IRS puts Jenkens out of its misery with demand for the firm’s closure

Two lawsuits in the course of five years proved too much for Jenkens & Gilchrist to bear, and the Texan firm closed its doors for the last time on 31 March after 56 years of operation.

The US Internal Revenue Service (IRS) confirmed that it had settled its tax fraud case with Jenkens for $76m (£38.45m) on 30 March. The settlement on its own for a firm that had still met all its financial obligations could have been overcome, but the IRS could be appeased only by it agreeing to shut down for good. A statement by the US Attorney’s Office in the Southern District of New York explained that the IRS decided to settle because Jenkens had agreed to close down, as well as admitting that its lawyers had encouraged the use of fraudulent tax shelters.

The statement continued: “J&G has recognized, in its statements to this Office and in the Agreement, that its tax shelter practice has caused serious damage to its reputation, revenues and stability, and that as a result it ultimately cannot continue in business.”

Former Jenkens chairman and managing partner Patrick Mitchell told the Dallas press: “Had we not stubbed our toe in Chicago, I don’t think we’d be where we are now.”

Hunton & Williams was the biggest beneficiary of Jenkens’ demise, taking a total of 93 lawyers, including Mitchell and name partner Henry Gilchrist.

Hunton managing partner Wally Martinez said he had no hesitation taking on a large number of lawyers from a firm forever tainted with scandal. He told The Lawyer: “These lawyers are of the highest ethics and calibre. They didn’t have any involvement with the events in Chicago.”

Martinez told The Lawyer that it became clear eight weeks ago that Hunton might score many more lawyers than first expected.

He said Hunton had first approached several Dallas-based Jenkens partners this time last year. Jenkens and Hunton share some bluechip clients, including GE Capital and Bank of America.

“The heavy lifting really starts now,” he said. “I have to make sure that practice heads are connected with their team and connected with clients.”

Jenkens’ troubles began in 2002 when the IRS pressured auditors Ernst & Young to release a list of clients with risky tax shelters. This was the year that Enron and Arthur Andersen were brought to their knees.

One client was Henry Camferdan. He then brought a class action against Jenkens and other advisers, claiming that Jenkens partners – namely Chicago-based tax partner Paul Daugerdas – knowingly advised on fraudulent tax shelters. This civil suit quickly mounted to 1,000 plaintiffs. It was eventually settled in 2005 for $81.55m (£41.25m). Jenkens only had to pay $5.25m (£2.66m) of this, with the rest being taken care of by its insurers and the other advisers.

But the damage was done. The IRS brought its own suit in 2003. It made an unprecedented demand on Jenkens to disclose the 600 clients with potentially fraudulent shelters. Jenkens refused until the day after the civil suit was settled. The IRS investigation rumbled on until last month.

What in the late-1990s was acclaimed “America’s fastest-growing law firm” by the National Law Journal lost its lawyers just as speedily. It also changed its managing partner three times in four years.

The 91-lawyer New York office’s defection to Atlanta-headquartered Troutman Sanders in 2005 would be just a taste of things to come.

By 2006, with no end in sight to the IRS suit, management decided to wind down operations in the firm’s satellite offices. The past three months have seen the firm carved up and finally closed down.

Timeline

1951: Firm opens doors in Dallas, Texas.

1991-2000: Offices are added in Austin, Washington DC, Los Angeles, Chicago, New York and Pasadena. Lawyer numbers reach the 600 mark.

2002: The firm is sued by investors for giving fraudulent tax advice, stemming from its Chicago office.

2003: The IRS sues Jenkens in Chicago. Investor class action lawsuit grows to more than 1,000 plaintiffs.

2005: Jenkens settles for $81.55m (£41.29m). IRS suit still pending. 91 New York lawyers move to Troutman Sanders.

2006: Lawyer numbers drop to 144. Management decides to close satellite offices.

January 2007: Fulbright & Jaworski takes Jenkens’ Houston tax team.

February 2007: Baker Hostetler takes Jenkens’ Los Angeles office. Fifteen Jenkens Chicago lawyers go to Nixon Peabody. Jenkens now has no offices outside Texas.

March 2007: Jackson Walker takes 10 Jenkens lawyers in San Antonio. Jenkens confirms that it is in talks with Hunton & Williams.

April 2007: Hunton scoops 93 remaining Jenkens lawyers from the firm’s Dallas, Houston and San Antonio offices. Hunton moves into Jenkens’ Dallas offices.The IRS accepts a $76m (£38.45m) settlement with Jenkens. Jenkens shuts its doors.