Dewey & Leboeuf LLP, the New York law firm fighting to stay alive after more than 70 partners left, is the subject of a criminal probe by state prosecutors into whether managers misled partners about payments due them, a person familiar with the matter said.
The investigation by Manhattan District Attorney Cyrus Vance Jr. is in a preliminary stage and has yet to determine whether a crime has been committed, said the person, who declined to be identified because the matter isn’t public.
Dewey, the No. 3 law firm adviser to banks handling merger deals, faces an April 30 deadline to show bank lenders it has a survival plan, possibly including absorption by another firm or cost-cutting.
The law firm has lost about 72 partners in recent months amid complaints about pay and a plan to restructure the firm. It has drawn about $75 million of a $100 million credit line from banks including JPMorgan Chase & Co. and Citigroup Inc., according to a person familiar with the firm’s finances. The banks extended an initial April 16 deadline to come up with a plan, according to a person familiar with a merger proposal Dewey has presented to other law firms.
Last month, as defections mounted, Dewey restructured its chairman’s office to include the heads of four practice groups in addition to Chairman Steven Davis. The group includes Martin Bienenstock, who runs the firm’s restructuring group; Rich Shutran, head of the corporate department; Jeffrey Kessler, head of litigation; and Charles Landgraf, who runs the Washington office and the legislative and public-policy group.
The firm said last week that it was considering “various paths including continuing to operate as an independent global law firm and a strategic combination with another leading law firm.” A possible partner is Greenberg Traurig LLP, which has held “preliminary discussions relating to lawyers at Dewey” and was making no commitments, Jill Perry, a spokeswoman for Greenberg, said.
In addition to the bank deadline, the firm also has $125 million in bonds sold to insurance companies in 2010 to refinance previous bank loans.
The bonds, placed by New York-based JPMorgan, come due between next year and 2020, Dewey said at the time. The firm’s revenue last year was $782 million, compared with about $760 million in 2010, according to the American Lawyer, a trade magazine which tracks law firm results. The trade publication lowered its numbers for Dewey this month after getting what it called “newly obtained information.”
A team led by partners Bienenstock and Bruce Bennett was weighing a so-called pre-packaged bankruptcy, one of the people familiar with the firm said. A bankruptcy plan approved in advance by creditors could lead to a merger with another U.S. firm, said the person, who didn’t want to be identified because they weren’t authorized to discuss the plans.
The team also explored what might happen if the firm shut down, the person said. Closing Dewey would make it much more difficult for members of the firm’s limited liability partnership and creditors to get any money back, the person said.
Bienenstock, whose restructuring team represented Los Angeles Dodgers LLC in its sale to a group including former professional basketball player Magic Johnson, didn’t respond to calls and e-mails seeking comment on plans for Dewey.
Dewey ranked third among legal advisers to investment banks advising companies on mergers this year, according to data compiled by Bloomberg. The firm placed 28th in American Lawyer’s ranking of the largest 100 law firms, with 190 partners and 2011 revenue of $782 million.
Most large law firms that fail don’t come out of bankruptcy, said Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll LLP in Louisville, Kentucky. Instead, they liquidate, he said, citing New York-based Finley Kumble, which went bankrupt in 1988. The firm had almost 200 partners, according to the American Lawyer.
Dewey might struggle to find a merger partner because many rivals prefer to select only the partners they want, Bowles said. The serial defections suffered by Dewey were “a form of cherry picking with groups of partners leaving,” he said.
While a pre-packaged bankruptcy “in theory could work,” Dewey’s challenge would be to keep control of the firm’s assets, which are mainly its partners, Bowles said. “The money is in the books of business of the productive partners.”
Dewey’s defections began in March with the departure of a group of 12 insurance and regulatory lawyers for Willkie Farr & Gallagher LLP. The firm has since lost lawyers to DLA Piper LLP, Reed Smith LLP, Patton Boggs LLP, Hunton & Williams LLP and Pillsbury Winthrop Shaw Pittman LLP.
In Dewey’s international network, the 42-lawyer Moscow outpost was recently assessing its options after approaches from firms including King & Spalding LLP, said a person familiar with the negotiations. The Russian office focuses on energy and corporate law.
In April, Dechert LLP took a five-partner corporate and securities team from Dewey’s Dubai office to open in the city.
Dewey’s Rome office head, Stefano Speroni, has said the Italian business wasn’t negotiating with anyone to leave.
Revenue for the first two months of this year rose 28 percent from a year earlier, and so-called billable value increased 13 percent, according to a letter to the partners obtained by Bloomberg News last month. Revenue for the 12 months through Feb. 29 grew 6 percent with an increase in billable value of 9.7 percent, according to the letter.
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