December 9, 2008 5:31 PM
The Death of the Dreier Model
Posted by Zach Lowe
Last year, Marc Dreier wrote a story for the National Law Journal, an Am Law Daily sibling publication, touting his model of a law firm in which only one person had an equity stake: Dreier himself would earn all the firm's equity and control its expenses; partners would earn base salaries plus bonuses linked to how much business they brought in during the year. The idea, Dreier wrote, was to create a system in which "each partner feels fairly compensated for his or her work" instead of having compensation "diluted by subperforming partners."
In the wake of Dreier's arrest for attempting to swindle nearly $150 million from three investment groups, law firm experts say the Dreier model is likely dead. The reason is obvious: when one equity partner falls, the whole firm goes down with him.
"When that person goes, there goes the business," says Ward Bower, a veteran law firm consultant at Altman Weil. "It's that simple. Nobody else has any right to any of the firm's assets. It's just not a business model that makes sense for a 250-lawyer firm. What if Dreier just got hit by a bus? What would happen then?"
Some small firms, especially plaintiffs firms, have equity split among just a few partners, say Bower and Leslie Corwin, a shareholder at Greenberg Traurig. Constantine Cannon, for instance, splits its equity between two partners--Abby Millstein and Jan Constantine, the wife of the firm's co-founder, Lloyd Constantine, the firm says.
Others are dominated by a single personality, Marc Kasowitz at Kasowitz Benson Torres & Friedman, for example.
But a one-partner-owns-all structure is completely unique, experts say.
"There has been nothing else like it," says David Keyko, a partner at Pillsbury Winthrop Shaw Pittman and former chair of the Association of the Bar of the City of New York's Committee of Professional Responsibility.
"There are no other structures like this," agrees Corwin.
Meanwhile, Dreier's sole ownership of the firm raises another question: Are the firm's other 250 or so lawyers shielded from the lawsuits that angry clients can be expected to bring if the firm owes them money?
Not necessarily, experts say; the suit filed yesterday by Wachovia targets every lawyer in Dreier's firm, and lawyers other than Dreier could be vulnerable to suits from clients who find their money missing from the firm's escrow account, Keyko says.
An aggressive client could claim, for instance, that a Dreier associate should have done a better job tracking the client's payments, Keyko and others say.
Corwin likewise says it's too early to say whether Dreier's dictatorial grip on the firm's finances protects the rest of the firm's lawyers; experts will have to comb through individual attorney's contracts and client billing records.
If the firm files for bankruptcy, some lawyers may have to give back bonuses and other payments made outside the ordinary course of business--especially if a court finds that Dreier used fraud to acquire the money to fund those payments, Keyko says.
The firm's insurance company--if it had one--will likely balk at paying for any losses linked to alleged and proven frauds, experts say. Insurance policies usually cover liability damage linked to an attorney's negligence, but not out-and-out fraud, experts say.
In simple terms, the level of the alleged fraud--combined with the unique structure of Dreier's firm--puts the firm's other partners in wholly uncharted territory.
Says Keyko: "We haven't seen anything like this before."