For people who spend a lot of their time advising corporates, lawyers can be woefully inept as far as governance is concerned. And there is no better example of this than collapsing Chicago firm Altheimer & Gray.
This firm, which on 26 June announced plans to dissolve, changed its management structure not once but three times in the space of three years.
The last change, in February 2001, saw the seven-partner executive committee, itself created just five months previously, abolish Altheimer’s 15-member steering committee, do away with an unfunded retirement benefit and introduce non-equity partners – all in one fell swoop.
In fairness, these drastic changes were voted in by Altheimer’s partners. But on reflection, they have proven to be fatal.
Altheimer is up to its neck in close to $30m (£18m) of debt, its 700 employees and 300-plus lawyers are facing terrifying uncertainty, while for those partners deemed suitable to retain equity status at the 2001 reorganisation, the chances of getting back their capital are disintegrating by the day.
More unnerving is the apparent confusion over who is or is not liable for Altheimer’s obligations. Several sources have indicated that they have no idea how much the receivables will total because Altheimer is still in the process of determining this. More pointedly, there are fears that salaried as well as equity partners could be liable for the firm’s obligations, as it is not clear if the new provisions in the partnership agreement, introduced in 2001, had been signed off, even now, by all members.
Even retired partners are suffering. A group, believed to be between 12-15 lawyers, who just qualified to receive some pension benefits despite the changes implemented in 2001, were told on Wednesday afternoon (2 July) that there were simply no cash reserves to pay them.
Still, as sadness gives way to boiling anger, it is likely that the management may find themselves the subject of a lawsuit. These retired partners are not going to take this lying down.
In the good times, the firm’s executive committee did not seem to think it was prudent to put a bit of cash away just in case.
LaSalle Bank is not prepared to bail Altheimer out. Sources say that last week, the bank stated it would provide enough capital to pay Altheimer’s staff. This came while the firm held off a vote on dissolution to right itself before potential suitors – including Sonnenschein Nath & Rosenthal – presented rescue plans for the firm, as revealed in Grapevine, part of The Lawyer News Weekly, on 2 July. However, there is no such luck for the firm’s partners, who will not receive any money this month.
One cannot help wondering whether this would have happened if the firm had kept the steering committee, a kind of legal non-executive board, in place. Bear in mind that just over two years after this last tinkering with the management structure, Altheimer is now careering towards an ignominious end. With a steering committee to guide them, would debt levels have ballooned to these levels?
Sources have told The Lawyer that the executive committee was aware of the debt level in February this year. This committee, made up in the US of Phillip Gordon, Gery Chico, Sy Peck, Jeffrey Smith, Louis Goldman and Jeremy Margolis, had apparently drawn up some sort of debt reduction programme that would have seen the debt reduced to manageable levels by August this year. Needless to say, this plan never materialised. And would a steering committee have asked questions on why partner profit distributions, usually dispersed in January, for the year ending 31 October 2002, took until May to materialise?
And what about remuneration, that most prickly of issues? Was it good practice to leave the all-important decision of who received what points in the hands of just one small group? Indeed, which partners decided how many points the executive committee re-ceived? Undoubtedly, this was a decision that should have been made by an independent body.
Finally, when the firm expanded into France and San Francisco last Sept-ember, and seriously thought about New York and Ger-many just six months ago, is it possible that a steering committee could have put its foot down about this? Who decided that these decisions made perfect commercial sense – it cannot have all rested in the lap of Louis Goldman, the head of Altheimer’s international practice?
All the danger signs were there before 2001. The second reorganisation left day-to-day operations in the hands of Chico, Smith and chief operating officer Bob Kubic. Meanwhile the executive committee, also containing Warsaw’s Gabriel Wujek and later ‘honorary’ member Anthony Fine, was in charge of ‘strategy and policy’. Apparently, this concentration of power helped facilitate fast decisions in a ‘dynamic’ market.
Unfortunately for the executive committee, this power has now shifted into the hands of David Neff, co-chair of the lodging and timeshare practice group at Piper Rudnick, and Jacob Brandzel, director in national corporate recovery services at American Express Tax and Business Services. It will be these people, as well as whoever from Altheimer is picked to oversee the dissolution, who will have to sort out the pressing question of liabilities.
Inevitably, these issues include property. Ironically, Altheimer shares the same landlord as the now defunct Brobeck Phleger & Harrison, Equity Office Properties, for its space at 10 South Wacker Drive.
And in a further twist, the London office’s 11,000sq ft space at 60 Bishopsgate was leased from Brobeck Hale and Dorr. This space and 7 Bishopsgate, an 8,000sq ft space that is costing the firm £337,237 a year (at least until 2005 when the break provision kicks in), are both on the market. Apparently, the London office will stay in whichever one remains unleased. But in the meantime, the empty space at 7 Bishopsgate is another liability for partners as the lease was taken out by the US partnership.
For the time being, it seems as if the suitors will keep circling as Altheimer’s executive committee races towards some sort of resolution. But, as was seen with Brobeck, although economic pressures did affect the firm, this alone cannot be blamed. Only the people so terribly let down by this mess know where to point the finger of guilt.
| The executive committee |
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| Phillip Gordon – Executive committee member and real estate rainmaker. Believed to be the power behind Altheimer & Gray’s management.
Gery Chico – Chairman of the executive committee and rainmaking head of government practice. Well-liked partner with political aspirations – the Democrat is running in the 2004 senate primary. Sy Peck – Executive committee member and private equity/corporate rainmaker. Jeremy Margolis – Executive committee member and litigation heavyweight. Louis Goldman – Former executive committee member and head of Altheimer’s international practice (resigned in May). Driving force behind the varyingly successful European expansion. Jeffrey Smith – Executive committee member and managing partner. Well regarded, though sources question his power among his management peers. Gabriel Wujek – Executive committee member and corporate finance rainmaker. Described as “a leading light” in Altheimer’s Central and Eastern European practice. Anthony Fine – Honorary executive committee member and chairman of the London management committee. Volatile grafter who brings in big bucks. |
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| The questions that the Altheimer & Gray leadership will have to answer |
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| l Why was the management structure changed three times in the space of three years?
• Why did the management let debt levels balloon to nearly a quarter of the firm’s total revenues? • Why was so little done to stem partner departures? • Why were partner drawings not cut in line with the underlying profits trend? • Why did the executive committee not build up cash reserves despite evidence that transactional work was drying up? |
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