Outside the offices of Dewey & LeBoeuf in New York.
Daniel Acker/Bloomberg NewsOutside the offices of Dewey & LeBoeuf in New York.
An accelerating wave of partner defections from the New York law firm Dewey & LeBoeuf is now threatening to violate the firm’s loan agreements with its banks.
Dewey has been in turmoil after slashing its partners’ salaries — many of them that had previously been guaranteed — after weak financial performance last year. With eight more partners announcing their departures from Dewey on Tuesday, at least 66 of 300 partners have now left the firm since January. Having lost more than 20 percent of its partners, the firm has run into problems with its banks, according to three people with direct knowledge of the matter who spoke on the condition of anonymity because they were not authorized to discuss it publicly.
At issue are Dewey’s loan agreements that require the firm to maintain a certain percentage of its partnership. It is unclear exactly what that percentage is for Dewey, but legal industry experts say that typically, a law firm’s agreement with a bank requires it to maintain 75 to 85 percent of its partners. If it falls below that threshold, the firm is considered in default and the bank can demand repayment.
Dewey is locked in negotiations with lenders —JPMorgan Chase and Citigroup — to restructure its credit line, these people said. It also has a $125 million bond issue it raised in 2010 that begins maturing next year.
“As Dewey’s partnership ranks thin, the banks have all the leverage,” said Bruce MacEwen, a lawyer and consultant who publishes the Web site Adam Smith Esq. “The firm’s leadership now bears the burden of proof to convince lenders, clients and lawyers that it can survive.”
Among the banks’ concerns, say legal industry experts, is that Dewey’s main source of collateral is the firm’s outstanding receivables from completed legal work and work in progress. Once partners start leaving the firm, it becomes significantly more difficult to collect unpaid bills from clients, and their collateral can become impaired.
On Tuesday, Dewey said the departures had not violated loan covenants, and Citigroup issued a statement of support for the firm. A spokesman for JPMorgan declined to comment.
“Dewey & LeBoeuf is a client in good standing with Citi Private Bank,” said Dan Di Pietro, the chairman of the law firm group at Citi Private Bank. “Citi has had a banking relationship with the firm dating back to the early 1970s and continues to provide banking services to a significant percentage of the partners and associates.”
Several industry consultants and recruiters say that, in addition to the outcome of talks with its banks, Dewey’s future now largely depends upon the loyalty of a small number of the firm’s partners who generate an outsize amount of business for the firm.
Among the so-called rainmakers who are crucial to the firm’s survival, these people say, are Jeffrey L. Kessler, the head of the litigation department and a prominent sports lawyer; Richard E. Climan, a Silicon Valley mergers and acquisitions lawyer; Berge Setrakian, a corporate lawyer with a large international practice; and Martin J. Bienenstock, a bankruptcy partner.
Since running into problems earlier this year, Dewey has gone on a public relations offensive. Last month it hired Michael Sitrick, an expert in crisis management.
Dewey has insisted that downsizing is necessary to increase profitability. It has maintained that the bulk of the departures would not affect the firm’s financial performance because many of those leaving were laggards. It has overhauled its management team and announced that its billings for the first three months of 2012 were up nearly 30 percent over the year before.
In its statement Tuesday, Dewey, the product of a 2007 merger of the two New York firms Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, again sought to minimize the escalating number of departures.
“As we have said in the past, although the new direction that the firm is taking was approved and is supported by the overwhelming majority of the firm’s partners — as might be expected at a firm with 300 partners — some didn’t like the change,” the statement said.
The firm absorbed a blow to its highly regarded energy group on Tuesday when Hunton & Williams, a law firm in Richmond, Va., said it had hired six partners, including Bud Ellis, formerly co-head of Dewey’s utilities, power and pipelines group.
“Current departures aside, Dewey & LeBoeuf retains one of the world’s leading energy practices spanning virtually every aspect of the sector across the globe,” the firm added. “It has been an important component of the firm’s practice for decades and remains as such.”
Dewey, with about 1,000 lawyers in 25 offices worldwide, is among a handful of large corporate firms that in recent years have added partners by poaching star lawyers from rivals with record-size, multiyear, multimillion-dollar contracts. Mr. Climan and Mr. Bienenstock, for instance, were both lured away from other firms.
Compounding Dewey’s problems were dozens of additional guarantees extended to the firm’s partners. These came from the Dewey and LeBoeuf merger in 2007, when management gave contracts to partners in order to retain top talent.
Dewey’s issues grew acute last year after it missed its earnings targets. It had budgeted a double-digit percentage rise in profits yet showed no increase over 2010.
Short on cash, Dewey management was forced to cut the compensation of numerous partners, many of whom thought they had guarantees. The financial woes have caused its partners to head for the exits.
To stabilize the firm, Dewey restructured its management last month, stripping its chairman, Steven H. Davis, of his title. He will join four other lawyers in an “office of the chairman” with five co-equal members representing the heads of the firm’s most profitable practice areas.
Amid the distress, Dewey continues to work on several prominent matters. The firm is involved in two takeover battles, representing the pharmaceutical company Genomma Lab in its bid for Prestige Brands Holdings, and defending Illuminafrom a hostile bid by Roche. And the partner Bruce Bennett represented the Los Angeles Dodgers baseball team on its sale to a group that includes the former basketball star Magic Johnson.
Yet Peter Zeughauser, a legal industry consultant, says that such tumult has a toxic effect on the work environment and the production of billable hours. Mr. Zeughauser was a consultant to Howrey, a 700-lawyer Washington firm that collapsed last year amid financial woes.
“It’s hard to get people focused on client work when they’re busy focusing on their own future,” he said.