Tuesday, October 7, 2008

First Finley Crumbled and Now it's Heller Ehrman's Turn

Finley, Kumble, Wagner, Underberg, Manley, Myerson & Casey rose like a meteor and then flamed out even quicker in 1987 at a young 21 years of age. (Check out Shark Attack and Conduct Unbecoming: The Rise and Ruin of Finley, Kumble). Finley seemed like an anomaly because of its short life, but now we see it for what it is: a harbinger of the collapse of dozens of large, well established law firms. Many were pillars of the bar and community. The immediate cause for almost all of them is a disruption in cash flow, often manifested by the firms borrowing money to cover the partners’ draws.

The various causes of failures mirror those of partnerships in general:

Poor leadership

Conflicts in revenue distribution

Disputes over the culture of the firm

Large overhead, especially in lease agreements

Lack of loyalty

Partner defections

Overexpansion

Scandals

Incompatible mergers

Declining business; loss of clients

Failure to diversify

Failure to move into emerging areas of the law

Misallocation of resources

Liability issues, especially malpractice

Leadership is especially critical as enterproses grow in size. As in every other arena of human cooperation, including the political, we often do not know how someone will lead until they are in office. Exceptional leadership skills are necessary to manage the prima donnas otherwise known as lawyers and law professors.

Compensation disputes are common in professional partnerships, be they accounting, advertising, architecture, engineering, investment banking or medical. (As a side bar, disputes over faculty salaries can be pernicious.)

Disputes run the gamete from how much of the take should go to the senior partners past their prime, which areas of practice should receive more, such as traditional transactional or litigation, and workers versus rainmakers

Stodgy law firms decide to remake themselves to chase higher draws per partner Рthe new gold standard. The three piece suit is exchanged for the leisure suit. The staid becomes pass̩. The new suit often does not fit as the practice of law becomes the pursuit of business. Growth for growth sake becomes the mantra. Lawyers sometimes forget that the needs of the clients come first.

Loyalty is a two-way street. For half a century, associates would toil for 7-9 years and then, if they survive the Darwinian trials, make partner and spend the rest of their professional life at the firm. The firm would even be generous in retirement. The commitment by the firm and partner was a marriage for life, often outlasting the other marriage.

That is no longer the norm. Firms, in the pursuit of profits, will often unceremoniously terminate “underachieving” partners without warning, literally throwing them out into the street. Retired partners, “of counsel”, those who may have built the firm may be stripped of benefits and receive the same treatment as retired NFL football players in the quest for profits for the current partners.

Firms should no loner be surprised when partners put their interests first and pack up their practices and move to a new firm, taking their clientele with them. Defections can be fatal, but loyalty is no more.

Bad legal advice may doom a firm. Jenkens and Gilchrist set up too many tax shelters that neither sheltered their clients from the IRS nor the firm from malpractice litigation. All the partners suffered.

When growth becomes the mantra, a firm may pour too many resources into a field, such as stodgy Brobeck, Phleger & Harrison betting the firm on High Tech and IP. The dot.com bust doomed Brobeck.

The key is diversification and balance such that when one field becomes hot, it can offset the decline in another area of practice. For example, bankruptcy is hot now and Antitrust is cold. Energy law and regulated utilities are making a comeback. Health law and pension planning provide steady streams of billable hours as legislatures can’t keep their hands off these areas.

On the other hand, the seemingly sexy boomlet in real estate securitization doomed many Wall Street bankers and probably some of their law firms.

Some firms are the victim of bad luck or poor geography. Firms in old industrial cities in the Frost Belt face a steadily declining market for legal services as large clients close, move, or sell out without being replaced by new clients moving into the area. When the factories close and the largest remaining private employer is a hospital, the portends are not rosy.

Misfortune can doom a firm. The well established San Francisco firm of Pettit & Martin was in trouble before a disgruntled client entered the firm’s office on July 1, 1993 and started shooting, killing 8 and wounding 6. The firm hung on for two more years.

Some firms have been in a long decline, but seemingly get a second wind. The venerable Mudge Rose Guthrie & Alexander received new life when Richard Nixon and John Mitchell joined the firm to become Nixon, Mudge, Rose, Guthrie, Alexander & Mitchell. Of course, and perhaps ironically, a large part of the firm’s practice became sewer bonds.

This list is of firms, with over 100 lawyers, that failed; it does not include firms who merged to survive.

1987 Finley, Kumble, Wagner, Underberg, Manley, Myerson & Casey

1989 Myerson & Kuhn

1991 Gaston & Snow

1993 Pettit & Martin

1994 Lord Day & Lord

Shea & Gould,

1995 Mudge Rose Guthrie Alexander & Ferron

1998 Donovan, Newton, Leisure & Irvine

1999 Bogle and Gates

Troop Steuber Pasich Reddick & Tobey

2002 Hill & Barlow

Testa, Hurwitz & Thibeault

2003 Altheimer & Gray

Brobeck, Phleger & Harrison

Pennie & Edmonds

Arter & Hadden

2005 Coudert Brothers

2007 Jenkens & Gilchrist

2008 Heller Ehrman

Who’s next?

Will it be a San Francisco or Wall Street firm?

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