so many means of commanding the respect and admiration of mankind, and will be enabled to act with such superior propriety and grace, that the lustre of his future conduct will entirely cover, or efface, the foulness of the steps by which he arrived at that elevation. [pp. 62—64, Oxford University Press edition, [1756] 1976]

In the cases of both Goldman and Dewey, blame for the peril the cultures now seem to be in may be widespread, but it has been actively or passively permitted to spread at the top.  That, you may say, is water over the dam.  So be it.

But here’s where we are today:  How Dewey comes out of this rests on the shoulders of Steve Davis.  No one else can do it.

Dewey is a great brand that thousands of people have devoted themselves to.  We will all be watching.


Update: 17 March 2012:  Twelve more partners leave Dewey as of last night

The story is both in The New York Times and The Wall Street Journal, but has the most detailed coverage.  A bit of who/what/where/when and then some thoughts:

  • The 12 will join the insurance practice at Willkie Farr
  • They include Alexander Dye, Michael Groll, John Schwolsky, and Robert Rachofsky
  • Dye heads Dewey’s US M&A practice, Schwolsky is co-chair of the corporate finance group, and Groll is co-chair of the insurance industry practice
  • Also decamping to Willkie are Scott Avitabile, Donald Henderson, Jr., Arthur Lynch, and Allison Tam in New York; Joseph Ferraro and Nicholas Bugler in London; and Christopher Petito in Washington, D.C.  (The profiles of all 12 have been removed from the Dewey website and none yet appear on the Willkie site, although you can still find them through Google cache.  Here, for instance, is Dye’s cached profile.)
  • Thomas Cerabino, co-chair of Willkie, said in a statement released today:   “We have worked closely with this team in a number of transactions over the years. They are among the most elite practitioners in their field and will add greatly to our capabilities in their areas of expertise.”
  • Steven Davis, Dewey’s chair, said in a firmwide memo obtained by the Times:“We are disappointed to see these partners leave the firm — they have been long-term colleagues and successful practitioners in the insurance sector for many years.  I recognize the emotional impact that these departures will have on our partnership and colleagues.“However, our initial assessment of these departures is that they will not have an adverse financial impact on the firm.”
  • These appear not to be “just another 12 partners:”Three former partners says the departures, particularly Schwolsky’s, will be a serious hit on firm morale. “The internal perception is that they are the heart of the firm,” one former partner says bluntly. Schwolsky, Groll, and Dye represented the old LeBoeuf, Lamb, Greene & McCrae insurance transactional practice, a pillar of that firm, which merged with Dewey & Ballantine five years ago to create Dewey & LeBoeuf. Another former partner said the group had been demanding a greater say in management decisionmaking in the past two weeks, before changing course and jumping ship.Because of their value to the firm, according to two former partners, Schwolsky, Dye, and Groll were given compensation guarantees in 2007, at the time of the merger. One former partner says members of the group did not receive all of their promised 2011 compensation.

Now let’s do a bit of math, as is our wont.

The group was expected to generate $47-million in revenue in 2012, and left $34-million in receivables behind.  On the cost saving side (to Dewey), the 12 partners were due to be paid a combined $15-million, and associates and staff affiliated with the group an additional $6-million.  Davis’s firmwide memo claims the departure will, net, cost the firm $22-million in revenue after expenses.  Note that although variable costs associated with the group will disappear, many fixed costs, including primarily rent, will not change in the short run.

What’s notable about these numbers?  First and most conspicuously, they were being paid well below firmwide average PPP: $1.36-million on average vs. $1.8-$1.9-million firmwide.  This implies they were making a tasty contribution to distributable profits for the rest of the firm.  It’s awkward to square this with Davis’s assertion that the departures “will not have an adverse financial impact.”  $47-million on $900-million annual revenue is 5%.

I think that’s “adverse” in anyone’s book, but maybe Davis meant not “materially” adverse? Trust me, I know as a securities lawyer that “materiality” is not an arithmetic calculation, but a revenue drop of 5% would put any AmLaw 100 firm at the very bottom of the performance grading curve on the gross revenue metric, and in and of itself would have dropped Dewey  from #22 in the AmLaw to #27 last year.

Persnicketian debates over materiality aside, let’s look at another number:  This group brings Dewey’s total YTD partner losses to 31, on a base of about 300; call it 10%.  Most bank loan covenants I’ve seen require law firms to maintain XX% of partners as of entering into the agreement, where XX often equals 85%.  (I don’t know if such a covenant or covenants exist in Dewey’s loan agreements, and a fortiori I don’t know what XX actually equals if there is such a clause or clauses; but this is extremely common in the industry.)

We noted in the original piece that Mr. Davis’ assertion that the firm “is not in default” struck us as quite a low bar to clear.  Maybe it’s not after all.

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