On a sunny afternoon in mid-May, a small group of Dewey & LeBoeuf employees gathered outside the firm's Manhattan headquarters at 1301 Avenue of the Americas. Their focal point: a five-foot canvas depicting the law firm's former chairman Steven Davis.

Behind them, a line of red moving trucks pulled one by one around the corner towards Dewey's loading dock, with a constant stream of lawyers and support staff exiting the building carrying their personal effects in cardboard boxes.

After some attempts at forced banter, the group stared silently at the painting of Davis – a man who in the weeks leading up to the firm's closure had been ousted from management, faced allegations of fraud and personal enrichment at the hands of his fellow partners, and more recently become the centre of a criminal investigation.

At this point the firm had not yet formally filed for bankruptcy, but it had effectively closed its doors as a going concern amid mass layoffs and more than half of its 300 partners having quit since January. Despite their imminent job losses and uncertain futures, the majority of employees passing the painting that day – many of them taking the opportunity to write messages on the canvas with Magic Markers – did not harbour resentment for Davis, according to Geoffrey Raymond, an artist who creates annotated paintings of fallen Wall Street icons.

"They appreciated a bit of catharsis in the middle of a terrible week," he remembers. "There was a sense of genuine sadness – a great fondness for the firm. Many employees expressed the same question: 'How could such a fine firm come to this?'" This is the first time that Raymond has turned his attention to the legal industry, having previously painted controversial individuals, including Lehman Brothers' ex-chief executive Dick Fuld and former New York governor Eliot Spitzer.

"I was hesitant initially, given that I think of my beat as the intersection of Wall Street and politics," reflects Raymond. "The more I thought about it, the more I came to realise the magnitude of the Dewey story and that it closely mirrored the American financial meltdown. So I picked up a can of paint and started dripping."

Indeed, Dewey's bankruptcy filing on 28 May punctuated the largest law firm collapse in the history of the legal industry. A firm crippled by a series of financial mis-steps, Dewey moved from its heyday as a legal giant employing 2,500 staff across 26 offices around the globe to become, by far, the largest in a string of law firm failures since the credit crunch in 2007.

"It was mis-management 101," says Bruce MacEwen, the New York-based consultant and author of Adam Smith Esq., the influential online publication on law firm economics.

"They had a ringside seat for the collapse of Lehman and Bear Stearns. But they had the same mismatch of assets and liabilities."

From the first reports of the firm's difficulties emerging in late February, Dewey's woes escalated at a shocking rate, in the process breaking out of the industry's goldfish bowl to gain huge prominence in the US and international press.

Having pushed its way into the broader consciousness, the collapse has often been characterised as a 'Lehman moment' for the global law industry – a shocking failure that raises troubling questions about the state of the profession.

Reviewing the fate of the firm – at its peak boasting revenues of more than $900m (£641m) – this is true and yet misleading. The firm's development since the merger less than five years ago between upwardly mobile mid-tier LeBoeuf Lamb Greene & MacRae and fading Wall Street royalty Dewey Ballantine was so unique in its details that on one level it says little about the wider profession; of sizeable failures, arguably only that of New York's Finley Kumble Wagner Heine Underberg Manley Myerson & Casey 24 years ago is a genuine comparison point.

And yet Dewey's woes reflect a wider shift in the legal profession – seen in other global markets, but demonstrated in the purest form in the US – towards worshipping a star culture, often to the exclusion of competing interests and constituencies.

One former Dewey partner reflects: "What it came down to was not the economy. It was what I call the two Gs: greed and governance. The entire management team was too personally entwined with Steven. This cult of the chairman – the idea of a lawyer who from a young age decides that managing a law firm is what he wants – is institutionally dangerous because the firm's culture is unable to adapt to the times."

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The $16m bet

The playbook had been in effect for a while but, even for a country used to accommodations for star lawyers, this was an unusual move. Over New Year's weekend 2005, LeBoeuf was having significant work done on its Washington DC offices.

The firm was decking out its 11th floor to duplicate the work space that heavyweight securities litigator Ralph Ferrara had occupied at his previous firm Debevoise & Plimpton. Walls were even torn down to recreate the L-shaped room in detail; furniture and carpets were matched exactly.

The move, documented in a 2006 profile in The American Lawyer, was part of a sustained bid by LeBoeuf to take its business upmarket. The New York firm, which traced its origins back to 1929, had a legacy as a solid but somewhat staid player in the US market, with a reputation resting largely on work in the heavily-regulated insurance and energy industries.

Under chairman Steven Davis, the 700-lawyer firm was intent on moving into more glamorous areas of practice, particularly high-end transactional and disputes work.

This attempt had faced setbacks. Between 1999 and 2003, the firm shed 20% of its staff, openly conceded that attempts to hire and integrate partners often failed and shut five offices. But profitability had risen sharply under this more rigorous central management, with profits per equity partner (PEP) growing 82% between 1999 and 2004 to hit $1.165m (£747,000).

In addition, growth was beginning to pick up after the firm began investing again in 2003. The primary means of achieving its ambitions were attracting top-level lateral hires with large books of business, ideally with their supporting teams in tow.

The arrival of Ferrara, then aged 60 and five years away from Debevoise's mandatory retirement age, was the most potent statement of intent yet. Established as one of Debevoise's top billers, attracting him was a major coup.

It was not cheap, with LeBoeuf reportedly committing to pay $2m-$3m (£1.2m-£1.9m) annually for three years, plus a $16m (£10.2m) injection to compensate for the loss of Ferrara's fully-vested pension. Despite the huge cost, it was an undoubted success, with the appointment going a long way towards putting the firm on DC's map and helping to attract other heavy-hitting partners.

Other big names recruited during the phase included Debevoise arbitration partner Arthur Marriott, Winston & Strawn corporate dealmaker Berge Setrakian and Thelen Reid & Priest's telecoms specialist Eric Cowan. This was a highly successful period for LeBoeuf, nationally and internationally. Buoyed by this success, the already-powerful Davis was given wide scope to push on with its expansive strategy.

The Yale-educated Davis had spent most of his career at LeBoeuf and quickly impressed his peers with his understated drive and ambition, qualities not in abundance in the unglamorous mid-tier at the time. He became head of LeBoeuf's core energy and utilities practice in 1994, before becoming its co-managing partner five years later.

The softly-spoken lawyer had a reputation as a focused and effective manager, backed by powerful right-hand man, the non-lawyer executive director Steve DiCarmine. LeBoeuf was also financially sound, carrying little debt. One legacy LeBoeuf partner recalls: "Steven [Davis] was extremely ambitious and made it his personal mission to lure laterals on board. He ran the firm like a CEO."

If LeBoeuf was a mid-tier player on the upward track, Dewey Ballantine was a stark contrast. The New York firm had a distinguished history having been founded in 1909 as Root Clark & Bird, with the Internal Revenue Service's first lawyer, Arthur Ballantine, joining in the 1920s.

In 1955, the firm famously attracted former New York governor and presidential candidate Thomas Dewey, further bolstering its formidable establishment credentials.

With a roster of big-ticket clients including General Motors, Morgan Stanley and Mobil Oil – not to mention strong M&A and litigation practices – Dewey was well established in its heyday as a 'white shoe' firm not far away from the clout of a Cravath Swaine & Moore or Sullivan & Cromwell. The firm was also regarded as having a collegiate culture in which rank and file partners had significant input into management decisions. But Dewey had its problems. By the 1990s, it was failing to keep pace with more profitable Wall Street rivals, while lacking the reach and resources of the new breed of expansive US national practices typified by Latham & Watkins.

Under the leadership of its longstanding co-chair Morton Pierce, an obsessive but very highly regarded dealmaker who held many of the firm's most important corporate relationships, its revenues fell 9% from $375m (£241m) in 2004 to $341m (£219m) in 2007, despite the backdrop of booming corporate markets. More worryingly, Dewey was carrying significant debt.

By the mid-2000s, it was known to be looking for a union with a larger firm to help it cope with these problems. But a deal was not easy to find. One leading London firm would not even engage in cursory discussions having had only the briefest indication of Dewey's financial position.

An apparent solution was a merger with expansive West Coast firm Orrick Herrington & Sutcliffe in 2006, but the talks broke down publicly. One reason given for the failure was the demand by long-time Orrick chief Ralph Baxter for a $25m (£16m) deal over five years, a prospect that did not impress Dewey.

Many who knew about the talks interpret that supposed deal-breaker as a fig-leaf – though there was clearly a cultural gulf between the modish San Francisco-bred firm and its conservative New York counterpart, Dewey's debt and pension liabilities were far bigger factors.

Another issue was the 10 partner departures Dewey suffered at the time of the talks, including several of its big-hitting M&A lawyers. With Dewey wounded by the publicity surrounding the Orrick talks, the firm was more intent than ever to merge with a partner that could bolster its position.

Davis and Pierce were already socially acquainted – on paper, a marriage between the larger and expansive LeBoeuf with Dewey's still-considerable position in the key New York market looked an ideal solution. Davis pitched the idea to Pierce in the spring of 2007 and things moved quickly.

Even with some challenges at Dewey, LeBoeuf seemed well resourced to handle them, with its revenues having rocketed from $341m (£218m) in 2004 to $614m (£393m) in 2007, a rise of 80%.

Another legacy Dewey partner says: "The failed Orrick talks only seemed to accelerate Dewey's desperation to merge, and in no time at all, a deal with LeBoeuf had materialised. It was rushed through in a matter of weeks."

On Davis' attitude, one former partner comments: "LeBoeuf was an aggressive mid-tier firm with delusions of grandeur. Davis and DiCarmine had an inferiority complex – they wanted something bigger and that sentiment led to their merger-at-any-cost attitude."

The deal was announced on 27 August 2007, touted as creating a global giant ranking in the US top 20 with more than 1,300 lawyers across 12 different countries and revenues of nearly $1bn (£641m). The firm would have 550 lawyers in New York and 170 in London, a strong position in the world's two key financial hubs.

There was not much time to consider the deal, with LeBoeuf partners apparently only told of it the week preceding the external announcement. Reportedly, the merger was ratified by a public vote at LeBoeuf, putting pressure on partners to back the union.

But hastily arranged or not, the deal was widely received as a landmark for the legal profession and a promising union of brand and brawn, bringing together Dewey Ballantine's Wall Street credibility with LeBoeuf's resource, growth story and reputation for effective management.

Repent at leisure

The merger went live on 1 October 2007. Davis was installed as the merged entity's sole chairman, as legacy Dewey's co-chair Pierce wished to return to client work ("Management is not my passion," the veteran deal lawyer was famously quoted at the time).

Bluechip consultant McKinsey & Company had been called in to advise on the deal, further bolstering the image of corporate sophistication surrounding the union (this was only slightly under-cut by a ­much-derided fudge that saw Davis initially act as overseer of its City arm instead of LeBoeuf London head Peter Sharp).

Davis quickly became the face of the merged practice and ran it in a top-down fashion, very much in the style of his old firm. DiCarmine, the permanently-tanned non-lawyer who often entertained his colleagues with stories about his colourful past, was seen as Davis' consigliere, the man who executed the strategy the chairman devised for the merged firm.

Their vision? To create a law firm of superstars – one in which every partner's book of business exceeded $10m (£6m). An important step in realising this goal was to ensure that none of the firm's current firmament of stars left to join other firms, an anxiety that turned into an obsession during the months after the merger.

The firm set up a number of so-called "grantor's trusts" – accounts for individual partners (including Pierce and Ferrara) which would receive transfers of between $250,000 (£161,000) and $1m (£643,000) per year over a four-year period.

These bonuses were intended to retain star performers and to keep powerful individuals toeing the management line. One former Dewey lawyer says that about 40 partners became beneficiaries of such deals.

This move reflected a curious internal dynamic after the merger in which management displayed both arrogance and insecurity. Most of this can be explained through the context of the union and the relationship between management and the partnership.

By consensus, the realities of Dewey Ballantine's strained finances were considerably played down to LeBoeuf partners ahead of the merger.

The timing of the deal was also unfortunate, coming amid the initial market shudders of the credit crunch in August 2007, which would develop into a full banking crisis by September 2008 with the collapse of Lehman. The merger had also inevitably incurred considerable expense and Davis was aiming for substantial expansion via investment. Davis was given wide discretion, but the firm's over-optimistic projections for 2008 would fall significantly short.

On one level, Davis' authority was unchallenged. He was supposedly one of the most powerful law firm leaders in the world. On the other, the firm's stretched balance sheet and myriad financial commitments left Davis strangely vulnerable and fearful of losing partners.

Despite the firm's 'barbell' compensation system, which paid top rainmakers as much as $6m (£3.84m) annually while many junior partners earned less than $450,000 (£288,000), the firm was easily pressured into handing out sweeter deals to partners who threatened to walk – even relatively low billers.

One ex-partner says: "They were terrified. As a result, literally anyone who threatened to leave was offered a juiced-up deal or some kind of inflated bonus to stay. The joke was that at every single partners' meeting, Steven would say that the fact that no one was leaving showed the strength of the partnership. Actually, it promoted greed and jealousy."

Yet the same partner adds: "Steven was a strange mixture of charming and softly-spoken and incredibly hard-nosed and steely. There was one occasion where I stepped out of line by voicing my opinion on one particular partner hire and he made it pretty clear that he was not happy with me. After that, I never went against 'Steven's orders' again."

The fear sets in

With Davis and DiCarmine in thrall to rainmakers, ­strong-willed partners easily pressured management. This is largely where Dewey's unusual practice of offering guaranteed deals to existing partners – not just laterals – stemmed from.

Neither was the firm's outsized executive committee likely to offer much of a counterweight to the core three of Davis, DiCarmine and chief financial officer Joel Sanders. The body had historically met somewhat irregularly and had a fluctuating and large membership of 24 to 26. It was not regarded as a strong governance vehicle.

But then Dewey was supposed to be driven by talent and charisma, not committee. Davis was banking on star power, a system reinforced not only by its pay model, but its weighted voting system, which handed more powers to big billers.

"The important point about Steven and DiCarmine was that they were star-struck," says one ex-partner, expressing common sentiments. "They loved the idea of having a collection of stars in their offices. They even encouraged people to see these individuals as legends by telling stories about their diva attitudes. These people included laterals like Ferrara, but also home-grown partners like Mort Pierce."

There was an early indication that the deal wasn't living up to billing. Having claimed at the time of the merger that the firm would be 10% over its target profit for the 2007 year, Dewey then told partners in the spring of 2008 that the expected windfall had been wiped out by an unbudgeted hit to hike associate bonuses, leaving partners about $30m (£21m) poorer. The firm opted for some modest trimming at this time, announcing the closure of three branches in secondary US markets – Jacksonville, Austin and Hartford – a move that affected about 50 lawyers.

With revenues in 2008 falling well under budget, there was discussion of cutting 30 to 35 underperforming partners but it was not followed through, perhaps because some of the targeted underperformers were friends with influential big-billers.

Insecurity at management level was compounded by unease among legacy LeBoeuf partners who were becoming increasingly aware of the level of Dewey Ballantine's debt. One partner claims Dewey Ballantine was "on the verge of bankruptcy". Another says: "[The biggest shock] was seeing the combined balance sheet after the merger – LeBoeuf partners had never known that a law firm could carry so much debt."

But Davis was convinced the market would quickly recover after Lehman and was determined to press on with his trusted superstar strategy that had worked so well with Ferrara.

What followed was a period marked by a slew of new arrivals. The firm had already signalled this intent at the end of 2007 by recruiting Martin Bienenstock, one of the leading counsel on Enron's Chapter 11 filing and co-head of America's top bankruptcy practice at Weil Gotshal & Manges.

Even with the recession in its depths in July 2009 Dewey was insatiable, making huge investments to recruit a ­top-rated M&A and securities team in Palo Alto from Cooley Godward Kronish, led by rainmaker Richard Climan and including partners Keith Flaum and Eric Reifschneider (the acquisition was regarded as one of Dewey's better investments, bringing in marquee clients such as Dell and eBay). The firm also added a string of new offices to its international platform, adding bases in the Middle East and across Asia.

Satisfaction guaranteed

The majority of laterals – right up until January 2012, when the firm hired a eight-partner Johannesburg team – were brought in on seven-figure, multi-year guarantees.

There was nothing unusual in the use of guarantees to secure laterals in the US market. But Dewey was certainly unique in the length and generosity of the deals it handed out – the highest of which exceeded $6m a year – to say nothing of the frequency that such deals were agreed.

One London lateral joiner says: "What struck [the new partners] was that the deals were never linked to performance. We began to hear stories of guarantees being renewed without the relevant due diligence and that underperformers were not being identified, but we deferred to the New York management on such matters."

The nature of these guarantees varied widely – roughly 25% were hard contractual multi-year deals – some functioned as a minimum floor or fixed-bonus deals, while others specified earnings.

By the end of 2011, about 30 existing partners would be on some form of guaranteed deal, according to one former executive committee member. There was an increasingly arbitrary nature to the firm's post-merger recruitment. By consensus, LeBoeuf's use of guarantees was more targeted and performance-related, while after the merger some partners noticed how widely varied the terms partners were being recruited on were becoming. Every deal seemed to be bespoke.

But Davis had remained calm after Lehman collapsed, telling his partners that the merger had been a success and that "the trouble would be over by Christmas", as one partner recalls. The financials told a different story – net income fell from $265m (£170m) in 2008 to $240m (£154m) in 2009.

The firm's revenues for 2009 fell 15.3% to $809m (£519m), according to financial documents that later emerged, a bad performance even in a year when many major law firms saw revenues dip.

"Despite the glaring economic problems, Steven was optimistic – some would say naive – and continued to make rosy predictions about target revenues and individual partner income," says one ex-partner. "There was not a single year that the executive committee's target compensation wasn't significantly higher than what we took in."

With the firm's finances strained, some partners started to see their compensation deferred in 2009 (there are indications that some deferrals happened in 2008). But it caused few ruffles given the huge turmoil in the wider legal market that year, with many firms ushering in drastic cost-cutting measures.

By 16 April 2010, Dewey appeared to have one answer to its problems as it agreed a shake-up of its finances that saw it agree a $100m (£64m) credit facility arranged by JP Morgan Chase. More unusually, the firm issued $150m (£96m) in bonds (to "consolidate and refinance existing bank debt" according to its bankruptcy petition). The bonds, carrying maturities of between three and 10 years, were privately placed with insurance companies. The 58-page bond offering document lauded Dewey's "strong financial position and conservative debt profile".

The bond and credit facility were both secured, giving the lenders wide rights over Dewey's assets, and additionally guaranteed by Dewey's UK limited liability partnership.

The bond would be controversial and it certainly ruffled feathers – a number of partners learned of it via press reports – though several former partners argue it was a valid move and allowed Dewey to gain favourable lending terms.

The chief architect of the financing, partner Richard Shutran, told fellow partners they had pulled off an excellent and pioneering deal.

But even if the post-merger growth projections Dewey continued to indulge in had been more realistic from this point on, the basic problem remained: the underlying picture of the firm's health was not as bright as that painted to partners.