

The Collapse: How a top legal firm destroyed itself - svenkatesh
http://www.newyorker.com/reporting/2013/10/14/131014fa_fact_stewart?currentPage=all

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rayiner
The former chairman (Davis), and the two administrators (DiCarmine, and
Sanders) are now facing criminal charges for fraud:
[http://mobile.bloomberg.com/news/2014-03-06/four-ex-dewey-
of...](http://mobile.bloomberg.com/news/2014-03-06/four-ex-dewey-officials-
charged-by-manhattan-district-attorney.html).

The Dewey collapse is a fairly typical story of greed, too much leverage, and
borrowing against uncertain future earnings destroying a company. Its also a
great example of cargo cult thinking. Law firms see their clients merging and
think: we need to get bigger too. Thus, there has been a huge trend in law
firm mergers the last couple of decades. Yet, law firms as businesses bear
almost no resemblance to the sort of traditional companies that benefit from
mergers. There's very little economics of scale in a law firm. They have
little to no physical capital, and almost all their value is wrapped up in
their people, who are only there as long as it suits them.[1] And legal ethics
rules penalize larger firms, because they impute conflicts of interest for
every lawyer onto the whole firm.

The only value to merging beyond a certain size,[2] is for the managers and
administrators, who can use the mergers as an opportunity to funnel more
profits up to themselves. At Dewey, Di Carmine and the CFO, two non-lawyer
administrators, were making over $2 million per year. They also had golden
parachutes and clauses saying they could only be fired if they committed
crimes. Their justification for all that was of course the role they played in
the merger. Its notable that at lockstep firms, where partner pay is based
strictly on seniority, and there is not a huge incentive for partners who take
on managerial roles, merger mania has not taken hold.

The collapse is also a wonderful example of how intelligent people can make
dumb decisions based on the narratives they create for themselves. Prior to
the merger, LeBouef & Lamb was financially sound, while Dewey Ballantine was
facing declining revenues. The folks pushing the merger, Davis and the
consultants, painted this narrative of LeBouef merging its way into a
prestigious brand, and Dewey shoring itself up with a profitable marriage-
partner. Of course in hindsight the narrative was ridiculous. The pedigree of
the brand wasn't particularly valuable in the end, and LeBouef was not large
enough to successfully absorb an ailing firm that was almost as large as
itself.

[1] Law firms face a more extreme version of the "talent exodus" problem that
plagues tech companies. At a firm, almost all of the value of the business is
wrapped up in the partners. If they leave, they take their billings with them
and your bottom line is in trouble overnight. The top partners might want to
stick with the firm through a rough patch, but they have an enormous game-
theoretic incentive to jump ship because if the firm does implode, the folks
that don't leave will be left holding the bag.

[2] Practice areas ebb and flow, so you need enough lawyers to support
diversified counter-cyclical practices and to be able to cross sell clients
internally. The point of diminishing returns for that are probably a quarter
of the size Dewey ended up after the merger.

~~~
abat
There are marketing reasons for law firm mergers. Law firms make money by
having the biggest/richest clients who pay multimillion legal bills. The idea
is that these clients want to hire the "best" law firms, and they determine
the "best" by looking at which firms are the biggest/richest/hired by other
big clients. This logic says that if your competitor firm becomes larger, you
need to get larger too in order to appear competitive to clients.

In reality clients are probably smart enough to realize bigger != better, but
it's not just pure cargo cult thinking that leads to firms trying to stay
large.

~~~
objclxt
Compare this with the world of advertising, where you have three major holding
companies controlling most of the market, but each company runs dozens - if
not hundreds - of independent agencies.

~~~
mathattack
It seems remarkably similar. Professional services is professional services.
In ad agencies, a star can always walk too.

Does the federated style of these firms minimize the damage from key walkouts?

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noname123
Nice. Sounds like an average "rainmaker" partner at a law firm clears north of
$2mil/year with sign-on bonuses and multi-year contracts; and you can be a
prima-donna and complain with the management and throw your weight around.

Very unlike an engineering company where you have to keep your head down and
do the work. Good for them.

~~~
rayiner
Law firms don't have "management" like a typical company. Partners are
shareholders, not employees, and the power structure is based on who
originates the most business, not on who holds what title. "Management" can be
a pretty thankless job under those circumstances.

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Nicholas_C
Pretty interesting and humorous write up about the e-mails between the
financial leaders of the firm:
[http://www.bloombergview.com/articles/2014-03-06/law-firm-
ac...](http://www.bloombergview.com/articles/2014-03-06/law-firm-accountants-
were-bad-at-accounting-law)

~~~
keithpeter
Odd how _lawyers_ did not stick to the basic rule of letting off steam/having
arguments face to face or by phone! Reminds me of the e-mail banter between
bankers in London when they were basically fiddling the LIBOR rates. Perhaps
it takes a generation to fully understand a new communications technology.

~~~
gatehouse
The technology firms seem a lot more capable at keeping their illegal
conspiracies from being written to storage.

~~~
rayiner
Like these tech firms? [http://rt.com/usa/apple-google-low-wages-
collusion-169/](http://rt.com/usa/apple-google-low-wages-collusion-169/)

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lazydon
Whenever I read a story like this I inevitably remember Greenspan. Its always
good to start with an extreme to begin with whats wrong with most systems
today.

As he once said - there shouldn't be any law against financial fraud; as the
markets themselves will take care of that.

And he himself got away with all the mess by saying there was a flaw in his
model of the world.

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TwoBit
"About 100 partners had guarantees totaling about $100 million a year".

There's half of their problem right there.

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jessaustin
Dye and his group should have left the week Davis shafted him out of the
leadership position. Their insurance specialty would have been successful
wherever they went, and D&L would have failed earlier. Since they didn't
leave, Davis was really borrowing trouble in going ahead with the merger that
he had justified as somehow taking their place.

I know, hindsight is 20/20.

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gwern
Fascinating tale of incentives gone wrong.

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coldcode
Sure sounds a lot like high school, except with millions of dollars going back
and forth.

