Thacher Proffitt & Wood: bitter end
19 January 2009
The manner in which Thacher Proffitt & Wood was wound up has left a sour taste with those left out in the cold, but that tells only half the story…
Thacher Proffitt & Wood is now history, but that does not mean the story is over. If the rumours currently swirling around the chilly streets of Manhattan are correct, the recriminations over the demise of one of New York’s most prestigious corporate firms are only just beginning.
On 31 December 2008, the 160-year-old US firm Thacher Proffitt joined Heller Ehrman and Thelen as casualties of the economic downturn. And as with any collapsed business where millions of dollars are at stake, questions have immediately begun to be asked about how Thacher Proffitt could have fallen so far, so quickly. Was it simply the result of the credit crunch and the collapse that followed it, or was management to blame?
“A lot of people are out of work as a result of the management’s miscalculations,” argues one New York legal market consultant.
Now that the firm is no more, questions of what management should or should not have done are largely redundant. Following its last-minute rescue by a white knight in the shape of Sonnenschein Nath & Rosenthal, the most pressing question for Thacher Proffitt’s former management, and in particular managing partner Paul Tvetenstrand, is: did you ultimately wash your hands of the firm, or did you do your best to save as many jobs as possible?
Losing it big time
Already a number of former partners are thought to be busy assessing whether or not there is a course of action against Thacher Proffitt’s management to recover some of the money they have lost.
“There’s a lot of bitterness and anger aimed at the management,” says one former partner of the firm. “Whatever happened, the management didn’t get any deal done for Thacher Proffitt & Wood. Thacher Proffitt & Wood has dissolved, taking 100 lawyers with it and leaving them facing losses running into the millions.”
According to this partner, the accumulated losses stem primarily from an attempt last year by the Thacher Proffitt management to inject some much-needed capital into the firm. Early in 2008 rumours began to circulate inside the firm that it had used its credit lines to pay 2007 partner bonuses and distributions. It is thought that, by the end of January, the firm had asked partners for a round of extraordinary capital contributions. For some partners this is believed to have amounted to around $500,000 (£343,400).
On top of this came an increase in held-back partner profits. Every year Thacher Proffitt would keep back a relatively small amount of profit from the distribution until after the audit was completed. Generally, says the former partner, this would come in at between around $18,000 (£12,400) and $20,000 (£13,700).
“In 2008 the holdback for many partners was around $150,000 [£103,000] and for some as much as $250,000 [£171,700],” claims the ex-partner.
Then there was a provision for retired partners, in which former partners receive shares of the profit either in lump sums or spread out over several years. This is also thought to be gone, swallowed up into the black hole that is created by a collapsed law firm.
The bottom line, say disgruntled partners, is that all of this money has disappeared.
“Everyone lost the lot, the holdback and the capital contributions,” the former partner says. “The upshot is that some partners will have lost millions.”
Winners and losers
In the aftermath of any failed business, especially one with a pedigree as strong as Thacher Proffitt’s, there will always be those who are hard done by.
It is only natural for anyone who feels short-changed to indulge in a spot of mouthing off. And as its final managing partner, and the one identified most closely with Thacher Proffitt’s focus on securitisation, Tvetenstrand is the most obvious target for that criticism.
But the hurt among former Thacher Proffitt partners has been compounded not only by the alleged loss of serious money, but also by the fact that the entire senior management, including Tvetenstrand and executive board members Robert McCarthy and Doug McClintock, have secured themselves new jobs over at Sonnenschein.
As one comment posted on The Lawyer’s website put it: “So the managing partner is joining a new firm and leaving half his old one dangling in the wind? There’s a name for that sort of guy.”
During the whirlwind days of Thacher Proffitt’s last-minute negotiations with Sonnenschein (and with King & Spalding before it), Tvetenstrand did not return The Lawyer’s calls for comment. But last week he spoke exclusively to The Lawyer to defend his actions during the final days of Thacher Proffitt.
“We fought tooth and nail to save the firm,” he insists. “If we hadn’t got this deal done there was really nothing else going on.”
The bottom line, says Tvetenstrand, is that he and his partners were able to save the jobs of 40 partners (19 of whom have entered the Sonnenschein equity), 60 associates and another 60 support staff. Remarkably, the Thacher Proffitt partners even offered to take pay cuts from Sonnenschein if it meant they could add more associates to the pack. Sonnenschein refused.
“But everyone else got two months’ salary,” he adds. “I think that it was a phenomenal, tremendous result and we worked like dogs to get it. We moved heaven and earth to try and keep the organisation together. But we weren’t able to save the firm.”
One ;by ;one, ;Tvetenstrand dismisses the allegations concerning Thacher Proffitt’s alleged recapitalisation. Did the firm use its debt lines last year to pay 2007 partner bonuses and distributions?
“Not in any way that was different from any other year in order to
meet the regular cashflow needs,” he counters.
Did the firm ask partners for a round of extraordinary capital contributions early last year?
“Nothing extraordinary, but over the past three years we had an annual increase to fund the build-out of floors.”
Was there an increase in held-back partner profits?
“No, though some people voluntarily left some of their 2007 money in the firm. Why? To help the firm.”
Tvetenstrand also adds that he is “not aware” of any claim either having been brought or being prepared against him or his partners. But he does admit, at least with the benefit of hindsight, that the firm should have begun looking for merger partners much earlier than the summer of 2008.
“With hindsight, absolutely,” admits Tvetenstrand. “But nobody could have expected what happened in September.”
September 2008, a month that saw the end of Lehman Brothers and the wholesale rejigging of the world’s financial markets, could hardly have been foreseen. But Thacher Proffitt’s small scale, with no overseas offices or US network to speak of and an overriding focus on securitisation and real estate finance, had been there for all to see for years. Was Tvetenstrand to blame for that lack of strategic growth?
“We’ve consistently worked to try and diversify Thacher Proffitt,” he claims. “We’ve brought in bankruptcy lawyers, litigators, corporate and hedge funds specialists. We’ve been diversifying. The problem was that the securitisation and real estate practices were going gangbusters in ’05, ’06 and ’07. What do you do? Tell your clients to go elsewhere? Hindsight is 20-20. I don’t know anyone who could have predicted what happened in 2007 and September 2008.”
Given the benefit
Did Tvetenstrand and the rest of the senior Thacher Proffitt management team do all they could for what remained of their firm? The consensus in New York is that they did.
“Both my initial and my considered reactions are that it was an admirable accomplishment that they could keep the core group together,” says
legal market commentator Bruce MacEwen. “I read it as 100 lawyers saved, not 100 left behind. It could easily have been 200 lawyers left out on the street.”
As Jomati’s Tony Williams points out: “King & Spalding fell at the last fence, so to be fair the Thacher Proffitt management had been pursuing a whole-firm option.”
“I’d be very surprised if there were any courses of action available to recover funds,” says former Thacher Proffitt partner John Woods, who is now with Clyde & Co. “I think the majority, if not all, the partners recognised that the firm has treated the lawyers fairly. Yes, some partners may not get the payouts they expected, but that can’t be helped. Partners always come last.”
For those who made it to Sonnenschein the focus is inevitably on the future, although for onlookers the speed of that deal is curious, to say the least.
Much of the credit for that last-minute Hail Mary deal goes to Tvetenstrand’s equivalent at Sonnenschein, managing partner Elliott Portnoy. It was his determination to secure a deal, and to boost his firm up the New York rankings at the same time, that was instrumental in its success (see box).
Portnoy’s energy and ability to spot a good deal appears to contrast sharply with the heel dragging that seemed to have gone on over at King & Spalding. Several sources say the Atlanta-based firm “overnegotiated” the deal, repeatedly reducing the number of lawyers it was willing to take while concurrently indicating that a deal was just about done.
“Sonnenschein took the deal out from under King & Spalding,” insists one New York recruitment consultant. “They were still working on it when Sonnenschein came in for Thacher Proffitt, but King & Spalding was going to be very selective and take a much smaller group. So if anything, the Sonnenschein deal was an effort by Thacher Proffitt to keep more of the firm together.”
That, at least, was achieved. It may not do much to diminish the bitterness felt by those left on the outside, but that, as they say, is likely to be consigned to history.
The deal and the players
Sonnenschein’s acquisition of 100 lawyers from Thacher Proffitt & Wood was a coup not only for the firm, but also for some of the consultants who played key roles.
Over at US recruitment consultants Major Lindsey & Africa, Laurence Mullman and Jacquelyn Knight decided early on to take the initiative.
“We cold-called Thacher Proffitt when we heard it was talking to ‘a firm’,” says Mullman. “We didn’t know which firm it was, but the Thacher Proffitt real estate group, which included partners Mitch Williams and Don Simone, chose us as their exclusive representatives to come up with a plan B. They were very loyal to the firm and didn’t want to break up the deal. The goal was to get as many lawyers as possible to the contemplated merger partner.”
Elsewhere, merger specialist Altman Weil had been hired by Thacher Proffitt as its exclusive representative. During the course of 2008 Altman introduced Bingham McCutchen, Reed Smith and, ultimately, King & Spalding as potential merger partners.
Meanwhile, Thacher Proffitt’s real estate group had been joined by the firm’s bankruptcy team in turning to Mullman and Knight at Major Lindsey. Once talks with Thacher Proffitt commenced, Sonnenschein managing partner Elliott Portnoy called on the services of David Barnard of US consultancy Blaqwell, who introduced the two firms.
“Elliott Portnoy saw the opportunity,” says Mullman. “It’s a great source of buzz. Clients have been very impressed by the additions. It solidifies their New York presence and is potentially transformational.”