Feature: Out of practice
8 April 2013 | By Lucy Burton
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Herbies rainmaker Ted Greeno is the latest in a line of top litigators packing their bags for the lure of the mighty dollar. But the firm insists their departures have nothing to do with the Freehills merger
But then again, as soon as numerous partners voiced their objections to the firm’s merger with Australia’s Freehills at a June 2012 partners’ meeting, the exit sign was writ large on the wall. In neon.
Since that meeting, which current partners insist had an “overwhelmingly pro-merger” mood, six high-profile disputes partners have left the London and Moscow offices.
In addition, there are whispers that more star litigators already have one foot in the departure lounge while a total nine partners have left since the merger.
While six disputes partners leaving a department of 130 may not sound like a mass exodus, those heading for the door are some of the chief rainmakers of legacy firm Herbert Smith - the likes of Greeno, now joining US litigation boutique Quinn Emanuel Urquhart & Sullivan, and financial services regulatory (FSR) chief Martyn Hopper, due to join Linklaters with regulatory partner Nikunj Kiri this year.
Why are these partners, some of whom have spent their whole careers at the firm, opting out? And why now?
The grass is Greeno
Herbies partners insist that any big change - such as the UK firm’s £800m merger with Freehills which went live in October - inevitably leads to big exits.
“A merger, or any big event, makes people step back and think about what they’re doing,” global head of disputes Sonya Leydecker told The Lawyer the day after Greeno resigned. “Partners reflect at moments like this and we always knew people would leave as a result.”
Leydecker makes a fair point, but it glosses over the fact that there was opposition to the merger in the first place.
One former insider recalls: “Some big litigation players maintained it wasn’t worth effectively doubling the firm’s size just to get into one more jurisdiction, or at least what is, on the face of it, one more jurisdiction - and a relatively small one at that.”
According to numerous sources interviewed by The Lawyer, frustrations with the tie-up only exacerbated a growing issue among litigators, who felt their share of the firm’s profit was being dragged down by underperforming departments, most notably corporate.
Indeed, the London disputes team had a stellar year in 2011/12, contributing £141.7m to the City office’s turnover of £312.3m, with headline cases including Martyn Hopper (soon to be at Linklaters) advising UBS following its $2.3bn (£1.5bn) loss from unauthorised trades carried out by rogue trader Kweku Adoboli.
Other departments in London that year were distinctly less impressive. Corporate generated £104m, finance £31.3m and property £35.4m. Litigation partners were no doubt miffed not to see a payoff commensurate with their contribution.
Firmwide average profit per equity partner (PEP) for the year fell to £840,000 (£833,000 in London) - a big drop from the £1.04m dished out to equity partners in 2008 and miles away from the £2.04m PEP recorded in the London office of Quinn Emanuel in 2012.
With the global litigation market showing no sign of losing steam (the top 50 litigation practices in the world generated $23.05bn (£15.13bn) last year), it is no wonder that top-tier litigators are seeing the merger as an opportunity to poke their noses into other firms, many of which are offering Monopoly money for their services.
“Disputes is a growth area for many firms in a lean transactions market,” points out Leydecker. “Firms looking to grow in disputes naturally look to recruit from a top litigation firm, using big chequebooks to help convince people the grass is greener.”
Lure of the greenback
Looking at the firms the partners have moved to tells us as much about why they are leaving as it does where: Greeno for Quinn Emanuel; Simon Bushell for Latham & Watkins; Dmitry Kurochkin for Dechert; and Kevin Lloyd for Debevoise & Plimpton.
Even pre-merger, in 2011, the firm lost London litigator Peter Burrell to Willkie Farr & Gallagher and a three-partner Paris disputes team to Allen & Overy. There is no hiding from the fact that US firms have the pulling power.
“It will be money,” comments one insider when asked why so many HSF partners are jumping ship. “No magic circle firm has the need or appetite for an expensive HSF partner, apart from Linklaters with Martyn Hopper, but that’s a specialist practice area where they had a gap. The only firms that have the ability and will to pay what [the partners] want are US firms.”
But while a wad of cash certainly helps, it is not all about the dosh.
“The reality is that you move for two reasons: money and work,” says one litigator. “The time for big litigation outfits with a football team behind the partner is over - the new model is one partner, one associate and maybe a barrister - that’s what the Quinn Emanuel model is. This is why heavily staffed UK firms like HSF are struggling in litigation.”
With the department arguably losing its dominance, US firms wanting to bulk up in litigation have their scouts out in force looking for talent. Quinn Emanuel beat off competition from several US rivals for Greeno, whose clients include motor-racing magnate Bernie Ecclestone (see graphic, above), with Davis Polk & Wardell thought to be one. But The Lawyer also understands Quinn Emanuel had conversations with at least one other HSF star litigator. In this case, it was not quite clear who was trying to chat up who, but the conversation started and ended as just that.
The Lawyer’s sources suggest Quinn Emanuel’s London office is now done with plucking people from HSF.
If gossip is to be believed, some partners have been approaching US firms, rather than the other way round. One source alleges that a disputes team of 20 or more approached Latham about a potential move late last year, but for whatever reason nothing materialised.
This is just one of a number of whispers, and it is worth pointing out that the chatter is not all about shuffles in the City. Singapore has been a particular focus of speculation.
“It wouldn’t be remotely surprising to see a disputes resolution team in Singapore move over to a US firm,” says one recruiter. “They’re getting high-volume, low-value work - not the class of work they think they should be getting.”
Just because some partners opposed the Freehills merger does not mean it is, or ever was, a flawed idea. Big-ticket litigation has never been more international and global expansion has accelerated the number of cases for Herbert Smith’s litigation department in the past.
A case in point is when the firm seconded an English solicitor team to Moscow in September 2011. By December that year the London and Moscow offices were working on 10 matters involving Russian parties needing English law advice, including advising oligarch Nikolai Maximov in relation to the alleged theft of his steel company’s assets.
But while work might have increased in Russia, the level of cross-border disputes firmwide increased only marginally during that time. The firm reported that in 2008 84.3 per cent of its matters were domestic and 15.7 per cent international, while in 2011 those figures had barely changed, to 83.3 per cent and 16.7 per cent respectively.
In comparison, some 25-30 per cent of Quinn Emanuel matters involved multiple jurisdictions that year. The US firm’s role in mobile phone patent disputes, where it continues to represent clients such as HTC, Motorola and Samsung, is a perfect example of how claimants are filing litigations in multiple venues.
Perhaps, then, radical change had been calling legacy Herbert Smith for some time. The prevailing criticism is that the merger is too little, too late.
“Herbert Smith really made litigation in London what it is, but, as the way things always go, other people caught up,” comments a former partner. “Some partners were so focused on pocket-lining they didn’t look to the future and see they needed to invest in international work. Senior partners might have made a wad of cash, but what about the next generation?”
That conservatism was supposed to come to an end with Project Blue Sky, the firm’s blueprint to become a global player and drive up profitability. Since it was mooted in 2011 the firm has severed its European alliance with German firm Gleiss Lutz and Benelux firm Stibbe, and has opened a number of offices, notably the long-awaited disputes-focused base in New York on the back of a hire of a group of litigators from Chadbourne & Parke - a launch that had long been on the wish-list of London litigators. The firm is also
due to open offices in Berlin and Frankfurt, its first move into the German market as a standalone firm, and has received approval from South Korea.
Whether or not these offices work out, undertaking the project at all shows the firm is willing to embrace some kind of change.
But the exits underline a big part of the problem for Project Blue Sky. Unless senior partners - many of whom have been at the firm since their trainee days - can take a realistic view of their firm and its position in the market, progress on the review will continue to be met with struggle.
Follow the leader
The worry for the firm is how much loyalty these big names commanded over their teams, especially in light of maverick senior partner David Gold’s retirement in 2010.
“When people start leaving, others start questioning their existence,” highlights one legal consultant. “Headhunters also feel more confident approaching the firm.”
Among the leaders that are left - Leydecker, Philip Pfeffer, Tim Parkes and Alan Watts - there is no standout personality with the same gravitas or external profile as Clifford Chance’s Jeremy Sandelson, Freshfields Bruckhaus Deringer’s Chris Pugh or Hogan Lovells’ Patrick Sherrington.
On the flipside, the exits will at least make space for HSF’s junior partners to make their mark, but it is hard not to see the departure of some of the firm’s highest-billing partners as detrimental to the department and, ultimately, the firm.
So, is Leydecker on the look-out for fresh meat, or is the exit of a few disputes stars genuinely water off HSF’s back?
“As sad as it is to see friends go we are big enough and ugly enough to come out of this unscathed,” she says. “We have several generations of great partners in our ranks. We don’t need to hire, except for some specialist areas or geographies. We are underweight in Europe for example, particularly in France and Germany, so these will be areas of focus for the next few years.”
Indeed, the view from partners we spoke to on the inside is not one of hysteria.
“Greeno left behind a sensational, deep practice that allowed him to leave amicably,” comments one partner. “There’s a positive buzz about what we’re doing and lots of cohesion about the merger and going international. Nobody said at the partners’ meeting in June that they would walk out of the door in a sulk if the tie-up went ahead - it was a cool, cohesive debate. It was quite powerful.”
Full speed ahead
So, going back to that meeting in June, what were the options discussed and what is on the agenda now? Various sources say a merger with a US firm was initially on the cards, and while that idea is thought to have been scrapped, or at least postponed, the plan for disputes is to go global - and do it fast.
“We’re putting a strategy in place for the global disputes practice and have just finished the first stage of evidence-gathering and partner meetings,” comments Leydecker, adding that the strategy should be finalised by the summer. “This isn’t a knee-jerk reaction to people leaving, we were always going to put together a three-to-five-year plan following the merger.”
While Leydecker would not go into detail about what has been discussed so far, The Lawyer will hazard a guess at some of the bugbears flagged up.
These are likely to include the merged firm’s lockstep revamp. Legacy Herbert Smith operates a rigid structure that allows partners to progress regardless of their performance, differing hugely from Freehills modified lockstep, which is linked heavily to performance. The new remuneration model is expected to be a hybrid. Good news for non-equity partners, less so for equity.
Another is conflicts with clients, with legacy Herbert Smith litigators unable to act for certain clients because it could dent their standing with the corporate team. It is an issue that surely wasn’t helped by the firm’s sudden expansion in headcount.
“Issues with PEP, problems with the remuneration model, conflicts with clients and a change in culture - these are all problems of varying importance to people, according to their perspective,” says one legal market consultant. “The firm still has - and will have - a good litigation department. But if the exits continue, that could diminish.”
For those who did not stand up at that partners’ meeting in June, now might be the time to get their voices heard.