When Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae decided in 2007 to join forces to become Dewey & LeBoeuf, mortgage backed securities were still the rage, business was booming and few appreciated the intensity of the storm on the horizon. A mere one year later however, Dewey & LeBoeuf as well as every other major law firm had seen virtually all of its structured finance work disappear and some of those firms were soon to be history.

The great recession that followed quickly claimed legendary names as victims including Thacher Proffitt, McKee Nelson, Heller Ehrman, Thelen, Wolf Block and Howrey, and some experts wondered out loud if hard hit players like Cadwalader and White & Case would manage to stay afloat. Practice diversity became a new holy grail, as bankruptcy and restructuring practices in particular were perceived as lifesavers. Dewey & LeBoeuf’s Chairman Steven Davis announced that his firm was better situated than many to weather the storm precisely because it was big, global and diverse while strengthening its counter-cyclical bankruptcy and restructuring practices and focusing on emerging markets like China and the Middle East. When he stated that the firm “really has created a global footprint,” he was not overselling as Dewey & LeBoeuf provided its clients with the services of over 1000 lawyers spread over four continents. The newly merged firm’s monolithic status enhanced its ability to attract top clients and talent, Mr. Davis noted, citing the acquisition of famed bankruptcy partner Martin Bienenstock who had recently joined from bankruptcy powerhouse Weil, Gotshal & Manges.

In December 2008, no one was surprised when major firms announced that associate bonuses would be decreased to a mere fraction of the prior year’s levels. Market leader Cravath established the rate to match of $17,500 for first year associates representing a fifty percent cut from the $35,000 it doled out to rookies in 2007. So when Dewey & LeBoeuf quickly joined the likes of Cleary Gottlieb and Milbank Tweed in matching the new market rate, its rank and file felt secure.

At about the same time, Dewey & LeBoeuf received a scolding from the Honorable Denny Chin of the Southern District of New York, which may have presaged some hard times to come. After receiving an application to collect compensation and expenses in excess of $2 million for about twenty days of work related to its role as WexTrust’s receiver, Judge Chin asked the firm to justify “the reasonableness of the hourly rates for most of the lawyers listed.” As recounted by the Wall Street Journal, the judge stated: “While I accept the representations that the requested hourly rates are D&L’s standard hourly rates for the individuals involved, I wonder whether the rates are high for legal services rendered in connection with a securities receivership proceeding. Is it reasonable to bill at hourly rates of $700 to $950 for partners and $425 to $605 for associates in the context of a securities receivership? Is it reasonable to bill at hourly rates of $285 for summer associates and $175 to $275 for paralegals? Have courts in other receivership cases awarded fees applying such rates?”

Whether or not associate rates may have been inflated in the midst of the financial crisis to make up for lost revenue is debatable, but when Dewey announced in March of 2009 that it was cutting over 100 administrative staff firm-wide, the revenue problems at the firm became evident. The fact that virtually every other major firm was also struggling may have provided some consolation, but it was becoming increasingly difficult to claim that Dewey & LeBoeuf was still sailing smoothly. Later the same month, the ABA Journal reported that as of January 2008 Dewey & LeBoeuf had decreased the pay of about twenty percent of its partners, some by as much as 80 percent. The AmLaw Daily reported that lower-tier partners incurred particularly steep reductions, with monthly draws of as little as $10,000 for an annual total of $120,000, or $40,000 less than the starting salary for a first year associate The Chairman’s strategic vision however remained steady as a drum, continuing to steer his firm in the direction of globalization while announcing the launch of an office in Abu Dhabi and exploring options in Western Europe, India and Latin America. “I’m a believer that being a global firm is a source of strength in good times and in bad,” Davis stated. “I haven’t seen anything in and of itself to discourage me of that belief. I mean, if you look at the pure or largely New York or US firms, it’s very hard for me to see that they’re doing better than the global firms.”

In addition to globalization, Dewey & LeBoeuf continued to pursue its strategy of attracting rainmaking partners with some notable successes In July 2009, the firm announced that several leading partners from Cooley Godward Kronish were jumping aboard the titan including M&A stars Richard Climan and Keith Flaum and tech transactions group leader Eric Reifschneider. Organic promotions though were on the downturn. In December 2009, the firm promoted only six attorneys to partnership firm-wide in contrast to 20 at the end of 2008. Once again though, the firm pledged to keep pace with Cravath in the associate bonus competition and match the newly established more modest range of $7500 for first years to $30,000 for seniors.

In March 2010, Dewey & LeBoeuf stated that its 2009 revenue had decreased 11 percent from 2008, while profits per equity partner increased by 3.4 percent due to a 10 percent decrease in equity partner headcount and other cost cutting measures. Shortly thereafter, it cut thirty additional administrative staff and in November added intellectual property litigation partner Joseph Lavelle from an even more shaky large entity which would be defunct a mere four months later, namely Howrey. That same month, Dewey & LeBoeuf lost Christopher DiAngelo, the former co-chair of its structured finance group along with four other partners and seven other attorneys to Katten Muchin. In an internal memo circulated to the entire firm the following Monday morning, Davis downplayed the defections noting that his firm’s structured finance practice had faced challenges related to the economic crisis and that the five departing partners would simply have a better platform at Katten given the economic climate.

2011 commenced with Dewey’s announcement that it was bringing on more partners from Howrey including IP litigator Henry Bunsow, who had recently served as Howrey’s vice-chairman, as well as IP partners Denise De Mory and Brian Smith. Mr. Bunsow was purported to carry with him a $20 million book of business, and experts could only begin to speculate as to the compensation arrangement he negotiated with Dewey & LeBoeuf in exchange for that pot of gold. In explaining his defection, Bunsow perhaps ominously stated: “Howrey is doing all of the right things, but they should have done them earlier. I lived through the down times, but I wanted some insurance… Rather than waiting to see if the good times were around the corner, I wanted to take advantage of them now. I didn’t want to invest more years in the process.”

Shortly thereafter, on January 18, 2011, Dewey & LeBoeuf brought on Sullivan Cromwell international arbitration star James Carter, who after a 40-year career at S&C was facing mandatory retirement there. The firm’s hiring of Carter reminded market observers of predecessor firm LeBoeuf Lamb’s ‘s 2005 plucking from Debevoise & Plimpton of securities litigation sensation Ralph Ferrara, who at the time was only five years shy of Debevoise’s mandatory retirement age of 65. Ferrara, parting ways with the consummately secure and stable Debevoise strikingly in contrast to Bunsow a few years later leaving the fast sinking Howrey, had rationalized as follows: “I was on a perfectly predictable and enjoyable trajectory, and I knew … I was going to walk out of the office with the gold watch… Or I could make a change, running the risk that I will not be happy–certainly I am throwing entropy into my life. But it can also mean excitement and vitality.”

In February 2011, Dewey & LeBoeuf stated that its profits per equity partner had risen by 10 percent from $1.6 million to $1.77 million while revenue had dropped to $910 million from the $914 million that the firm reported in 2009. “We are pleased with where we ended up,” noted Davis, “[but l]ike all firms, we continue to feel fee pressure from clients.” He assured listeners that the firm’s decision to slice its non-equity partnership ranks from 155 attorneys in 2009 to 115 in 2010 reflected nothing more than a strategy that had been in place for more than a year to trim the number of partners and reduce costs in order to enhance the firm’s profitability.

Dewey & LeBoeuf’s globalization strategy also continued unabated in 2011 as it launched in Georgia and Turkey and announced that it would be opening an office in São Paulo anchored by its acquisition earlier in the year of the former head of Milbank’s Latin America practice Mike Fitzgerald. Davis explained: “We need to look at every large economy on the planet and have a strategy… For decades our strategy has been to focus on emerging markets. Brazil is large and booming and although we’ve always done work there, for credibility reasons you have to be there on the ground.”

As 2012 commenced, Dewey stated that revenues and profits had both improved in 2011 over 2010 levels, revenues growing by 2.8 percent to $935 million with profits per equity partner up one percent — overall profits at $340.5 million up from $328 million and firm-wide lawyer head count remaining virtually unchanged at 1040. “It was an okay year,” Davis opined, but “[w]e would have liked it to be a better year.” The firm reported bringing in a total of 30 equity partners in 2011, but with partner departures and retirement, total equity partner head count rose by just five people. The firm also acknowledged increased disparity between its highest and lowest earners, indicating that it continued to target for compensation reductions partners whose practices were viewed as less profitable or desirable, while sticking to its policy of paying heavy premiums to bring in top rainmakers laterally. Perhaps more controversially, Davis circulated news that the firm planned to cut five percent of its lawyers or a total of about 55 attorneys, including partners, counsel and associates.

Whether or not the announcement of firm-wide across the board cuts had the effect of erasing any residual sense of loyalty at Dewey & LeBoeuf or exacerbated a sense of panic, it was not long that partners, many of whom solid revenue generators, began departing in droves. On March 19, Willkie Farr & Gallagher brought on a team of twelve Dewey & LeBoeuf transactional and regulatory lawyers including London partners Joseph Ferraro and Nicholas Bulger, as well as four partners who had held leadership roles at the firm: US M&A chair Alexander Dye, insurance industry group co-chair Michael Groll, corporate department leader Robert Rachofsky, and finance practice co-chair John Schwolsky.

Speculation as to serious financial woes at Dewey & LeBoeuf soon followed, as law firm consultants opined that a $125 million bond issuance by the firm to institutional investors in 2010 may be largely to blame while noting that it is rare for law firms to issue private placement bonds for funding to supplement standard funding sources such as banks and partner capital. To make matters more complicated, Dewey & LeBoeuf partner Richard Shutran stated that the institutional investors may have included insurance companies that were clients of the firm. Either way, the Wall Street Journal reported that issuance of the $125 million bond may account for as much as 50 percent of the firm’s total shortfall, expressing the concern that to the extent the firm is having difficulty making good on its total debt it may be harder for it to renegotiate terms with the institution investors than with its traditional banks lenders. Moreover, the Journal suggested that even if the firm was able to negotiate good terms on its bond issuance, the increasing partner defections may jeopardize its ability to procure loans from more traditional sources, which could in turn have a negative impact on cash flow. K&L Gates chairman Peter Kalis chimed in as follows: “Bond debt due next year is like a slate roof. It lasts forever, but when forever comes it’s damn costly to replace… If these guys can keep it all together, God bless them.”

On March 15, 2012, the New York Times summarized Dewey & LeBoeuf’s predicament as follows: “Tens of millions of dollars in deferred compensation are owed to Dewey’s partners. Some have been told they are being paid a fraction of what they were promised. The firm is cutting 5 percent of its lawyers and 6 percent of its staff. Nineteen of its 300 partners have left Dewey since January, including heads of major practice areas. About a dozen more departures are expected… After the merger, the firm went on a hiring binge, poaching big producers away from rivals with multiyear, multimillion-dollar guarantees. In 2011 alone, it brought on 37 so-called lateral partners. On top of those obligations, the firm, in order to retain essential talent at the time of the merger, gave contracts to dozens of its partners. Yet Dewey, like many law firms, has failed to see a meaningful recovery from the lean post-financial crisis years. The firm posted sluggish results last year, showing no increase in earnings over 2010. Dewey had budgeted for a double-digit percentage rise in profits. The firm’s enormous compensation commitments, combined with disappointing financial performance, have created a significant shortfall, forcing the firm to slash or defer pay for numerous partners. ‘To say that this has caused a morale problem here is something of an understatement,’ said a lawyer at Dewey on the condition of anonymity.”

Ten days later, the AmLaw Daily reported that Dewey & LeBoeuf had lost six more partners including John Pruitt and Cynthia Shoss, the New York co-heads of the firm’s insurance regulatory practice, and Jeffrey Mace, the head of the firm’s Lloyd’s of London and Lloyd’s market practice as well as the managing partner of their Chicago office, James Dwyer. Firm management though once again reiterated its reassuring refrain: “We have said all along that with change more departures were expected. These additional departures, while regrettable, we do not believe will change the conclusion that the firm is poised to have a very good economic year. We have a strong and deep bench as is evidenced by the results our professionals are producing for our clients and the firm… These departures will not have a material impact on firm finances this year, nor will it affect the compensation budget on a net basis after deducting the departing partner comps.”

Over the last few weeks Dewey & LeBoeuf has taken various measures to stop the bleeding including hiring Paris Hilton’s public relations chief to fight negative publicity and more significantly the assembly of four leading partners to join Steve Davis in the Chairman’s office including the heads of its bankruptcy, corporate, litigation and public policy practice groups. Specifically, Davis will be joined by current restructuring group head Martn Bienenstock, corporate head Rich Shutran, litigation chief Jeffrey Kessler, and Washington office leader Charles Landgraf. The new team was assembled after “internal requests for more hands-on management,” Shutran stated. “We’re responding to a general sentiment that we should be more involved in the executive management of the firm.”

Nonetheless, to this day, April 16, 2012, the hemorrhaging at Dewey & LeBoeuf continues unabated. As of yesterday, a total of 52 partner defections had been reported since the onset of the calendar year, David Smith, a partner in the Los Angeles office, being the latest to jump. That said, Martin Bienenstock has assured the public and his rank and file alike that he and other top producers have no intention to leave: “Two weeks ago, more than 50 business generators each individually pledged to stay with the firm. I was among them, and my only plans are to make the firm survive and thrive.”

While the jury may still be out on the long-term viability of this great firm, at least one thing is eminently clear: It takes much more than the pledge of Mr. Bienenstock and a few of his strongest partners to keep a Queen Elizabeth afloat. That said, we at Hanover Legal wish Dewey & LeBoeuf the best of fortune as this venerable player strives to effectively negotiate the perilous waters in which it currently finds itself immersed.