Dishing the debt

The ill-fated tie-up between debt-laden Dewey Ballantine and LeBoeuf Lamb Greene & MacRae has seen the merged firm career from one crisis to another. Can a new management team save Dewey & LeBoeuf from going under?

It was a peculiar experience for partners of US firm LeBoeuf Lamb Greene & MacRae.

They must have known something was up when, one late summer’s day in 2007, the firm asked them to file off into small groups as though they were in a classroom and the teacher was about to begin storytime. Management had a message for them: something was about to appear in the US press very soon and there was an internal announcement to make. They sat, captivated, in teams of up to around seven, to be told of the merger that was to change the firm’s fortunes for the next five years.

Those who were there at the time say there were roughly six weeks between the awkward huddles and the deal with Dewey Ballantine going live on 1 October. There was no desire by Dewey, a New York M&A firm, to hang about. It had just called off rather public merger talks with US rival Orrick Herrington & Sutcliffe and wanted to get this deal through as quickly and as neatly as possible.

Dewey and Orrick had ended their discussions in January 2007, some three months after confirming they were in talks. The fallout was nasty. Barely weeks after the flirtation ended, The Lawyer revealed that Orrick chair Ralph Baxter had demanded a $25m (£12.92m at January 2007 conversion rate) guaranteed payout over five years, a dealbreaker for Dewey (15 January 2007). His broad demands were considered extreme, and the legal world knew this. The talks ended as a blight on both firms’ histories.

Secret liaison

Less than a year later Dewey and its new suitor, LeBoeuf, were determined to do things differently.

“It was railroaded through,” points out one former LeBoeuf partner about the merger. “It needs to be ­secret, it needs to be quick,” was the mantra according to the partner.

Indeed, management at both LeBoeuf, led by chairman Steven Davis, and Dewey & LeBoeuf appears to be defined by a sense of secrecy, from the merger talks right through to the merged firm’s controversial private placement, Citibank credit lines and remuneration system (see management box, below). Partners felt they were out of the loop and would feel their hearts skip beats every time the firm called a conference call to break the latest shock update.

It is little wonder that the partners who came from the LeBoeuf side of the combined firm are the ones leaving in their droves. Senior LeBoeuf ’lifers’ are now quitting: London corporate partner Joseph Ferraro has joined Willkie Farr & Gallagher, while California-based global insurance co-chair James Woods is now at Mayer Brown. Both quit in the past six weeks and are among nearly 50 partners to walk since the start of 2012. Woods even went with a parting shot, slamming Dewey & LeBoeuf implicitly in the Californian legal press earlier this month by highlighting that his new firm, Mayer Brown, has “apparently no problems paying partners in a timely fashion and valuing partners and practices very highly”.

“Davis has let down an awful lot of the historic LeBoeuf partners,” says one former partner.

Bad relations

No one can agree on the precise cause that led to the current crisis at Dewey & LeBoeuf, which has suffered a mass partner exodus and scrutiny of its financials – including The American Lawyer reviewing the 2011 revenue figure for the firm. It has even brought in crisis PR manager Michael Sitrick, whose previous clients include socialite Paris Hilton and R&B singer Chris Brown following his assault on then-girlfriend and fellow R&B star Rhianna.

But one thing insiders and observers can agree on is that the current crisis did not come out of the blue.

“I’m not sure that it’s any one thing,” says a former partner.

“Certainly, the confluence of factors put the nail in the coffin,” comments another source close to the firm. “This isn’t something that just happened.”

In truth, the story goes back to the 2007 merger.

“It all stems from the very ill-conceived merger between Dewey and LeBoeuf and the immediate falling off a cliff of the profits of 2008,” reflects a former partner of the merged entity. “As a result of various poor management decisions, and because of the model of business strategy they had, they shot themselves in the foot.”

Unequal billing

In 2007 LeBoeuf was an impressive New York firm with energy and insurance practices to compete with the best. Its Lloyd’s of London market team – the bulk of which has now left – was highly respected. It was a cautious, conservative firm that was averse to sudden change.

Dewey Ballantine, on the other hand, was less fortunate. Granted, it had superstar rainmakers, such as co-chair Morton Pierce (known the world over simply as ’Mort’), a leading figure on Wall Street in investment banking M&A and adviser to Deutsche Bank. It also had a few well-regarded insurance partners, including Tony Fitzpatrick and Jonathan Freedman. The latter quit for Sidley Austin just prior to the merger.

But there was a surprise in store for the LeBoeuf partners.

Commentators say Dewey Ballantine was right to reject Orrick because the pair were not a good cultural fit, while the LeBoeuf deal made more sense in this respect. But it was a ­rescue merger for a firm saddled with debt of up to eight figures.

“Mort had to basically sell the firm to LeBoeuf,” says an insider.

People familiar with the situation at the time say roughly six months passed between the merger going live and Dewey Ballantine’s massive ­pension deficit emerging. LeBoeuf partners outside the core management were either not made aware of the huge debt, or were at least encouraged to turn a blind eye to it.

“It was a big amount of money,” confirms a source.

The circumstances are odd. McKinsey & Company, which LeBoeuf brought in to conduct a wholesale ­review of its management structure, is said to have given the merger a glittering report in 2007 (McKinsey declined to comment). Sources say some LeBoeuf partners were given bonuses at least in the thousands of dollars to buy them into the merger idea, which one former partner mischievously refers to as a financial incentive to stop them worrying about the Dewey pension deficit. Others say many partners knew nothing about Dewey’s debt. It was all part of the regime of swiftness and secrecy, they believe.

“The merger was a disaster, a complete and utter disaster,” reflects one former LeBoeuf partner. “Within five months the finance department of LeBoeuf realised that Dewey was bust and had a high level of debt.”

“[LeBoeuf] screwed up their due diligence,” comments an insider. “And this is supposed to be a firm that’s good in M&A.”

This oversight had dire consequences. It is understood that LeBoeuf’s 2008-09 profit went towards paying off Dewey Ballantine’s debt, meaning the finances were in turmoil when the combined firm had barely got off the ground.

Citi’s stranglehold

Dewey & LeBoeuf has sizeable credit lines from Citibank, with the latest renegotiations due to close at the end of this month. It is unclear when the firm embarked on the loans, but former partners and observers claim that money was coming in from Citi post-2008. Neither is the amount of debt to Citi clear – it is expected to be in the tens of millions; but what is certain is that the financing gave the bank significant leverage over Dewey & LeBoeuf’s strategy.

“Dewey LeBoeuf is a client in good standing with Citi Private Bank,” says Dan DiPietro, chair of Citi Private Bank’s law firm group. “Citi has had a banking relationship with the firm dating bck to the early 1970s and also continues to provide banking services to a significant percentage of partners and associates.”

The firm is in the process of renegotiating the Citi loans, a crucial process. The chat is that Citi is playing a hard line and that a successful renegotiation of the revolving credit facility is no certainty.

“If [Citi] just pull the plug, they pull the receivables and you’re gone,” says a source close to the firm. “Don’t assume any of these facilities will be renewed. The key for Dewey is to explain to the banks that they’ve got a credible story.”

Dewey & LeBoeuf sources claim the firm has tapped other banks since the merger too. It is believed to have received funding from Barclays, with the law firm waxing lyrical to partners about the excellent rate the UK bank had offered.

“They were going on about what a fantastic rate they’d got,” an ex-partner recalls.

Around two years ago Dewey & LeBoeuf attempted to increase the credit lines as profit tumbled and debts rose.

“What ended up happening is they went to Citibank and Wells Fargo [one of the firm’s other lenders]. No one would give them any additional money,” says a source.

It all points to a firm addicted to borrowing. The reasons are clear. In 2008 the firm missed its budget by roughly 40 per cent. Late that year, with Christmas shopping well underway, junior partners were in for another heart-stopping communal announcement. This time the firm did it over the phone in a mass conference call. Because 2008 profit was 40 per cent off target, junior partners were not entitled to the full drawings they thought they were. Any junior partners who had taken drawings of more than £170,000, which is 60 per cent of their target compensation, would have to pay back the rest out of their following year’s distributions. If this did not happen, the firm said it would be in breach of covenants with its bankers.

Bond bombshell

In the meantime, the insurance practice was suffering and the M&A deal rate was dropping (see practices box, page 24). In an almost unprecedented move by a law firm, Dewey & LeBoeuf decided it had to turn to the capital markets for financial input. To refinance the bank debt the firm had in 2010, it raised $125m by ­issuing a bond that was bought by insurance companies with maturities of three to 10 years, according to ­reports at the time. The firm’s management was not open about the interest rate at the time, but said it was a better rate than the bank loans, and former partners have confirmed that it described the private placement internally in glowing terms.

Partners who were there in 2010 claim the bond was another bombshell: it was not until a memorandum was circulated just as the bond was about to be sold that partners knew anything about it. The apparent secrecy is understandable given how unusual the move was: Dewey & LeBoeuf joined a small group of law firms to have issued bonds that­includes Clifford Chance, Morrison & Foerster and legacy Dewey Ballantine. Clifford Chance scrapped its bond in 2005, roughly two years after issuing it, deciding to return to a traditional financing policy after partners in July 2003 had to forgo their quarterly profit distribution.

But there is a curious, if not entirely surprising, feature of the Dewey & LeBoeuf bond that appears to have caused waves in the market.

“There was an agreement that below a certain revenue they couldn’t pay partners until they’d paid bondholders,” reveals a figure with knowledge of the firm.

So when revenue dropped below the threshold, the firm could not pay its partners, meaning a number have been receiving half of their compensation since then. Some are thought to have had their pay limited to ­drawings, which are understood to be £170,000 annually for standard ­partners and more for those on fixed deals.

The exceptions to this – and this is the crux – are partners with whom the firm had agreed a guaranteed remuneration figure. It is understood that these partners – thought to number around 25 at the time – had the right to be paid even before bond-holders, although it is believed that some gave up part of their remuneration for the sake of the firm. But it has still been a source of tension.

Just as controversial was what the bond was supposed to do: fill the pension hole or finance expansion?

“What was the intention of the money in the first place? Was it expansion, or was it to pay off pensions debt? Was [Davis] right to be in expansionist mode at that time?” wonders one figure with ties to the firm.

The bond issue came amid a significant move to bring in star partners on fixed deals, which dates back to the first major hire in late 2007 – that of restructuring star Martin Bienenstock from Weil Gotshal & Manges. It is thought that the total number of partners brought in on guarantees is close to 100, with a large proportion of these joining in 2011.

The guarantees are central to what has happened at the firm, although some are keen to knock down this interpretation as Dewey spin – the ‘at least we tried to expand’ excuse. According to a source, at some points around 80 per cent of profit has been handed to 10 per cent of partners, with much of this 10 per cent made up of the ’guarantee partners’.

The chosen few

The deals are understood to have ranged from $2m to $6m annually, including pensions contributions, with top guns such as Bienenstock and litigation chair Jeffrey Kessler towards the higher end of the scale. Dewey & LeBoeuf partners had a number of terms for the band of rainmakers on fixed deals: the ’chosen few’, the ’superstars’, even the ’celebrity chefs’. It was a source of jealousy, but also of anger at strategic incompetence. There are claims that the firm deferred compensation to partners and paid guarantees with bank loans, effectively borrowing from the next year’s profit to fund that year’s remuneration.

“The cause is ridiculous overpayment when money wasn’t there,” one former partner states.

“Anyone with half a brain could see that was going to cause problems in the future,” says another. “If you like, [guarantee partners] were insulated from being a partner. It was a pretty toxic environment.

“What they always did was, ’Okay, we’ll promise you something in the future’. There’s going to be a lot of partners who’ve been paid 50 per cent and are being paid in the future.”

The firm is currently rolling out an incentive scheme to keep potential departees at the firm by distributing profit over the course of a number of years.

But profit distributions are not the only problem. Equity partners are required to put 37 per cent of their ­annual ’target’ compensation – what they should get if the firm hits budget – back into the business. This capital is paid back to partners in three installments on 31 December every year for three years after they leave, meaning former partners could truly lose hundreds of thousands of dollars if – and it is a big if – the firm goes bust. The current bone of contention is whether partners should have to give the firm 37 per cent of its target compensation or, in the case of those whose remuneration has been limited, 37 per cent of their actual remuneration. Litigators will be quick to pounce if Dewey’s nightmare scenario occurs.

Silicon stars

Not that observers are unanimous in their criticism of the guarantees scheme. Most agree that Bienenstock was a rash acquisition, but the one lateral hiring move that prompts the most discussion is the snaring of a Silicon Valley corporate team from Cooley Godward Kronish (now Cooley) in 2009.

The triple partner hire, including star Richard Climan, caused gasps in the market. But it also induced astonishment inside Dewey when the circumstances emerged. Dewey was not the only firm on the market for the Cooley team of Climan, Keith Flaum and Eric Reifschneider (the first two are still at the firm and the third has moved in-house). But it was the only firm that met the partners’ asking price, even paying over the odds to secure the trio, with Latham & Watkins understood to be the rival left in Dewey’s wake. The trio turned down firms that were a natural fit to join Dewey on a massive guarantee.

“The Silicon Valley deal was generous,” says a former partner who was at the firm when it hired the trio.

Another ex-partner takes a more generous view, saying “they’ve been a roaring success and they’re probably worth everything they’re paid”.
Indeed, Climan brought over clients such as Dell and Gilead Sciences, while Flaum snared the likes of eBay for his new firm.

So where did it all go wrong? Critics say the hiring spree just went too far in 2011, but ironically it is the pre-2011 hires with whom the firm is currently renegotiating guarantees. The five members of the so-called office of the chairman – Davis, Bienenstock, corporate co-head Richard Shutran, Kessler and Washington DC head Charles Landgraf – have had their profits capped at $2.5m, with at least some of the remainder deferred until 2014. The firm denies this.

The source of the firm’s decline appears to have been an honest attempt to invest, which turned into a scheme that ballooned out of control.

“It was waiting to happen,” says one ex-partner of the outcome.

Desperate measures

Dewey & LeBoeuf has taken notice of the crisis and rejigged its management, effectively ousting Davis and replacing him with a five-person team alongside executive partner Stephen Horvath, a man with apparently little management experience (see management box, below).

Davis has returned to London, supposedly to fee-earn, which is said to be something he is rather out of practice at after spending 10 years without undertaking any client work.

In replacing Davis with four of the firm’s key figures, Dewey & LeBoeuf appears to have found a possible rescue measure. Dewey & LeBoeuf denies that it has hired bankruptcy counsel, but no one knows what the future is for the firm.

“[The new management] have come in at the right point to keep this firm going,” stresses a former partner.

“Basically, it’s going to be the death of Dewey,” predicts a headhunter.

New management might be the quicker solution than the obvious one – another rescue merger.

“I’m sure [they’d look for a merger], but who wants them? They’re toxic,” claims another recruiter.

One competitor even jokes that Davis had returned to London to pursue a merger with Herbert Smith.

Warning to partners at other firms: if the boss splits you up into small groups and tells you there’s an announcement about to be made, get out of the door as quickly as ­possible.


When Dewey Ballantine merged with LeBoeuf Lamb Greene & MacRae, there was little flexibility over the name the combined firm would choose.

Former New York governor Thomas Edmund Dewey, who joined the firm in 1955, adding his surname at the front of what was Ballantine Bushby Palmer & Wood, wrote into his will that if the firm was ever to merge, the name Dewey had to remain and had to come first.

One can only wonder what the old Republican would have made of the current management, which might be less self-centred, but is widely prone to criticism.

“Steve Davis is totally secretive,” says an ex-partner of the former LeBoeuf boss.

Davis was the perfect person to hurry through a quiet and neat merger with Dewey Ballantine. After all, he was a longstanding friend of Dewey
M&A bigshot Morton Pierce, with whom he had worked on deals for years.

Their relationship was not purely a business one: the pair would get together “very much on a social basis”, a former partner recalls. “They used to meet up for dinner or lunch in New York.” It was at one of these rendezvous that merger talks arose.

It was no surprise when the pair emerged as the masterminds behind a merger in 2007. And neither is it a shock that Davis, said to be the architect of the fixed-deal hiring spree, is the one who has been ousted as boss.

His replacement is a former Dewey Ballantine man, London-based Stephen Horvath. No one can quite fathom this appointment to the new executive partner role. Horvath, famous for his all-brown Homburg hats, has minimal management experience and used to keep a copy of Steven Silbinger’s The Ten-Day MBA on his desk. (The book did not go down well everywhere: “Business law and labour relations are
ignored altogether; Silbiger’s thoughts on ethics, negotiating and international business are superficial,” wrote Publishers Weekly.) Unfairly or not, he is considered a puppet leader and, as a partner not seen as a top-billing rainmaker, is not perceived as a massive loss to the corporate practice.

“What experience has he got running a billion-dollar firm?” an observer with ties to the firm wonders.

The one figure who seems to have disappeared into oblivion is executive director Stephen DiCarmine, a non-lawyer who was once among the firm’s most powerful characters.

“DiCarmine [an ex-LeBoeuf man] put the merger together with Davis. Partners were slightly nervous around him. He’d hold your career in his hand,” recalls a source.

“He was the Cardinal Wolsey. He was Steve Davis’s right-hand man,” says a former partner. “I always found him very helpful and very supportive. A lot of lawyers in big law firms don’t like being told what to do by a non-partner.”

DiCarmine’s influence in the firm appears to have waned: he is said to have been reporting to Horvath, a far less medalled manager.

“I’m not even sure reporting to the office of the chairman would be very desirable for him,” says a former partner.

The other powerful figures in the firm are the management-shy Pierce and New York chief Junaid Chida, as well as stars such as litigation head Jeffrey Kessler.

But Pierce has seen a big drop in his deal rate in the past year and is understood to be on the market.

If Dewey finds that Pierce has gone and Davis and DiCarmine have lost their influence, the team who lined up the controversial merger could be a thing of the past.

International network

Dewey & LeBoeuf has an impressive European network, particularly in Paris, Moscow and Warsaw. But observers predict that these offices will be the next to fall victim to the exodus from the firm.

The Paris team, particularly insurance regulatory star Jean Alisse, is very well thought of in the firm. But things have not been what they were. Well-liked corporate partner Stephen Walters has been an important link between the Paris and the City offices, but is spending more time in London nowadays.

“You want him in the office,” one firm source stresses.

The firm has already been hit by the loss of Paris managing partner Eric Schwartz to King & Spalding in 2009 and senior counsel Jean-Claude Petilon, a project finance lawyer who was a key link between the office and Africa. Petilon left to join Fasken Martineau as a founding partner of its Paris office in 2009.

Moscow, meanwhile, is one of the best offices at the firm, especially for oil and gas, with partners Jonathan Hines and Brian Zimbler possessing star status.

“They know everyone. They’ve been there for ages,” a source comments.

Dewey is also one of the top firms in Poland, where local managing partner Jarosław Grzesiak is held in very high esteem by the New York management. Grzesiak really has the ear of Dewey vice-chair Morton Pierce, who rarely travels to Europe because his family fled the region as refugees.

Alisse, Grzesiak, Hines and Zimbler all command respect, but observers are expecting a mass departure soon in one of the locations. Paris is thought to be particularly fragile and Moscow the more likely site of a sneaky spin-off.

Dewey & LeBoeuf’s reaction

The Lawyer called Dewey & LeBoeuf for comment on numerous occasions. Just as we went to press with this feature, the firm issued this statement: “We believe our results speak for themselves: in terms of the quality of our professionals, the work we have been performing for our clients, the new clients that have joined the firm and the financial results the firm has been producing. Trailing 12-month revenues and earnings were among the firm’s strongest. We expect the current year to be a very profitable one for the firm.

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 almost 300 partners – some didn’t like the change. We recognised from the outset that, in addition to the staff changes and reductions that were part of the original plan, this would result in the departure of some of the firm’s partners and professionals.

The number who have left to date, including firm-initiated reductions, is consistent with the reduced headcount contemplated by our plan, which calls for limited further attrition over the next several months. The fact is, Dewey & LeBoeuf is a strong firm and expects to meet its positive financial targets for the year.”


The 12-partner walkout of Dewey & LeBoeuf partners to Willkie Farr & Gallagher last month was a clear signal of the state of the firm’s insurance practice. The mass departure saw the likes of London corporate partner Joseph Ferraro (above), a key figure in the Lloyd’s of London market team, quit, with New York partner Jeffrey Mace, head of the Lloyd’s of London and Lloyd’s Market teams, soon following his lead by jumping ship to Sutherland Asbill & Brennan as part of a six-partner exodus.

The firm is understood to have removed insurance from its core strategy following the two team exits, which is a dramatic shift for a firm built around the practice.

LeBoeuf, and later Dewey & LeBoeuf after the 2007 merger with Dewey Ballantine, truly majored on insurance and energy.

“They really have two industry sectors. A lot of their business is predicated on insurance. They’ve left a bloody massive whole in their sector strategy,” says a source.

Post-merger the firm had a strong footprint in insurance, with insurance regulatory head Jane Boisseau one of the key figures in New York. She retired at the end of 2010, while well-regarded New York corporate insurance partner Jonathan Freedman joined Sidley Austin in summer 2007.

Meanwhile, the firm’s practice acting for UK-based Lloyd’s groups dropped off when they redomiciled in Bermuda, with UK firms winning much of this work.

Ferraro was extremely highly thought of, while Nicholas Bugler, who has joined him at Willkie, was seen as an impressive number two. US M&A chair Alexander Dye also left, a loss for the firm, but he is off to more familiar circles. The word on the street is that, when Dye was planning his move to Willkie, he was interviewed by twin brother William, a New York corporate and finance partner.

The London non-contentious insurance practice is close to being in tatters, with William Marcoux having joined DLA Piper in New York, leaving James Lewis to fly the flag in the City. Paris insurance partner Jean Alisse is held in high esteem, but commentators are not expecting the Paris team to hang around.

Meanwhile, Dewey has been hit by an M&A downturn in New York, with corporate star Morton Pierce said to have suffered a 45 per cent drop in his deal rate in the past year.

“They’re perfectly pleasant to deal with. It’s not obvious why this has happened,” a competitor points out.

Keeping hold of beefy insurance clients is tough if you lack the corporate reputation of a magic circle firm, with sector specialists such as legacy Barlow Lyde & Gilbert and SNR Denton struggling.

Dewey diversified in 2009 with its high-profile Silicon Valley team hire from Cooley Godward Kronish (now Cooley), bringing in tasty technology clients such as Dell and eBay, but this might not be enough to rescue the situation.

100 – The number of partners brought
in on guaranteed remuneration

50 – The number of partners to
quit since the start of 2012