Dewey presses to secure debt terms as international losses escalate

Turmoil at Dewey & LeBoeuf this week spread to the firm’s international offices as it emerged that the new management team is pressing to restructure its debts.

The firm’s Dubai and London offices have seen a string of partner departures, with teams and individuals in countries including Italy and Russia also considering splitting away from the embattled US firm.

This week’s five-partner walkout from the firm’s Dubai office – alongside the departure of two London partners – to rival US firm Dechert has prompted a restructuring of Dewey’s Middle East operations that could lead to the closure of the Dubai, Abu Dhabi and Doha offices.

Those losses contributed to a tally of 17 partner departures this week, with Hunton & Williams and McDermott Will & Emery among the firms recruiting senior lawyers.

In addition, The Am Law Daily reports today that Dewey’s New York office has lost another partner, with Stanton Lovenworth, the chair of the firm’s life sciences global industry sector group, joining O’Melveny & Myers as a counsel.

Meanwhile, the firm’s London arm, which has already seen eight partners leave since the start of March including the pair joining Dechert, looks set for more senior exits, with one partner telling Legal Week that the firm was drawing up a revised strategy for the office based around a core team of just 12 partners.

This compares with 24 partners currently listed as working full-time in London, as well as nine splitting their time with other offices.

Elsewhere, as Legal Week went to press, US firms including White & Case, King & Spalding and Baker Botts were in talks with teams of energy and corporate partners in Moscow, regarded as one of Dewey’s most successful foreign offices. Partners in Italy, another of the firm’s largest international practices, are understood to be considering setting up their own firm.

Dewey’s foreign network also includes branches in Frankfurt, Paris, Hong Kong, Almaty and Warsaw.

Around half of the partner exits from Dewey so far this year are thought to have been instigated by management. However, with the remainder choosing to leave, the growing discontent in the 1,000-lawyer firm’s international offices has been highlighted by the resignation from the executive committee of five partners responsible for non-US operations.

They are part of a wider group of nine partners stepping down from the committee, with the international resignations from the body representing a protest at the way management has been dealing with the firm’s issues, according to two current partners.

Those stepping down are: the chairman of the European supervisory committee Fred Gander; Europe, Middle East and Africa corporate finance head Frank Adams; head of Italy Bruno Gattai; utilities co-head John Klauberg; Latin American chair Michael Fitzgerald; London oil & gas partner John LaMaster; New York litigator Ellen Dunn; and New York corporate partners Denise Cerasani and Barbara Goodstein.

A further five partners on the executive committee have left the firm altogether, leaving Dewey with 12 committee members. One Dewey partner commented: “There is a lot of internal resentment – expect more departures to follow.”

Working in Dewey’s favour, though, are indications that the firm has this week successfully renegotiated terms on one of its credit lines. The firm has loans with Citi, JP Morgan and Wells Fargo, with a $100m (£63m) revolving credit facility currently in place. The firm also issued a $125m (£83m) bond in 2010.

While talks with lenders are still ongoing, one partner suggested the firm has renegotiated more favourable terms on some of the loans, which previously required the firm to hold onto at least 225 of its partners. Dewey has seen more almost 70 partners leave since January, leaving it with more than 250 partners; however, agreement from the banks could give it more freedom to restructure as a smaller firm.

One partner told Legal Week that new terms with lenders would allow Dewey to restructure itself as a practice with fewer than 200 partners focused around its stronger US offices and its London outpost.

Offices generally regarded as less profitable include Chicago and Boston in the US and foreign outposts in Frankfurt, Paris, Hong Kong and Almaty. Several partners said that Dewey was exploring a full restructuring of its debt with the intention of securing a comprehensive solution within the next four weeks.

The Wall Street Journal reports today (20 April) that one option being considered by Dewey’s management is to enter bankruptcy protection to deal with its liabilities and secure a firesale to another firm. The report says that Dewey has contacted a number of US firms regarding a potential takeover, including Greenberg Traurig, Shearman & Sterling and Reed Smith.

A partner in London commented: “We are optimistic that New York is now taking the right decisions to turn this situation around. Renegotiating our credit lines is the first step to recovery. It is worth pointing out that a number of the partners that have left since January were pushed.”

Dewey’s main source of collateral against the debt is its outstanding receivables. For this reason, Dewey has introduced measures to stem partner departures including long-term financial incentives and the introduction of 60-day notice periods for some partners.

Dewey maintains that its business remains fundamentally strong, but that it has been hit by its overambitious expansion plans. Guaranteed payouts to a number of partners have overstretched the firm, with around 60 partners understood to have been on fixed payouts.

However, this week’s drama comes as fresh details emerge regarding Dewey’s controversial – but lawful – method of reporting external revenue. The firm has acknowledged that it used a different measure for externally reporting revenue from its internal benchmarks, with figures provided to The American Lawyer showing revenues of $935m (£587m) in 2011. It has since been established that the firm’s cash collections during 2011 were significantly lower, at around $780m (£490m).

One partner told Legal Week that the higher external measure was reached by combining cash collections with uncollected invoices issued during the calendar year, an unusual practice that has been criticised by some for presenting an unrealistic picture of the firm’s finances.

The partner said: “Our understanding is that the finance department counted cash income for the calendar year as well as all outstanding receivables. Effectively, this means the firm posted results for a 14-month period.”

Dewey declined to comment on its financial reporting or its talks with lenders.

Dewey & LeBoeuf – 2012 in the headlines

17 April – Eight partner departures are announced, including a five-partner energy and infrastructure team exiting for Hunton & Williams.

16 April – A seven-partner corporate and securities team quits Dewey’s London and Dubai arms to join Dechert. Two London-based private equity partners resign for McDermott Will & Emery.

4-13 April – A string of partners announce their departures for firms including DLA Piper, Reed Smith, Mayer Brown and Hogan Lovells. By 13 April the number of partner departures since the start of 2012 reaches 52.

5 April – News emerges of a move to retain partners via a long-term incentive plan, which will pay out deferred compensation over a number of years.

26 March – Dewey confirms that it has brought forward negotiations with its banks regarding loan agreements as the firm also unveils a shake-up of management resulting in the creation of a new office of the chairman. The five-member body saw current chair Steven Davis joined by restructuring chief Martin Bienenstock, corporate head Rich Shutran, litigation head Jeffrey Kessler and public policy and Washington head Charles Landgraf on the revamped management team.

23 March – Six US partners resign for Sutherland Asbill & Brennan. The firm appoints high-profile crisis communications adviser Michael Sitrick.

21 March – a Wall Street Journal article highlights differences between the $935m revenue figure for 2011 Dewey provided to The American Lawyer and a lower figure taken in cash collections.

19 March – Twelve partners from the firm’s well-regarded corporate insurance practice quit to join Willkie Farr & Gallagher, taking the number of partner departures in 2012 to 30.

2 March – Dewey confirms plans to cut 5% of its associates and 6% of support staff as part of a cost-cutting package. The firm cites overexpansion during 2011, including a high number of partner hires, as a reason to reduce costs. The firm says that a number of partners have been asked to leave and it emerges that some partners have seen their compensation deferred.

4 January – Dewey announces the hire of an eight-partner team in South Africa from Werksmans.