Three years ago I published What Laterals Need to Know: A Modest Proposal, which essayed the thought that firms had an obligation to disclose certain information about the firm in advance to a prospective lateral partner. (I owe a debt of gratitude to my friend Arnold Ross of the Ross Companies, here in New York, for a conversation that sparked this idea.) At the time I wrote I treated it more or less as a thought experiment, but we now see that shirking that obligation can come back to bite firms with sharp and large teeth right here in the real world, as Henry Bunsow’s high-profile suit against Dewey’s former leadership (accusing them of running a “Ponzi scheme,” and alleging he’s out $1.8-million in lost capital, among other damages) makes quite clear. The gist of Bunsow’s action is:
Dewey promised Mr. Bunsow, now a partner at Bunsow De Mory Smith & Allison LLP in San Francisco, annual compensation of $5 million in 2011 and 2012, and told him the firm “was doing very well financially,” according to the lawsuit. His complaint accuses Mr. Davis, former Dewey executives Stephen DiCarmine and Joel Sanders, as well as former partners Jeffrey Kessler and James Woods, of painting a misleadingly rosy picture of Dewey’s finances, and failing to disclose it owed its partners millions in deferred compensation.
The suit also alleged that Mr. Davis withdrew his own capital investment after he was stripped of his leadership role in late April, “and took those funds personally to the disadvantage of the firm and his fellow partners,” according to the lawsuit, which was filed Tuesday in California state court in San Francisco.
My three-year-old proposal was that firms be obliged to prepare the equivalent of a Private Placement Memorandum for laterals—equally available to incumbent partners as well, of course—that would include, I suggested, discussions of the following topics:
- Summary of the Offering
- Investor [Lateral Partner] Suitability
- Risk Factors
- Conflicts of Interest
- Management of the Firm
- Legal Proceedings
- Degree of concentration of client base
- Degree of concentration of rain-making partners
- Purpose of the Offering
- Capital Structure; Dilution
- Financial Statements
for the past 3—5 years
- Financial Model, Projections
- Income Statement
- Balance Sheet
- Statement of Cash Flows
- Partner by partner compensation, from highest to lowest (permissible to anonymize), with median and average figures
- Business Plan
- Client Base
- Growth Strategies
- Practice Areas
- Geographic Footprint
- Industry Focus
- Client Conflicts, Current and Projected
- Recruitment and Retention Strategies
- Fees and Billing Methodologies
- Partner Capital Obligations
- Amounts: When Due
- Uses of Partner Capital
- Conditions for Return of Partner Capital
- Risk Factors
- Partnership Agreement
- Material terms of any outstanding term or revolving debt, to the extent not disclosed in the financial statements
- Compensation Model (to the extent reduced to writing)
I also noted that the reaction of most readers would probably fall into polar camps: That my proposal was “fascinating” or else “preposterous.”
I submit it’s not remotely as preposterous as some might have seen it three years ago—and that what some then viewed as a “fascinating” idea is now one it’s time to take with deadly seriousness.
Thanks the industry of The New York Times’ Peter Lattman, we now have seen at least one such PPM as a matter of public record, although it wasn’t prepared for partners and prospective laterals but rather for institutional investors. I refer of course to the document Dewey prepared in connection with its 2010 bond offering, which I analyzed here shortly after it became public. I trust those of you interested in these things have seen that article.
You may not have seen, or may not recall, a separate piece I did over two years ago in April 2010 called Dewey’s Undisclosed PPM, in which I wrote:
I must assume that some form of private placement memorandum was prepared in connection with Dewey’s offering. What a fascinating and juicy document that must be, but here are the areas that would grab my attention first and foremost:
- Risk Factors: How would Dewey describe the risks to a world-class law firm? Client flight? Partner flight? Upstart competition? Outsourcers such as Axiom Legal or CPA Global? Losing the war for talent? The chances of New York ceasing to be a global financial capital?
- What undertakings has Dewey assumed with respect to revenue, or even revenue growth? Size of the partnership? Client attrition? Secondary financing?
- Finally and perhaps of greatest fascination, what are the remedies of debt-holders in the event of material breach of covenants? Is there personal recourse liability to the partners? (I have to surmise not.) The ability to accelerate and demand immediate repayment in full? A lien against tangible assets? […] Or perhaps the remedy is not really defined, on the assumption of improbability. That in and of itself would be interesting to know.
Well, folks, the joke of course is now on us. There was no “Risk Factors” section in the 2010 Dewey PPM. You would think that should have been an enormous red flag at the time—the most salient “risk factor” conceivable—but evidently it wasn’t viewed that way.
At least we don’t have to worry about that happening again.
So, Dear Readers, what think you of this proposal?
Is preparing a PPM (even a somewhat informal one, to the extent law firms might be constitutionaly capable of doing anything in an informal fashion) simplly not in law firms’ DNA, or “not done here” as I hypothesized three years ago?
To the contrary, aren’t we as a profession dedicated to the notion of disclosure and transparency? Is it remotely conceivable we would advise our clients otherwise?
OK, maybe we should think about it (I hope you’re thinking at this point) but it would be hard work. Well, there’s work that’s hard because it’s detail-oriented, time-consuming, and extremely precise. I thought that was what we’re supposed to good at.
So you must mean the other kind of hard work, work that’s hard because it requires actually getting skeptical, strong-willed and opinionated people to come to a consensus about important questions such as how to describe the firm, its prospects, its competition, and its way forward.
If that’s your reservation, get over yourself.
I would seriously appreciate everyone’s feedback on this notion—either publicly through the comments function right here online (although I approve anonymous comments all the time assuming their substance is non-scandalous)—or in private if you’d prefer to drop me a note.
Finally, if anyone thinks outlining a PPM for your firm would be a useful exercise—whether or not it ever sees the light of day—I’d be delighted to work with you.