Dewey Plan To Give Retired Partners a Seat at the Bankruptcy Table?

What's the latest news in the Dewey & LeBoeuf bankruptcy?

Over at The Belly of the Beast, former Kirkland & Ellis partner Steven J. Harper has an insightful and interesting profile of Jeffrey Kessler. As you may recall, Jeff Kessler is the prominent litigator who left Dewey, where he served for a time in the “Office of the Chairman,” and moved over to Winston & Strawn.

It’s not a particularly flattering piece to Kessler. If you think we’re snarky here at Above the Law, you need to spend more time reading Steven Harper. He writes:

Apparently, Jeffrey Kessler (Columbia University, B.A., 1975; Columbia Law School, J.D., 1977) has become a prisoner of his celebrity clients’ mentality. A prominent sports lawyer, he analogizes big-name attorneys to top athletes: “The value for the stars has gone up, while the value of service partners has gone down.”

…. Kessler was a vocal proponent of the Dewey & LeBoeuf star system that produced staggering spreads between people like him — reportedly earning $5.5 million a year — and the service partners, some of whom made about five percent of that. It was the “barbell” system: top partners on one side; everybody else on the other.

In such a regime, there’s no shared sacrifice. What kind of partnership issues IOUs to star partners when the firm doesn’t make its target profits? Something that isn’t a partnership at all.

We discussed the “star system” at Dewey, and its corrosive effect on the firm’s “partnership” (to the extent that it had one), back in this detailed post.

Dewey’s star system, which warped the firm’s compensation and governance for years, even affected the firm’s (ultimately unsuccessful) efforts to right itself. From Harper:

To deal with outstanding IOUs to Dewey partners whose guaranteed compensation couldn’t be paid when the firm underperformed for the year, Kessler helped to mortgage its future: for “a six- or seven-year period, starting in 2014, [a]bout six percent of the firm’s income would be put away to pay for this….”

It’s a remarkable notion. Partners didn’t get all of their previously guaranteed earnings because the firm didn’t do well enough to pay it. But rather than rethink the entire house of cards, it morphed into a Ponzi scheme whereby future partnership earnings — for six or seven years — would satisfy the shortfall. Never mind that there was no way to know who would be among the firm’s partners in those future years. The money had to be promised away because the stars had to be paid.

Can you blame the Dewey partners for defecting? Those on the low end of the totem pole understandably didn’t want to toil away for years so that a hefty chunk of the revenues they generated would go to those at the top. And, at a certain point, those at the top realized that the Ponzi scheme wasn’t going to pay out. Once they started to leave, LeBoeuf was cooked.

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(It is interesting to note how many of the star partners stuck around longer than their less-high-powered counterparts. A lot of the stars — Kessler, Martin Bienenstock, Morton Pierce — didn’t leave until near the end. Perhaps they were hoping that their guarantee deals could somehow be saved.)

Harper acknowledges that major players need to be paid, but suggests that the gap should be kept within reason:

[D]oes Kessler really think that he and a handful of his fellow former Dewey partners are the first-ever generation of attorney stars? Twenty-five years ago when average partner profits for the Am Law 100 were $325,000 a year, did his mentors at Weil Gotshal earn twenty times more than some of their partners — or anything close in absolute dollars to what Kessler thinks he’s worth today? Does he believe that there are no stars at firms such as Skadden Arps, Simpson Thacher or other firms that have retained top-to-bottom spreads of 5-to-1 or less?

For more discussion of the very interesting subject of the spread from lowest-to-highest partner incomes within law firms, check out this great article by Patrick J. McKenna and Edwin Reeser, cited in Harper’s post.

Harper closes his “profile” of Jeffrey Kessler on a harsh note: “Beyond his prominence in the profession, Kessler is shaping tomorrow’s legal minds as a Lecturer-in-Law at Columbia. For anyone who cares about the future, that’s worth pondering.”

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Actually, considering his involvement in the biggest law firm bankruptcy ever, Kessler probably has a lot of hard-earned wisdom to impart. He should just be sure to warn his students: “Dewey as I say, not as I do.”

U.S. Trustee Appoints Dewey Creditors Group — Plus One For Retired Partners [WSJ Law Blog via Morning Docket]
Former Partners, Vendors Selected to Advise on Dewey Bankruptcy [Am Law Daily]
DEWEY’S JEFFREY KESSLER: STARS IN THEIR EYES [The Belly of the Beast]
Spread Too Thin [Am Law Daily]
Paul Hastings Continues Antitrust and Competition Expansion with Former Department of Justice Executive in DC [Paul Hastings (press release)]
Dewey Beijing chief joins raft of partners at Morgan Lewis [Legal Week]

Earlier: Dewey Know What Led to the Collapse? And What Lessons Can Be Learned?
Dewey Know Whom To Blame? Some Say ‘Steve’
Dewey File for Bankruptcy? Yes — It’s About That Time