Finley Kumble's children – the familiar cycle of legal collapses
There have been plenty of precedents for high-profile collapses in the world's largest legal market, but one failure still looms the largest over the US profession 24 years on. After all, the rise and rapid implosion of Finley Kumble Wagner Heine Underberg Manley Myerson & Casey was in some aspects even more startling than that of Dewey & LeBoeuf. Finley was built at breakneck speed on the basis of a new model. In place of the traditional focus on the practise of law, the firm hungered for partners who would win business and expansion through continuous lateral recruitment.
June 22, 2012 at 07:02 AM
7 minute read
There have been plenty of precedents for high-profile collapses in the world's largest legal market, but one failure still looms the largest over the US profession 24 years on.
After all, the rise and rapid implosion of Finley Kumble Wagner Heine Underberg Manley Myerson & Casey was in some aspects even more startling than that of Dewey & LeBoeuf. Finley was built at breakneck speed on the basis of a new model. In place of the traditional focus on the practise of law, the firm hungered for partners who would win business and expansion through continuous lateral recruitment.
"When we're the biggest, people will think we're the best," Steven Kumble, the firm's architect and leader, once proclaimed. This brash style was hugely controversial – bitterly dividing the US profession – but it was a rallying cry to some.
The firm's origins go back to 1964, when Kumble joined the family-run New York practice Amen Weisman and Butler as an associate. Three years later, Leon Finley, a flamboyant veteran with a flair for winning clients, joined the firm. But the father and son team of Herman and Bobby Weisman soon clashed with the commercially-minded Kumble and Finley.
Following a foul-mouthed argument that saw Kumble physically thrown out of Bobby's office, Finley and Kumble allied to force the Weismans out of the firm, which was in 1968 renamed Finley Kumble Underberg Persky and Roth.
The rest of Finley Kumble's short history reads like a John Grisham novel, with the firm rapidly growing despite a reputation for cavalier ethics – a reputation sealed when name partner Robert Persky was sent to prison in 1973 for filing false statements with securities regulators.
But with Kumble determined to build a nationally focused practice – a radical notion at a time when US law was state-dominated – the firm began bolstering its reputation by recruiting a string of well-connected figures such as former New York City mayor Robert Wagner, former senator Joseph Tydings and Paul Laxalt, a politician at the time famed as the best friend of President Ronald Reagan.
The firm dramatically expanded in major markets such as California, Washington DC and Florida. So successful was it at breaking into DC that local mayor Marion Barry officially named 16 March 1986 'Finley Kumble Day'.
Such growth was backed by Finley's willingness to offer massive packages for big names, with a select handful earning $1m (£641,000). At the height of its influence in the mid-1980s, the firm appeared to have attained respectability having forged a 700-lawyer practice – only Skadden Arps Slate Meagher & Flom had higher revenues in the US. When The American Lawyer in 1984 ran a cover feature with the tag 'Should you sign on when the Finleyman calls?' the answer for a growing number of senior US lawyers wowed by the firm's chutzpah and generosity was an emphatic 'yes'.
The fall was to come with shocking speed, with Finley going from arguably the most influential law firm in the world to filing for bankruptcy in February 1988 in the space of six months.
The cause of its fate will be familiar to lawyers keeping an eye on recent headlines. Several years before its collapse, Finley had created a vehicle that borrowed against receiveables. It was initially a modest scheme, covering $2m (£1.56m) in fees, which was then paid out to partners as drawings. The practice soon expanded massively with the firm borrowing $27m (£17.3m) in January 1987 to boost partner distributions – a huge sum for a firm earning about $160m (£102m) annually. Finley was also listing expenditures in cash terms, while treating revenues on an accrual basis, an unsubtle piece of financial slight of hand.
When The American Lawyer broke news of its accounting tricks in a September 1987 piece entitled 'Bye Bye Finley Kumble: the firm everyone loves to hate is falling apart', turmoil quickly gripped the firm, which was already carrying substantial debt incurred during its expansion.
Finley was already riven with internal rivalries and a business built on laterals proved inherently unstable. Almost immediately, partners learning the firm's true position began leaving in droves. On October 1987, the firm's total debt had hit $83m (£53m). On 1 February 1988 the firm dissolved, triggering a lengthy bankruptcy and years of satellite litigation.
Finley was as extreme an example of institutional problems as Dewey, but over the following years the US has seen a string of large collapses. Among them are those of West Coast technology leader Brobeck Phleger & Harrison (2003), Chicago's Altheimer & Gray (2003), Boston's Testa Hurwitz & Thibeault (2005), and international pioneer Coudert Brothers (2006).
Unsurprisingly, the recession that began in 2008 claimed more firms, with San Francisco giant Heller Ehrman and Thelen both shutting their doors that year. New York's Thacher Proffitt & Wood, a pioneer of mortgage-backed securities, broke up in 2009. These were overshadowed in March 2011 with the dissolution of antitrust and litigation specialist Howrey.
The collapse of Brobeck and Howrey in particular made waves, with Brobeck having been the US's 14th largest firm during its dot com heyday with revenues of nearly $500m (£320m); Howrey generated nearly $600m (£385m) at its 2009 peak.
Though the cause of these failures has varied, there have been clear common themes. Many of the firms had attempted aggressive expansion, either to move up the food chain or on the back of hot growth markets. This was particularly evident in the cases of Brobeck and Thacher Proffitt, which were respectively focused on the boom in technology in the 1990s and the explosion in structured debt in the 2000s. When the bubble burst, both firms were cruelly exposed.
Many also made big bets on lateral recruitment, a model that leaves little partnership 'glue' when hard times hit. Even more toxic to law firms have been large obligations, in particular debt but also excessive real estate commitments or pension promises.
K&L Gates chairman and global managing partner Peter Kalis (pictured) says: "Large debt obligations abound within our profession. They are ticking time bombs for law firms. Dewey is but the latest casualty. There doubtless will be others."
Other cultural aspects of the US market clearly have had an impact. The greater willingness of clients to move with partners means firms that lose senior lawyers can quickly become vulnerable – a pattern that has played out in every collapse. The long-term trend among a sizeable section of the US legal market to pay rainmakers as much as 10 to 20 times that of junior partners is also agreed to have weakened the bonds and alignment of interest that traditionally protects a partnership.
In this regard, many still return to the comment of Finley Kumble's bankruptcy trustee Francis Musselman on the collapsed firm's policy of paying its stars 12 times as much as its most junior partners: "That's a lot of things but it's not a partnership". It turns out that not being a partnership can be a risky business. Back then, such a pay gap was startling. Now it is commonplace.
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