How Dewey & LeBoeuf Became the Biggest Law Firm Bankruptcy Ever

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Dewey BankruptcyIt's official. The law firm of Dewey, Cheatem, & Howe -- sorry, I mean "Dewey & LeBoeuf" -- has declared bankruptcy.

[Pause for cheers.]

Now that that's out of the way, let's move on to the details.

Formed from the merger of Dewey Ballantine LLP and LeBoeuf, Lamb, Greene, & MacRae LLP in 2007, New York-based Dewey & LeBoeuf was one of the world's great law firms. Even if you've no exposure to the legal world yourself, you've probably heard of at least a few of the deals this firm was involved in over the past few years.
  • Dewey played a leading role in Disney's 2009 acquisition of Marvel Entertainment.
  • That same year, Dewey helped eBay sell its Skype subsidiary to a group of private investors. (The subsidiary ultimately wound up as part of Microsoft.)
  • And Dewey was Mark Cuban's lawyer as well, helping to defend the Dallas Mavericks owner when the SEC investigated him on charges of insider trading.
With 1,300 attorneys and a support staff of thousands more, Dewey operated out of two dozen offices spanning 12 countries on five continents and generated revenues in excess of $900 million a year.

This makes the Dewey & LaBoeuf bankruptcy quite simply the largest law-firm failure ... ever.

How did a business this good manage to go broke? The answers may contain lessons for all of us.

"Our People Are Our Most Valuable Asset."

Companies mouth this line all the time (often while simultaneously freezing their pensions, raising their insurance deductibles, and demanding more overtime). But at Dewey, it really was true. In fact, it's true at most law firms -- and that's not always a good thing.

The problem with Dewey, and with law firms in general, is that their workers are highly mobile individuals, and they're often worth more to other firms than to the firm they already work for. Over time, a law firm partner tends to build up a portfolio of paying clients. But partners aren't necessarily paid in proportion to the amount of money they bring in -- up until the moment they jump ship for a different firm that wants the clients for itself.

At Dewey, fears that the firm was in trouble took a steady toll on the company's most valuable employees and the revenue they brought in.

During the first three months of this year, 20% of the company's equity partners left, taking their clients with them. By the time Dewey declared bankruptcy, partner defections had climbed past 80%.

By the time the firm realized it was bankrupt, there was hardly any "firm" left.


TANSTAAFL (There Ain't No Such Thing As A Free Lunch)

But how did Dewey get in such as state as to scare its partners off in the first place? The answers may (or may not) surprise you: high salaries and guaranteed bonuses.

Now, everyone knows that lawyers make good wages. At Dewey, your average "associate" attorney was pulling down better than $170,000 a year, according to Glassdoor, and the partners made much more. But in an effort to attract top talent and keep it in-house, Dewey's managers went a bridge too far.

Many of the firm's partners were guaranteed bonuses on top of their salaries. Reportedly, the top 100 partners at Dewey had contractual guarantees topping $100 million in total bonuses. Some individual partners were promised at least $6 million a year -- performance not necessarily required.

How could Dewey afford to be so generous?

Simple. It couldn't.

So rather than pay what it could afford, Dewey did the next logical thing: It borrowed like mad.

According to bankruptcy court filings, by the time the firm went kaput, Dewey had racked up $245 million in debt, and maybe even more. Between obligations to secured lenders, long-term lease obligations, and accounts-payable, pension, and deferred-compensation claims, Dewey is said to be in hock to the tune of perhaps $315 million.

As one local lawyer put it: "The combination of outsized debt and widely spread pay guarantees divorced from performance put the firm in a situation with almost zero margin for error."

Like a consumer with high debt but a few credit cards in his wallet and a love of cash advances, Dewey was able to keep the game rolling for a while. But once partners began defecting, the cash flow dried up, and Dewey had nowhere left to turn: "Cash flow was insufficient to cover capital expenses and full compensation expectations."

The sad implication: Had Dewey been just a bit less profligate with its spending, and its lawyers just a little less greedy, they -- and the thousands of Dewey employees who weren't collecting seven-figure bonus checks -- might have still had a firm to call home.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Walt Disney and Microsoft. Motley Fool newsletter services have recommended buying shares of eBay, Microsoft, and Walt Disney, as well as creating a bull call spread position in Microsoft.

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Carlinsquest

Have you ever noticed that the lawyer always smiles more than the client?



George Carlin~

June 18 2012 at 12:41 AM Report abuse +1 rate up rate down Reply
rugufytoo

Huey, Dewey & KaBloowie

June 18 2012 at 12:37 AM Report abuse +1 rate up rate down Reply
kaysings

How ironic is it that Dewey & LeBoeuf represented former Los Angeles Dodger owner Frank McCourt in bankruptcy court?

June 17 2012 at 5:33 PM Report abuse rate up rate down Reply
cpo1514

Not to worry..... Barry will give them your tax dollars for a bail out.....

June 17 2012 at 9:34 AM Report abuse +2 rate up rate down Reply
ejorillion

Excellent start, the fewer of these bottom feeding scum bags the better off the America will be, next to go is the white house scum bag

June 16 2012 at 11:28 PM Report abuse +2 rate up rate down Reply
ragtopdaz

Did you know that illegal immigrants all over the United States are using a massive scam to receive tax refunds from the federal government that are often in excess of $10,000? It is estimated that 2 million illegal immigrants are filing fraudulent tax returns each year and that they are pulling in more than 4 billion dollars in tax refunds every year that they are not entitled to. They are doing this by abusing the additional child tax credit and the IRS knows all about it and yet they refuse to do anything to stop it. Illegal immigrants are filing tax returns that sometimes claim 10 or 12 nieces and nephews as dependents, and most of the time those nieces and nephews do not even live in the United States. So while you and I are being taxed into oblivion, many illegal immigrants are often pulling in tax refunds that are well into five figures. At a time when the federal government is absolutely drowning in debt, this is the type of fraud that desperately needs to be cracked down on, and





Last year, the whistleblower alerted the IRS to dozens of examples of illegal immigrants using this scam.

So what happened?

Absolutely nothing.

The IRS took no action.

But they seem to have plenty of time to come after you and I, don't they?

The WTHR investigation mentioned above discovered one instance in which it was claimed that a total of 20 children lived in one trailer in Indiana.

Because of tax credits for those children, a total of $29,608 was paid out to several illegal immigrant workers.

But when a reporter from WTHR went to the trailer, he found that only one girl actually lived there.

June 16 2012 at 4:16 PM Report abuse rate up rate down Reply
1 reply to ragtopdaz's comment
dede4007

Amazing. I believe it. Here, thousands of dollars were scammed off the government, and yet my daughter had 450.00 dollars taken out of her account by the IRS, and she didn't even owe them any money. She was severely injured at work and couldn't work for an entire year. She wasn't earning any income, so she wasn't paying taxes on her income. Regardless of her PROVING to the IRS that she didn't owe the money, they have not returned her money to her, and it's been over 3 years now.

June 17 2012 at 9:10 PM Report abuse rate up rate down Reply
ragtopdaz

Who cares???
President Obama thwarted the will of Congress and shunned the 20 million under-employed and unemployed Americans by announcing he will grant work permits to 2 million to 3 million illegal immigrants.
Even though Mexico throws any one in that country in jail if they are illegal. There is no NAACP or a ACLU, or even a Caucasian caucus there.


(Illegal immigrants the next terrorist threat to the US???? We all know what would happen if the Federal Government in forced the laws on the books regarding them... It would be the worst race riot in US history, and it would be committed by a group of people who are already breaking our laws just being in our country...)

And Calderon has a lot of gall in claiming the Mexican government is trying to discourage the invasion of our country by his unwanted people. The Mexican government has been encouraging illegal immigration for years, issuing official-looking ID cards to illegal aliens in the United States at Mexican consulate offices in this country, and even publishing a guide on how to sneak into the United States without getting caught and milk our system for all its worth.

Even though Mexico has harsher laws against illegal aliens than U.S. law..

June 16 2012 at 4:14 PM Report abuse +2 rate up rate down Reply
marine1942

Hey, it is a start.
Lawyers have ruined this country. Guess which party they support.

June 16 2012 at 3:24 PM Report abuse +5 rate up rate down Reply
ragtopdaz

Why file for bankruptcy when you can file a bogus tax return..

An Oregon woman was charged Wednesday with duping the state into giving her a $2.1 million tax refund that allowed her to go on a short-lived spending spree — an alleged scam that has prompted embarrassed state revenue officials to review how they process tax returns.

Krystle Reyes, 25, of Salem, filed an electronic return in January via Turbo Tax, reporting erroneous earnings of $3 million, authorities said. Her request for a $2.1 million refund was initially red-flagged by an automated system, but a subsequent manual review by Oregon revenue department workers OK'd the refund, and Turbo Tax then loaded the full amount onto a debit card for Reyes.

Authorities say she spent $150,000 of the funds before reporting the card lost or stolen, at which point the ruse was discovered. The state has recovered roughly $1.9 million of the funds.

Reyes was arrested June 6, and now faces eight felonies. In addition to tax evasion and theft charges, she is accused of computer crime and methamphetamine possession. She is scheduled to be arraigned July 5.

June 16 2012 at 2:05 PM Report abuse rate up rate down Reply
alstayl7

Who would lend money to a company that could break up at any minute and whose assets were all in the brains of the lawyers--who could and did leave anytime they wanted to? 245 million dollars??? I hope the lenders lose all of this and their legal fees for being so stupid.

June 16 2012 at 1:40 PM Report abuse +1 rate up rate down Reply
1 reply to alstayl7's comment
cpo1514

alstay.... is this a multiple choice question and limited to Libs????

June 17 2012 at 9:36 AM Report abuse +1 rate up rate down Reply