The firm told members of the end of negotiations in an internal memorandum that also announced that Steven Davis, its former chairman, has been terminated as a member of the five- person chairman’s office and the executive committee.
The firm plans to continue merger talks with other firms as it faces a deadline tomorrow with banks over whether to extend a $100 million line of credit, according to the memo, which was obtained by Bloomberg News. The firm will continue as usual tomorrow without disruption to its work, the memo said.
The New York-based firm is said to be the subject of a criminal probe by state prosecutors related to whether managers misled partners about payments due them, another person familiar with the matter said.
Manhattan District Attorney Cyrus Vance Jr.’s investigation is in a preliminary stage, said the person, who declined to be identified because the matter isn’t public. Prosecutors, tipped by disenchanted Dewey partners, are probing whether some attorneys were wrongly shut out of pay as the firm’s profits shrank while others received guaranteed packages. Vance seeks to ensure documents and other evidence is preserved ahead of any bankruptcy, merger or dissolution, the person said.
Partners have been leaving Dewey, the No. 3 law firm adviser to banks handling merger deals, 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. (JPM) and Citigroup Inc. (C), 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 another person who is familiar with a merger proposal that Dewey presented to other law firms.
Erin Duggan, a spokeswoman for Vance, declined to comment. Angelo Kakolyris, a spokesman for Dewey, didn’t return an April 27 call seeking comment on the probe. On April 26, he declined to comment on the deadline.
In a copy of an internal memorandum obtained by Bloomberg News and dated April 27, the law firm said it’s aware of an investigation by Vance into one Dewey attorney involved in the firm’s management. The firm said in the memo that it has begun an internal probe and plans to cooperate with Vance’s office. Harvey Kurzweil and Seth Farber, as counsel to the firm, were asked to conduct the internal investigation, the memo stated.
Last month, as defections mounted, Dewey restructured its chairman’s office to include the heads of four practice groups in addition to 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 was Greenberg, which has ended its discussions with Dewey.
“Dewey is a firm we hold in high regard, with many fine lawyers, though we never considered a merger,” said the firm’s CEO, Richard A. Rosenbaum, in a statement sent today by Jill Perry, a spokeswoman for the firm.
Dewey partners, who were getting less pay than expected as profit fell, learned at a partnership meeting in Manhattan that the firm had struck special deals with some partners who would have to be paid before others, according to a person familiar with those events.
Davis said at the meeting that the special deals requiring Dewey to defer pay for most partners involved fewer than 100 lawyers, the person said. Pay at the firm ranged from about $300,000 for junior partners, to as much as $5 million to $6 million for a handful of Dewey’s top lawyers, with base pay of about $25,000 a month, the person said.
Dewey’s executive director, Stephen DiCarmine, had a deal putting his salary and bonus at $2 million a year, said the person, who wasn’t authorized to comment on these matters and didn’t want to be named.
Davis didn’t return phone or e-mail messages on April 27 seeking comment on the probe or the firm’s finances.
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 that tracks law firm results. The publication lowered its numbers for Dewey this month after getting what it called “newly obtained information.”
Rich Shutran, head of the corporate department at Dewey and a member of the chairman’s office, told Bloomberg in March that the firm earned about $250 million last year. American Lawyer’s revision of its report on Dewey’s 2011 results came after that.
A team led by partners Bienenstock and Bruce Bennett was weighing a so-called prepackaged 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.