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Dewey Connect The Dots

BankruptcyMisconduct has had an epiphany of sorts related to the "accounting something" that has now become a part of the dialogue in the Dewey LeBoeuf crisis.

Our page on Viability rounds out the initial limited analysis from last year, when we first highlighted issues we believe are central to the question of a given law firm's economic circumstance, and ultimate survival. Specific mention was made of Legal Liability, Stigma, and Unconventional Debt Financing.

Too Good Too Be True

Like an old fashioned un-sugared medicine, it can be tough to swallow the bitter truth. That is one reason that we have art. So why don't you read our Haiku devoted to Bruce Bennett. We are not sure if the literary classification of the struggle depicted therein is best described as "man against man" or "man against himself". Maybe we'll put up a poll and let you decide.

BankruptcyMisconduct doesn't want to poke fun at any of the "big swinging" members of Dewey who were recently lured to join with large guarantees. Because we didn't start thinking about this angle until after the Dewey LeBoeuf crisis in confidence really took hold, and quite a few partner defections occurred. But the phrase that comes to mind is "bag holder". You know, the stooge who is left holding the bag.

Let us consider Nature as either a teacher for proactive planning, or just as a metaphor to aid post game understanding: The Common Cuckoo is a bird which flies into the nest of a different species, pushes out an egg and then leaves an egg of its own in place of the "terminated" egg. The parent of the victimized egg is a bird dumb enough to sit on the Cuckoo's egg. Outrageously enough, this bird will even care for the Cuckoo's young bird after it has hatched. It's something like you make a big mess in the kitchen, then you trick your sister and brother into the kitchen just as Mommy and Daddy are pulling into the driveway so that they have the burden of the clean up.

In 20/20 hindsight it seems all too clear, that the true complete liabilities at Dewey were so great that partner profits had to be withheld, that big cost cutting took place, that a private placement of debt was needed on top of the bank line, and thus a new source of cash was critical. One way to raise cash: lure big lawyers with big revenues by promising guarantees so good that they were perhaps even beyond ordinary economic reason. Can you pay too much for cash? Consider the extreme gyrations of the yield curve. Do you recall the short end going crazy low, even negative?

Claw Back Against Insiders in the event of a Bankruptcy Filing by Dewey LeBoeuf

It doesn't matter if the cash coming in goes right out the door, just as long as it has passed through the firm. There is more going on here than meets the eye, particularly when impaired by tunnel vision. Yo, check out the "new" two year preference action for insiders, dude. OK, maybe we can fault these top earners if they didn't perform their own "reality check" as to whether their negotiated deal would result in their getting overpaid. There may be a special chemical which forms in the brain of introverts when the ego and greed nerve centers are simultaneously mega tweaked, causing momentary loss of common sense.

What is a guarantee anyway? Even if the new star rainmaker was senior in liquidation priority to another equity member, he is still junior to all other debt. Like bank debt, bond debt, litigation debt, WARN liabilities, junior staff priorities on Schedule E, PBGC stuff - maybe even some of those substantial guaranteed pensions to certain retired partners. Oh, plus the administrative priority expenses which come right off the top. No fair complaining about those now. The specific details don't matter as far as a back of the envelope calculation.

You see, even if one of these really bright guys had his guarantee specified somehow in writing as "guaranteed" - it is all subject to equitable subordination. So if the boat is underwater, these star performers could console themselves knowing they had first shot at the empty pie tray. But don't take my word for it, the Bruce Bennett Bankruptcy team know all about when you would want to consider the applicability of equitable subordination. But then again, Bruce and his team might have a conflict of interest if you happen to be currently, or formerly, employed by Dewey LeBoeuf.

Forward Looking And Other Statements On Financial Affairs

Historically, Law Firms have not had the same restrictions on their public statements that public companies have had. This was true because law firms traditionally have been funded internally. However for a firm like Dewey LeBoeuf, once a firm has accessed the capital markets, going beyond just bank debt to include debt securities, the game changes dramatically. To the extent that actions have been taken to inflate revenues, or hide expenses or other facts, any of which could adversely interfere with the ability of any creditor to make an informed decision as to the extension, or continuation, of credit - we believe such conduct could be found to be fraudulent.

Obviously, Dewey LeBoeuf is still a private company. Presumably its partners are fully informed as to the facts, and ultimately the truth will be revealed. We can only form estimations based upon the very limited public disclosure, enhanced by speculation to fill the vacuum created by snippets and other gems cast about by involved persons prancing upon their public stage. So let's see what's in play so far:

The $155 Million Dollar Accounting "Something"

Dewey LeBoeuf publicly reported to industry scorecards that for 2011 they received $935 Million dollars in revenue. Yet it is reported by a number of former partners that their understanding was that revenues were only $780 Million dollars according to the Wall Street Journal. It's like "Déjà Vu all over again":

Partner Richard Shutran, co-chair of the firm's corporate practice and a member of the firm's operating committee, said the American Lawyer uses different metrics to measure firm revenue than those used in general budget calculations.

"They're just not comparable numbers," Mr. Shutran said. "That's something people like to pick on."

Remember when Eliot Spitzer was given carte blanche by the media to spin his special problem issue du jour as just a "Private Matter"? Since that time, we all know that the real issue was Spitzer's decade long relationship with organized crime, as he engaged in money laundering with wire transactions through sham corporations, and Mann Act violations - all the while he prosecuted competitors of his Prostitution Ring associates. Sometimes b.s. works, indeed. Well we just gotta give Dick an honorable mention for his attempted Jedi Mind Trick on the revenue numbers. Frankly, we think it failed and may ironically be counterproductive - He established scienter at the same time he validated the rumblings in cyberspace.

BankruptcyMisconduct recalls the "profitability waffling" that begin with a trickle way back in the days that led up to the Leslie Fay bankruptcy filing. But there is a world of difference in accounting flexibility between the net resulting recognitions of accrued income and the simple math of gross revenue summation. Shutran surely doth protest too much if he faults the peanut gallery for chortling at the tip toe through the tulips top line revenue "nuanced prancing" by his firm. We might not know all the accounting buzzwords, but like Justice Ginsburg oft remarks:

"If it looks like Bullshit, and it smells like Bullshit, and when you roll it between you're fingers it really feels like Bullshit, then you don't even need to put your tongue on it, if you're not into that sort of thing".

And we're not the first to notice. Adam Smith, Esq. tears Dewey to shreds on this. Which brings us to our recurring neo-exclusive elephant in the room observation. We didn't have to be clairvoyant to predict that new media, which doesn't report news by copy and paste from emails by truth sellers like Sitrick & Co, would grab hold of the "accounting something". Just a matter of time before the Big (revenue) Media chimed in. Like all of the Dewey LeBoeuf story (still unfolding), better late than never.

We brings us to what's behind curtain number 3:

Does anyone out there get the Barbara Streisand Reference vis-a-vis Dewey LeBoeuf?

What, Me Hide? We want to apologize if it seams like we are teasing you. We're just hoping to get our hands on a PACER docket so we'll have more facts in hand. But if you want a hint: Google wiki on The Babs.

John M. HUFF "Pick's On" Dewey LeBoeuf

What is big, red, and eats $155 Million worth of rocks?

...More Coming Soon!

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