DANGEROUS ADVICE FOR LAW FIRM LEADERS

During the past 25 years, law firm management consulting has grown from cottage industry to big business. In a recent Am Law Daily article, “What Critics of Lateral Hiring Get Wrong,” Brad Hildebrandt, one of its pioneers, provides a comforting message to his constituents:

“Large law firms are weathering the storm of the past five years and continue to transform their businesses to operate with efficiency and agility amid a new set of client expectations.”

Hildebrandt v. Altman Weil

Hildebrandt correctly notes that painting all large firms with a single brush is a mistake. But his general description of most firms today is at odds with the results of Altman Weil’s recent survey, “2014: Law Firms in Transition.” The summary of responses from 803 law firm leaders (including 42 percent of the nation’s largest 350 firms) offers these highlights:

— “The Survey shows clear consensus among law firm leaders on the changing nature of the legal market…. [But] law firms are proceeding without an apparent sense of urgency.”

— “Less than half of the law firms surveyed are responding to the pressures of the current market by significantly changing elements of their traditional business model.”

— “Most firms are not making current investments in a future they acknowledge will be different – and different in seemingly predictable ways.”

— “Only 5.3 percent of firms are routinely looking farther than five years out in their planning.”

Altman Weil’s conclusions comport with its October 2013 Chief Legal Officer Survey. When clients rated outside law firms’ seriousness about changing legal service delivery models to provide greater value, the median score was three out of ten — for the fifth straight year.

Hildebrandt v. Georgetown/Thomson Reuters Peer Monitor and Henderson

So what are most big firms doing? Growth through aggressive lateral hiring. Hildebrandt responds to “academics, journalists, former practicing attorneys, and countless legal bloggers” who question that strategy. Count me among them.

Acquiring a well-vetted lateral partner to fill a specific strategic need is wise. But trouble arises when laterals become little more than portable books of business whose principal purpose is to enhance an acquiring firm’s top line revenues.

“Growth for growth’s sake is not a viable strategy in today’s market,” the 2014 Georgetown/Thomson Reuters Peer Monitor Report on the State of the Legal Market observes. Nevertheless, the report notes, most firms are pursuing exactly that approach: “[Growth] masks a bigger problem — the continuing failure of most firms to focus on strategic issues that are more important….”

Professor William Henderson has done extensive empirical work on this subject. “Is Reliance on Lateral Hiring Destabilizing Law Firms?” concludes: “[T]he data is telling us that for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.”

Hildebrandt v. Citi/Hildebrandt

Big law partners acknowledge the truth behind Henderson’s data. According to the 2014 Citi/Hildebrandt Client Advisory, only 57 percent of law firm leaders describe their lateral recruits during 2008-2012 as successful, down from 60 percent last year. If those responsible for their firms’ aggressive lateral hiring strategies acknowledge an almost 50 percent failure rate, imagine how much worse the reality must be. Nevertheless, the lateral hiring frenzy continues, often to the detriment of institutional morale and firm culture.

With respect to culture and morale, Hildebrandt rejects the claim that lateral partner hiring crowds out homegrown associate talent. But the 2013 Citi/Hildebrandt Client Advisory suggests that it does: Comparing “the percentages of new equity partners attributable to lateral hires vs. internal promotions in 2007…with percentages in 2011 reveals a marked shift in favor of laterals” — a 21 percent decrease in associate promotions versus a 10 percent increase in lateral partner additions.

Nevertheless, Hildebrandt offers this assessment:

“In the six years prior to the recession, many firms admitted far too many partners—some into equity partnership, many into income partnership. A driving factor in the number of partners in the lateral marketplace is that firms are coming to grips with the mistakes of the past. Lax admissions standards have been a far greater issue than mistakes made on laterals.”

When I read that passage, it seemed familiar. In fact, Chapter 5 of my latest book, The Lawyer Bubble – A Profession in Crisisopens with this quotation:

“The real problem of the 1980s was the lax admission standards of associates of all firms to partnerships. The way to fix that now is to make it harder to become a partner. The associate track is longer and more difficult.”

Those were Brad Hildebrandt’s words in September 1996. (“The NLJ 250 Annual Survey of the Nation’s Largest Law Firms: A Special Supplement — More Lawyers Than Ever In 250 Largest Firms,” National Law Journal)

“Fool Me Once, Shame On You…”

Evidently, most firms followed Hildebrandt’s advice in the 1990s because the overall leverage ratio in big law firms has doubled since then. His recent suggestion that “lax admission standards” caused firms to make “far too many” equity partners during the six years prior to the Great Recession of 2008-2009 is particularly puzzling. In the May 2008 issue of American Lawyer, Aric Press noted that during the “Law Firm Golden Age” from 2003 to 2007, “Partners reaped the benefits of hard work — and of pulling up the ladder behind them. Stoking these gains has been a dramatic slowdown in the naming of new equity partners.”

Meanwhile, the swelling ranks of income partners reflect a different strategy: using the non-equity partner tier as a profit center. The strategy is misguided, but pursuing it has been intentional, not a “mistake.” (Take a look at the American Lawyer article, “Crazy Like a Fox,” by Edwin Reeser and Patrick McKenna.)

Even so, Hildebrandt’s words reassure firms that are recruiting laterals for all the wrong reasons and/or tightening the equity partner admission screws. Tough love might better serve the profession.

MORE JOBS, EXCEPT FOR LAWYERS

During April 2014, job growth exceeded economists’ expectations. The recovery continues, but one line item in the latest detailed Bureau of Labor Statistics report should be particularly troubling to some law school deans and professors who are making bold predictions about the future.

The Facts

As the economy added 288,000 new jobs last month, total legal services employment (including lawyers and non-lawyers) declined by 1,200 positions from March 2014. A single monthly result doesn’t mean much. But over the past year, total legal services employment has increased by only 700 jobs.

In fact, according to the BLS, since December 2007 net legal services employment has shrunk by 37,000 jobs. Meanwhile, law schools have been awarding 40,000 new JD degrees annually for more than a decade.

The Denier’s Plight

Some law school deans and professors still object to any characterization of this situation as a “crisis” in legal education. In fact, one professor proclaimed last summer that now is still a great time to go to law school because a lawyer shortage would be upon us by the fall of 2015! Before rejoicing that we’ve almost reached that promised land, note that in 2011 the same professor, Ted Seto at Loyola Law School – Los Angeles, similarly predicted that the short-term problem of lawyer oversupply would lend itself to a quick and self-correcting resolution when the business cycle turned upward.

Well, the upward turn has been underway for several years, but significant growth in the number of new legal jobs hasn’t accompanied it. Nevertheless, tuition has continued to rise. For prelaw students now contemplating six-figure JD debt, law school deniers have a soothing argument: A degree from anywhere is well worth the cost to anyone who gets it.

Using aggregate data, the deniers ignore dramatic difference in individual outcomes for schools and students. Some deniers even use their lifetime JD-value calculations to defend unrivaled tuition growth rates for law schools generally. In somewhat contradictory rhetoric, they simultaneously promote income-based loan repayment plans as a panacea.

Leadership?

Recently, one dean assured me privately that deniers have now become outliers. If so, the overall reaction of deans as a group remains troubling. In particular, law schools have countered a precipitous drop in applicants with soaring acceptance rates. The likely result will be a fall 2014 class somewhere between 35,000 and 38,000 first-year students.

Likewise, law school sales pitches have devolved into cynical efforts at selling something other than the practice of law. They market the versatility of a JD as preparation for anything else that law graduates might want to do with their lives. But so is medicine. So are lots of things. So what? Medical schools train doctors. Isn’t the core mission of law schools to train lawyers? What will remain after we abandon that sense of professional purpose and identity?

Practicing Law? Oh, I Could Have Done That. 

All of this raises a question: How do the law school deans and professors in denial about the state of things deal with unpleasant facts that don’t fit the world view they’re trying to sell others? Ignore them. Pay no attention to the man behind the curtain, as the self-designated Wizard of Oz might say to Dorothy. Somehow, we’ll get you back to Kansas — where associate admissions dean Steven Freedman at the University of Kansas recently went public with his denial.

Like similar predictions, Freedman’s analysis is suspect. For example, his projections of a lawyer shortage by 2017-2018 ignore the excess inventory of new law graduates that the system has produced over the past several years (and is still producing). (In a follow-up comment to his own post on “The Faculty Lounge,” Freedman defends his resulting calculations on the unsupported grounds that “the vast majority of them retired or changed careers” — an assumption, he acknowledges, that contradicts the real world observations and data of Jim Leipold, executive director of NALP.)

Even worse, Freedman offers a general recommendation to every prospective student — “Enroll today!” was the title of his first installment at “The Faculty Lounge.” But he fails to mention that employment outcomes vary enormously across law schools. His post’s subtitle — “Why 2017-2018 Will Be a Fantastic Time to Graduate from Law School” — is fraught with the danger that accompanies the absence of a nuanced and individualized message.

Ironically, in the real world of clients, judges, and juries, attorneys who ignore the key facts in a case usually lose. Eventually, they have trouble making a living. Someday, perhaps the law school deniers will have that experience, first-hand.

A TROUBLESOME TASK FORCE

For any lawyer, credibility is everything. A key reason that the ABA Task Force on the Future of Legal Education produced such a worthwhile report and recommendations was the stature and credibility of its participants, especially its chairman, retired Indiana Supreme Court Chief Justice Randall T. Shepard. Although imperfect, the effort and outcome have received widespread and well-deserved praise.

On a vitally important issue, the Task Force punted. With respect to the cost and financing of legal education, a new ABA task force has now stepped into that breach. Unlike its predecessor, the ABA Task Force on the Financing of Legal Education has a credibility problem at the outset.

The Best Intentions

The chairman of the new task force, Dennis W. Archer, is undoubtedly a decent man trying to the right thing. In fact, he has an impressive history of public service. But as a former associate justice of the Michigan Supreme Court, Archer understands that appearances matter. In fact, the mere appearance of impropriety in a case is enough for a judge to step aside. It’s not a question of personal ethics. Rather, it’s a matter of public perceptions about the integrity of a decision-making process and its outcomes.

Since 2010, Archer has been a member of the National Policy Board of InfiLaw, which owns three private ABA-accredited for-profit law schools: Arizona Summit Law School (formerly the Phoenix Law School), Charlotte School of Law, and the Florida Coastal School of Law. The board on which he sits “provides counsel upon the strategic direction and long-term plans for the InfiLaw system of independent law schools….”

The Business Model

Annual tuition and fees at all three InfiLaw schools exceed $40,000. According to their ABA disclosures, the schools have been big beneficiaries of the current dysfunctional system of financing a legal degree. At Arizona Summit, median federal law student debt between July 1, 2012 and June 30, 2013 was $184,825. At Florida Coastal, it was $162,549. The Charlotte Law School median was $155,697, plus another $20,018 in private loans.

At all three law schools, students’ “institutional financial plan debt” was zero. The InfiLaw schools have plenty of federal student loan dollars skin in the game, but none of their own.

A Disturbing Trend

Even as the market for lawyers has languished, InfiLaw schools increased enrollment. According to the ABA, the three schools graduated a combined class of 679 students in 2011. Nine months later, only 256 had long-term, full-time jobs requiring a JD. That’s 38 percent.

Last year’s combined graduating class for the three school had soared to 1,191 students. Only 428 found full-time long-term JD-required employment. That’s 36 percent.

All of the schools’ websites follow the format of Arizona Summit’s rosier description of employment outcomes:

“Arizona Summit Law School was able to confirm the employment status of 99% (278 out of 279) of its program completers [sic] who graduated September 1, 2012, through August 31, 2013. The job placement rate for these graduates was 90%. This figure was calculated using the NALP formula for calculating job placement rate. Therefore, the 90% job placement rate was calculated by adding together all the employed graduates (250) and then dividing by the number of graduates whose employment status we were able to confirm (278). In accordance with NALP guidelines, the number of employed graduates includes all employment positions, including legal and non-legal positions, permanent and temporary positions, full-time and part-time positions, and any positions funded by Arizona Summit Law School.”

Clicking to another document on the site reveals that 25 of those jobs were “Law School Funded Positions” — 22 of which were short-term.

The Challenge of Leadership

Perhaps it takes an insider, such as former Justice Archer, to accomplish the kind of monumental change that his InfiLaw constituents may well resist. Perhaps this will be a “Nixon goes to China” moment for him and the profession. Maybe it will be the equivalent of President Lyndon Johnson muscling civil rights legislation through the Senate — a Texan overcoming a resistant South in the 1960s.

On the other hand, if the latest ABA task force produces anything less than revolutionary recommendations that finally make law schools financially accountable for the fate of their graduates, everyone will laugh it off — as they should. Unfortunately, there’s nothing particularly funny about the situation.

UPCOMING APPEARANCES

SATURDAY, MAY 3, 2014, 11: 15 am (CDT)
“The Future of Law Firms”
American Academy of Appellate Lawyers
Omni Chicago Hotel
Chicago, IL

TUESDAY, MAY 6, 2014, 11:30 am (CDT)
The Society of Trial Lawyers
Petterino’s Restaurant
50 W. Randolph Street
Chicago, IL

MONDAY, MAY 12, 2014, 11:30 am (MDT)
Legal Inclusiveness and Diversity Summit
Keynote speaker
Center for Legal Inclusiveness
Denver, CO

THE ILLUSION OF LEISURE TIME

Back in January, newspaper headlines reported a dramatic development in investment banking. Bank of America Merrill Lynch and others announced a reprieve from 80-hour workweeks.

According to the New York TimesGoldman Sachs “instructed junior bankers to stay out of the office on Saturdays.” A Goldman task force recommended that analysts be able to take weekends off whenever possible. Likewise, JP Morgan Chase gave its analysts the option of taking one protected weekend — Saturday and Sunday — each month.

“It’s a generational shift,” a former analyst at Bank of America Merrill Lynch told the Times in January. “Does it really make sense for me to do something I really don’t love and don’t really care about, working 90 hours a week? It really doesn’t make sense. Banks are starting to realize that.”

The Fine Print

There was only one problem with the noble rhetoric that accompanied such trailblazing initiatives: At most of these places, individual employee workloads didn’t change. Recently, one analyst complained to the Times that taking advantage of the new JP Morgan Chase “protected weekend” policy requires an employee to schedule it four weeks in advance.

Likewise, a junior banker at Deutsche Bank commented on the net effect of taking Saturdays off: “If you have 80 hours of work to do in a week, you’re going to have 80 hours of work to do in a week, regardless of whether you’re working Saturdays or not. That work is going to be pushed to Sundays or Friday nights.”

How About Lawyers?

An online comment to the recent Times article observed:

“I work for a major NY law firm. I have worked every day since New Year’s Eve, and billed over 900 hours in 3 months. Setting aside one day a week as ‘sacred’ would be nice, but as these bankers point out, the workload just shifts to other days. The attrition and burnout rate is insane but as long as law school and MBAs cost $100K+, there will be people to fill these roles.”

As the legal profession morphed from a profession to a business, managing partners in many big law firms have become investment banker wannabes. In light of the financial sector’s contribution to the country’s most recent economic collapse, one might reasonably ask why that is still true. The answer is money.

To that end, law firms adopted investment banking-type metrics to maximize partner profits. For example, leverage is the numerical ratio of the firm’s non-owners (consisting of associates, counsel, and income partners) to its owners (equity partners). Goldman Sachs has always had relatively few partners and a stunning leverage ratio.

As most big law firms have played follow-the-investment-banking-leader, overall leverage for the Am Law 50 has doubled since 1985 — from 1.76 to 3.52. In other words, it’s twice as difficult to become an equity partner as it was for those who now run such places. Are their children that much less qualified than they were?

Billables

Likewise, law firms use another business-type metric — billable hours — as a measure of productivity. But billables aren’t an output; they’re an input to achieve client results. Adding time to complete a project without regard to its impact on the outcome is anathema to any consideration of true productivity. A firm’s billable hours might reveal something about utilization, but that’s about it.

Imposing mandatory minimum billables as a prerequisite for an associate’s bonus does accomplishes this feat: Early in his or her career, every young attorney begins to live with the enduring ethical conflict that Scott Turow wrote about seven years ago in “The Billable Hour Must Die.” Specifically, the billable hour fee system pits an attorney’s financial self-interest against the client’s.

The Unmeasured Costs

Using billables as a distorted gauge of productivity also eats away at lawyers’ lives. Economists analyzing the enormous gains in worker productivity since the 1990s cite technology as a key contributor. But they ignore an insidious aspect of that surge: Technology has facilitated a massive conversion of leisure time to working hours — after dinner, after the kids are in bed, weekends, and while on what some people still call a vacation, but isn’t.

Here’s one way to test that hypothesis: The next time you’re away from the office, see how long you can go without checking your smartphone. Now imagine a time when that technological marvel didn’t exist. Welcome to 1998.

When you return to 2014, read messages, and return missed calls, be sure to bill the time.

A POINT OF PERSONAL PRIDE

My daughter, Emma Harper, writes short stories. Her latest, “Family Tree,” appears in the current issue of the online publication, Flexible PersonaClick on the link and prepare to be entertained.

ANOTHER REVIEW OF “THE LAWYER BUBBLE”

Professor William Henderson’s generous review of my latest book, The Lawyer Bubble – A Profession in Crisis, appears in the current issue of the Michigan Law Review: “Letting Go of Old Ideas.” 

WHO REALLY PAYS FOR LAW STUDENT DEBT?

More public interest lawyers for our nation’s underserved citizens would be a good thing. More public debt to subsidize law schools that shouldn’t exist at all would be a bad thing.

In recent years, law schools have promoted debt forgiveness programs as a solution to rising student loan obligations. In some important ways, they are. Income-based repayment (IBR) can be a lifeline in a drowning pool of educational debt. It can also open up less remunerative options, including public interest law, for those willing to forego big bucks to avoid big law firms. But now everyone seems surprised to realize that, when all that debt is forgiven years hence, someone will have to pick up the tab.

Well, not quite everyone is surprised. More than two years ago, Professor WIlliam Henderson, one of the profession’s leading observers, saw this train wreck coming. “Unless the government’s actuarial assumptions on student loan repayments turn out to be correct,” Henderson wrote, “federal funding of higher education is on a collision course with the federal deficit.”

Tuition increases without regard to value added

Recently, the Wall Street Journal made that collision a front page story. In “Plans That Forgive Student Debt Skyrocket,” law students took center stage — and for good reason. For a decade, new lawyers have outpaced everyone, even medical students, in the rate at which they have accumulated educational debt.

Am Law columnist Matt Leichter has reported that from 1998 to 2008, private law school tuition grew at an annual rate of almost 3.5 percent, compared to 1.89 percent for medical schools and 2.85 percent for undergraduate colleges. Public law school tuition increased at an even faster pace: 6.71 percent. From 2008 to 2012, median law school debt for new graduates increased by 54 percent — from $83,000 to $128,000. (That compares to a 22 percent increase in medical student debt.)

Market disconnects

What accounts for the law school tuition explosion? For starters, the U.S. News rankings methodology incentivizes deans and administrators to spend money without regard to the beneficial impact on a student’s education. More expenditures per student mean a higher ranking, period.

Who provides that money? Students — most of whom obtain federally backed loans. To that end, the prevailing law school business model requires filling classrooms. As transparency about dismal law graduate employment outcomes has produced fewer applications at most schools, deans generally have responded by increasing acceptance rates. The overall rate for all law schools rose from 56 percent in 2004 to almost 80 percent in 2013.

Sell, sell, sell

As National Law Journal reporter Karen Sloan observed recently, “It’s a tale of two legal education worlds.” Top law schools place 90 percent of their graduates; but “more than three-quarters of ABA accredited law schools — 163 — had underemployment rates of 20 percent or more.”

Those numbers begin to explain what has now become an annual springtime ritual. As I’ve discussed in recent posts, many law school professors and deans at schools producing those underemployed graduates are proclaiming that the lawyer glut is over. Now, they say, is the best time ever to attend law school.

Outside the ivory tower, practicing lawyers know that such hopeful rhetoric isn’t transforming the market or slowing the profession’s structural changes. Last June, NALP Executive Director James Leipold wrote, “There are no indications that the employment situation will return to anything like it was before the recession.”

The most recent ABA employment statistics for the class of 2013 prove Leipold’s point: Nine months after graduation, only 57 percent had obtained long-term-full-time jobs requiring a JD. Median incomes for new graduates aren’t improving much, either. For the class of 2008, it was $72,000; for the class of 2012, it was $61,245.

IBR to the rescue

The vast majority of students borrow six-figure sums to fund their legal education. The federal government backs the loans, which survive bankruptcy. The end result is law schools with no financial skin in a game for which they reap tremendous economic rewards.

IBR is a godsend to many new lawyers who can’t get jobs that pay enough to cover their loans. It permits monthly installments totaling 10 percent of discretionary income (defined as annual income above 150 percent of the poverty level). Outstanding balances are forgiven after 10 years; for private sector workers, it’s 20 years.

Less obvious consequences

IBR has a dark side, too. If a person leaves the program early, total debt will include all accrued interest and principal, often creating a balance larger than the original loans. For those remaining in the program for the requisite 10 or 20 years, forgiven debt becomes taxable income in the year forgiven.

More insidiously for the profession, IBR allows marginal schools to exploit an already dysfunctional market. Such schools are free to ignore the realistic job prospects for their graduates (including JD-required public service positions) as they recruit new students who obtain six-figure loans to pay tuition. When graduates can’t get decent jobs, it’s not the school’s problem. Meanwhile, IBR becomes the underemployed young lawyer’s escape hatch.

The Wall Street Journal reports that graduates are using that hatch in dramatically increasing numbers: “[E]nrollment in the [IBR] plans has surged nearly 40% in just six months, to include at least 1.3 million Americans owing around $72 billion.” Those figures aren’t limited to lawyers, but they undoubtedly include many young graduates from law schools that should have closed long ago.

Bill Henderson probably finds some measure of vindication as a wider audience now frets over a problem that he foresaw years ago. But I know him well enough to believe that for him, like me, four of the least satisfying words in the English language are: “I told you so.”

ANOTHER UNFORTUNATE OP-ED

The current debate over the future of legal education is critical. Even more important is the need to base that debate on a common understanding of indisputable facts. Perhaps UC-Irvine Dean Erwin Chemerinsky and Professor Carrie Menkel-Meadow just made an honest mistake in misreading employment statistics upon which they rely in their April 14, 2014 New York Times op-ed, “Don’t Skimp on Legal Training.” If so, it was a bad one. (The Times designated my comment that includes some of the data cited in this post as a “NYT pick.”)

The offending paragraph comes early in the effort to dismiss those who use the word “crisis” — their op-ed puts it in quotation marks — to describe the challenges facing the profession. Since that word appears prominently in the subtitle of my latest book, I’ll take the bait.

Wrong From The Start

The authors support their “no crisis” argument with this:

“[A]s recently as 2007, close to 92 percent of law-school graduates reported being employed in a paid-full-time position nine months after law school. True, the employment figures had dropped by 2012, the most recent year for which data is [sic] available, but only to 84.7 percent.”

But the data on which they rely include part-time, short-term, and law school funded jobs — and only those graduates “for whom employment status was known.”

“Facts Are Stubborn Things”

Not until 2010 did the ABA require law schools to identify the types of jobs that their graduates actually obtained. The results have been startling, as data from the class of 2013 demonstrate:

— Nine months after graduation, only 57% of graduates had long-term full-time (LT-FT) jobs requiring bar passage. Another 5% held part-time or short-term positions.

— LT-FT “JD Advantage” jobs went to another 10.1%. This category includes positions — such as accountant, risk manager, human resources employee, and more — for which many graduates are now asking themselves whether law school was worth it.

— Another 4% got law school funded jobs.

— Unemployed law graduates seeking jobs increased to 11.2%.

— Average law school debt for current graduates exceeds $100,000. The rate of tuition increase in law schools between 1998 and 2008 exceeded the rate for colleges and medical schools. One reason is that U.S. News ranking criteria reward expenditures without regard to whether they add value to a student’s education.

— For 33 out of 202 ABA-accredited law schools, the LT-FT JD-required employment rate was under 40%; for 13 schools, it was under 33%.

Federally-backed student loans that survive bankruptcy fuel a dysfunctional system that has removed law schools from accountability for graduates’ employment outcomes. The current regime blocks the very “market mechanisms to weed out the weakest competitors” that the authors cite as providing the ultimate cure. As law school applications have plummeted, most schools have responded with soaring acceptance rates.

If all of that doesn’t add up to a crisis, what will it take?

The Importance of Credibility

The problem with the authors’ unfortunate attempt to minimize the situation is its power to undermine their other points that are, in fact, worth considering.

For example, they note that job prospects “obviously depend on where a person went to school and how he or she performed.” True, but many law professors now touting the happy days ahead for anyone currently contemplating law school ignore that reality.

“The cost of higher education, and the amount of debt that students graduate with, should be of concern to all.” True, but what’s their proposed solution?

“Law schools specifically should do more to provide need-based financial aid to students — rather than what most law schools have been doing in recent years, which is to shift toward financial aid based primarily on merit in order to influence their rankings. This has amounted to ‘buying’ students who have higher grades and test scores.” True, but how many schools are changing their ways? Between 2005 and 2010, law schools increased need-based financial aid from $120 million to $143 million while non-need based aid skyrocketed from $290 million to $520 million.

Like almost every law school dean in America, Dean Chemerinsky has a choice. He can acknowledge the crisis for what it is and be part of the solution, or he can live in denial and remain part of the problem. Earlier this year, National Jurist named Chemerinsky its “Most Influential Person in Legal Education.” Now is the time for him to rise to the challenge of that role.

 

DEWEY – PROSECUTING THE VICTIMS

[NOTE: On Friday, April 11 at 9:00 am (PDT), I’ll be delivering the plenary address at the Annual NALP Education Conference in Seattle.

On Wednesday, April 16 at 5:00 pm (CDT), I’ll be discussing The Lawyer Bubble — A Profession in Crisis as part of the Chicago Bar Association Young Lawyers Section year-long focus on “The Future of the Legal Profession.”]

The trip from victim to perpetrator can be surprisingly short. Just ask some former Dewey & LeBoeuf employees who pled guilty for their roles in what the Manhattan District Attorney calls a massive financial fraud. Anyone as puzzled as I was by 29-year-old Zachary Warren’s perp walk last month will find recently unsealed guilty plea agreements in the case positively mind-boggling. In some ways, those agreements are also deeply disturbing, but not for the reasons you might think.

Warren, you may recall, was a 24-year-old former Dewey staffer when he allegedly had the misfortune of attending a New Year’s Eve day meeting in 2008 with two of his superiors. According to the grand jury indictment, they were among the “schemers” who developed a “Master Plan” of accounting fraud that persisted for years.

When Warren left Dewey in 2009 to attend law school, the firm was making hundreds of millions of dollars in profits, many individual partners enjoyed seven-figure paychecks, and no one foresaw the firm’s total collapse three years later. Nevertheless, last month Warren was indicted with three others who had held positions of responsibility right up to the firm’s ignominious end: former chairman Steven H. Davis, former executive director Stephen DiCarmine, and former chief financial officer Joel Sanders.

A fateful New Year’s Eve meeting

The indictment alleges that CFO Sanders was one of two people with Warren at their December 31 meeting. Now we’ve learned the identity of the other: Frank Canellas.

Canellas’ ascent in the firm had been meteoric. While finishing his bachelor’s degree at Pace University, he joined LeBoeuf, Lamb, Greene & MacRae in 2000 as a part-time accounting intern. Only seven years later, he became — at the tender age of 28 — director of finance for the newly formed Dewey & LeBoeuf. Thereafter, his compensation increased dramatically, rising to more than $600,000 annually by 2011.

In February 2014, Canellas copped a plea. He agreed to cooperate with prosecutors and plead guilty to a felony charge of grand larceny for his role in allegedly cooking Dewey’s books. In exchange, the DA will recommend a light sentence – only two-to-six years of jail time compared to the 15-year maximum penalty for the offense.

Using the boss to get underlings?

Presumably, one reason that the Manhattan DA squeezed Canellas was to help prove culpability at higher levels of the defunct firm, particularly CFO Sanders. But there is something more troubling here than the use of that standard prosecutorial tactic to get at the higher-ups. In his plea agreement statement, Canellas also implicates downstream employees who, he says, implemented the accounting adjustments that he and his bosses developed.

Ironically, in 2012, the people whom Canellas now fingers were among the hundreds of non-lawyers who suffered the most in the wake of Dewey & LeBoeuf’s spectacular implosion. When that was happening, observers properly regarded the firm’s low-level staffers generally as helpless victims. Now, for some of them, guilty pleas in exchange for recommendations of leniency give new meaning to the phrase “adding insult to injury.”

What’s the point?

Why go after the underlings at all? Does it really take a criminal prosecution coupled with the promise of a plea deal to assure the truthful testimony of pawns in a much larger game? With Canellas on the hook, wouldn’t a trial subpoena do the trick for those working under him?

The policy ramifications are even more profound. What message does the Manhattan DA send by flipping a cooperating superior to nail underlings for doing what the superior asked them to do? What does this approach mean for employees far down the food chain in a big law firm or any other organization? Even if you don’t have an accounting degree, should you now second-guess the bookkeeping directives that you receive from people who do? Then what? Complain to your local district attorney that you have concerns about your instructions? And why draw the line at accounting issues?

For any employee now worried about becoming the target of a subsequent criminal proceeding, other options make even less practical sense. As the economy crashed in 2008 and 2009, was it the low-level staffer’s duty to refuse a directive relating to the firm’s accounting procedures or any other issue that caused the staffer concern? To quit or get fired from a decent job and enter a collapsing labor market? To apply for work elsewhere, only to have a prospective new employer solicit a prior job reference and learn that the would-be hire is not a “team player”?

Losing sight of the mission

Unlike many senior partners at Dewey & LeBoeuf, the six relatively low-level staffers who did as Canellas directed (and have now pled guilty to resulting crimes) did not walk away with millions of dollars. Other than the jobs they held until the firm disintegrated, none benefitted financially from the alleged financial fraud.

The situation brings to mind a November 2012 court filing on behalf of Dewey’s former chairman, Steven H. Davis. Responding to the motion of the Dewey & LeBoeuf Official Committee of Unsecured Creditors for permission to sue Davis personally, Davis’s brief concluded: “While ‘greed’ is a theme of the Committee’s Motion, the litigation that eventually ensues will address the question of whose greed.” (Docket #654; emphasis in original)

The Manhattan DA’s investigative efforts could center on that question, too. So far, as indictments and plea deals get unsealed, the situation looks more like an unrestrained effort to secure notches on a conviction belt.

Perhaps it’s just too early to tell where the prosecution is headed. Then again, maybe vulnerable scapegoats make easier targets than the wealthy, high-powered lawyers who created and benefitted from the culture in which those scapegoats did their jobs.

A DEWEY GUILTY PLEA COULD BECOME MORE THAN ANYONE BARGAINED FOR

Sometimes there’s more to a news story than meets the eye. For example, recent indictments and guilty pleas involving former Dewey & LeBoeuf personnel focus on a handful of individuals who allegedly cooked the firm’s books for years prior to its implosion. The sordid details make for entertaining press conferences and great headlines.

But maybe a more interesting question is: who will be standing naked when the Manhattan DA finishes pulling the threads on that sweater? A careful look at Frank Canellas’ plea agreement suggests some surprising possibilities. But it takes a brief history of the Dewey bankruptcy proceeding to understand some of them. So bear with me.

Remember the PCP?

Back in October 2012, the Dewey & LeBoeuf bankruptcy judge approved a novel Partnership Contribution Plan. For a collective $71.5 million, participating former Dewey partners received releases of creditor claims totaling more than $500 million. That meant creditors could not seek to “clawback” additional amounts that partners received while the firm was insolvent.

When did the firm become insolvent? The PCP answered that question with a specific date, January 1, 2011. A progressive payment table determined each partner’s required contribution based on the amount the partner received from Dewey after that date. Partners who had received $400,000 or less paid back 10 percent of the total. From there, the percentage rose so that partners who had received $3 million or more paid 30 percent. (Former Chairman Steven Davis was not allowed to participate in the plan.)

Remember the 2010 bond offering?

The January 1, 2011 cutoff date was important because Dewey & LeBoeuf’s unusual $150 million bond offering closed in 2010. Under the PCP, any money that participating partners received that year — including proceeds from bond investors and funds from banks that refinanced the firm’s debt — remained off the potential clawback table.

A group of retired Dewey partners objected to the PCP, claiming that its terms favored former firm leaders.  Attorneys for the Dewey bankruptcy estate responded that they had retained an outside professional, Jonathan Mitchell of Zolfo Cooper, who had “controlled the development and promulgation of the PCP.” (Docket #482 at 10) Mitchell worked on the project with David Pauker of Goldin Associates.

Remember the court’s approval of the PCP?

Dewey’s bankruptcy judge overruled objections to the PCP and determined that the January 1, 2011 cutoff date was reasonable. In doing so, he relied in part on Mitchell and Pauker, who testified to the difficulty of efforts aimed at proving that the firm was insolvent earlier:

“Based on investigations of the Debtor’s finances by the Debtor’s professionals, Pauker and Mitchell testified that there was strong evidence to support the assertion that the Debtor was insolvent in 2012, but insolvency would be more difficult to prove for 2011, and even harder for 2010. Determining the exact insolvency date is both difficult and expensive because several complex tests are used, leading to extended expensive litigation as those tests can produce contradictory results.” (10/09/12 Mem. Op. at 23; transcript record citations omitted)

Of particular interest in light of Canellas’ recent guilty plea regarding his role in creating the firm’s financial statements, the court went on to observe: “Further complicating the issue, the firm had a clean audit opinion issued in 2010 and was able to refinance a significant portion of its debt,….” (Id.)

Now things get interesting

Flash forward to March 2014, when the Manhattan DA unseals Canellas’ plea agreement. In his accompanying statement, the former Dewey director of finance says that, far from clean, audit opinions for 2008, 2009, and 2010 were based on financial statements that he knew to be false.

Meanwhile, the Dewey bankruptcy attorneys who persuaded the court to approve the PCP gave way to a liquidating trustee. That trustee is asserting clawback claims against individual partners who refused to participate in the PCP. Those complaints allege that the firm was insolvent no later than January 1, 2009 and seek recovery based on that much earlier date.

Now what?

Here’s another way to look what has happened so far:

1. Lawyers for the Dewey bankruptcy estate presented the court with a plan whereby former Dewey partners returned a percentage of the amounts that they received after January 1, 2011 — but anything they received prior to that date became off limits to Dewey’s creditors. (The court-approved final confirmation plan estimated that general unsecured creditors with claims collectively approaching $300 million would eventually receive between 4 cents and 15 cents for every dollar that the firm owed them.)

2.  A group of objectors claimed that the PCP favored Dewey’s most wealthy and powerful former partners.

3. The court overruled that objection and approved the PCP with its January 1, 2011 cutoff date because, among other reasons, professional advisers to the Dewey estate testified that it was reasonable and the firm got what the court called a “clean” audit for 2010.

4. The Manhattan DA has now indicted four former Dewey employees — and obtained guilty pleas from seven others — for their roles in allegedly cooking the books in ways that, if true, would render the 2010 audit not so clean.

5.  One more thing. According to Canellas’ statement appended to his February 13, 2014 plea agreement, after Dewey filed its bankruptcy petition on May 28, 2012, he continued working for the firm’s wind down committee and, at the time he signed the statement, was still working for Dewey’s liquidating trustee. (The plea agreement required him to resign from that position.)

As you try to wrap your head around all of this, remember that “foolish consistency is the hobgoblin of little minds.” So think big and follow the money, if you can find it.

In my next post, I’ll discuss another aspect of the Canellas plea agreement that is likewise deeper than the current headlines — and far more troubling.

UPCOMING APPEARANCES

FRIDAY, APRIL 11, 2014, 9:00 am
Plenary speaker
2014 NALP Annual Education Conference
Sheraton Seattle
1400 6th Avenue
Seattle, WA

WEDNESDAY, APRIL 16, 2014, 5:00 pm
“The Future of the Legal Profession”
Chicago Bar Association
Young Lawyers Section
321 S. Plymouth Court
Chicago, IL

FALSE ADVERTISING POSING AS LEGAL SCHOLARSHIP

Sometimes everything you need to know about a piece of purported scholarly legal research appears in its opening lines. Take, for example, the first two sentences of “Keep Calm and Carry On” in current issue of The Georgetown Journal of Legal Ethics:

“Supposedly, there is a crisis in legal education. It appears to be touted mostly by those who are in the business of realizing monetary (or, at least, reputational) gain from providing cost-efficient coverage about matters of (rather) little importance.”

At this point, Professor Rene’ Reich-Graefe’s 15-page article offers the second of its 80 footnotes: “For example, in 2011, The New York Times Company reported annual revenues of $2,323,401,000. Of those, approximately 52.57% (or $1,221,497,000) were raised in advertising revenue…”

So it turns out that the New York Times, The Wall Street Journal, and every other media outlet reporting on the troubled world of American legal education have manufactured a crisis to sell advertising space. Never mind too many law school graduates for too few JD-required jobs, more than a decade of soaring law school tuition, and crippling student debt. Everyone just needs to calm down.

The argument

Professor Reich-Graefe offers what he calls “a brief exercise in some eclectic apologetics of the present state of legal education for those of us who refuse to become card-carrying members of the contemporary ‘Hysterias-R-Us’ legal lemming movement.” Starting with a Bureau of Labor Statistics report that “lawyer employment jobs in 2010 were at 728,200,” he observes that the United States has an additional 500,000 licensed attorneys and concludes:

“One may safely assume that, at present, a good number (though certainly not all) of those licensed lawyers are gainfully employed, too — mainly within the legal profession.”

Then Reich-Graefe posits trends that he says will favor the legal profession: “Over half of currently practicing lawyers in this country will retire over the next 15 to 20 years”; “U.S. population will increase by over 100 million people, i.e., by one third, until 2060, thus, increasing total demand for legal services”; “the two largest intergenerational wealth transfers in the history of mankind…will occur in the United States over the course of the next 30 to 40 years, thus, increasing total demand for legal services even further”; and “everything in the law, by definition, will continue to change…there will be more work for more lawyers.”

His analysis culminates in a breathless conclusion: “[R]ecent law school graduates and current and future law students are standing at the threshold of the most robust legal market that ever existed in this country — a legal market which will grow, exist for, and coincide with their entire professional career [sic].”

The critique

Others have already dissected Reich-Graefe’s statistical arguments in great detail. Suffice it to say that when law professors wander into the world of numbers, someone should subject their work to peer review before publishing it. But Professor Bill Henderson makes an equally important point: Even if Reich-Graefe’s analysis and assumptions are valid, his advice — “Keep Calm and Carry On” — is dangerous.

I would add this nuance: Reich-Graefe’s advice is more dangerous for some law schools than for others. The distinction matters because law schools don’t comprise a single market. That’s not a value judgment; it’s just true. At Professor Reich-Graefe’s school, Western New England University School of Law, only 37 percent of the graduating class of 2013 obtained full-time, long-term jobs requiring a JD. Compare that to graduate employment rates (and salaries) at top schools and then try to convince yourself that all schools serve the same market for new lawyers.

The dual market should have profound implications for any particular school’s mission, but so far it hasn’t. Tuition at some schools with dismal employment outcomes isn’t significantly less than some top schools where graduation practically assures JD-required employment at a six-figure salary.

Likewise, virtually all schools have ridden the wave of dramatic tuition increases. In 2005, full-time tuition and fees at Western New England was $27,000. This year, it’s $40,000.

Shame on us

Reich-Graefe makes many of us accomplices to his claimed conspiracy against facts and reason. Shame on me for writing The Lawyer BubbleShame on Richard Susskind for writing Tomorrow’s Lawyers. Shame on Bill Henderson for his favorable review of our books in the April 2014 issue of the Michigan Law Review. Shame on Brian Tamanaha, Paul Campos, Matt Leichter, and every other voice of concern for the future of the profession and those entering it.

Deeply vested interests would prefer to embrace a different message that has a noble heritage: “Keep Calm and Carry On” — as the British government urged its citizenry during World War II. But in this context, what does “carry on” mean?

“Carry on” how, exactly?

Recently on the Legal Whiteboard, Professor Jerry Organ at St. Thomas University School of Law answered that question: filling classrooms by abandoning law school admission standards. Ten years ago, the overall admission rate for applicants was 50 percent; today it’s almost 80 percent. That trend line accompanies a pernicious business model.

It’s still tough to get into top a law school; that segment of the market isn’t sacrificing student quality to fill seats. But most members of the other law school market are. They could proceed differently. They could view the current crisis as an opportunity for dramatic innovation. They could rethink their missions. They could offer prospective students new ways to assess realistically their potential roles as attorneys while providing a practical, financially viable path for graduates to get there.

Alternatively, they can keep calm and carry on. Then they can hope that on the current field of battle they’re not carried off — on their shields.

DEWEY & LE BOEUF: MORE COLLATERAL DAMAGE

Does 29-year-old Zachary Warren hold the key to understanding the demise of the storied white-shoe law firm, Dewey & LeBoeuf’? Apparently, New York County District Attorney Cyrus R. Vance, Jr. thinks so.

Zachary Who?

In 2006, Warren graduated from Stanford University with a degree in international relations. In 2008, he went to work for Dewey & LeBoeuf as a client relations manager; it was his first job out of college. His work at Dewey, Am Law Daily’s Sara Randazzo reports, was “to pester partners to make sure clients paid their bills, according to two former Dewey employees.” That, by the way, is an annual ritual at every big firm, and it’s no fun.

When Warren started at Dewey, he was 24 years old. After spending his “gap year” there, he attended Georgetown Law where he served on the law review. After graduation, he took a federal district court clerkship in Maryland. Then he accepted another clerkship that he still has for Judge Julia Smith Gibbons on the Sixth Circuit Court of Appeals.

Having left Dewey three years before its demise, Warren must have found it odd when Vance’s office called to discuss the firm’s failure. Most people who once worked at the firm would have been surprised, too. They’d never heard of Zachary Warren until last week, when he was indicted, along with three more familiar Dewey names — Steven Davis, Stephen DiCarmine, and Joel Sanders, respectively, the firm’s last chairman, executive director, and chief financial officer.

An Observer’s Perilous Plight

What did Warren do to merit inclusion with such a powerful and notorious threesome, thereby creating a foursome that the indictment identifies collectively as the “Schemers”? Based on the allegations of the 106-count indictment, not much.

On or about December 30, 2008 — the end of the first full calendar year of operation following the blockbuster merger of Dewey Ballantine and LeBoeuf Lamb — Warren’s boss, CFO Joel Sanders, allegedly told him that he would receive his full bonus “if the Firm satisfied its bank covenants.” The indictment doesn’t say whether Warren knew what that phrase meant.

The following day, the indictment alleges, Warren sat in a meeting with Sanders and an unnamed “Employee C” while Sanders and Employee C discussed “financial adjustments.” That evening — New Year’s Eve at 7:24 pm, to be precise — Employee C wrote to Warren: “Great job, dude. We kicked ass! Time to get paid.”

Twelve minutes later, Warren responded, “Hey man, I don’t know where you come up with some of this stuff, but you saved the day. It’s been a rough year but it’s been damn good. Nice work dude. Let’s get paid!”

Finally, two months after that, on February 24, 2009, Warren supposedly responded falsely to a message from a Dewey employee about an allegedly inappropriate financial adjustment in 2008.

Only one of the 106 counts against the “Schemers” includes Warren. It is #106 and is a bit confusing: “CONSPIRACY IN THE FIFTH DEGREE… as follows: The defendants…during the period from on or about November 3, 2008, to on or about March 7, 2012, with intent that conduct constituting the crime of SCHEME TO DEFRAUD IN THE FIRST DEGREE be performed, such crime being a felony, agreed with one and more persons to engage in and cause the performance of such conduct.” I’m not sure where to put the “[sic].”

Warren has another distinction: He is also the subject of his own, separate indictment, alleging six counts of falsifying business records.

The Awesome Power of Government

To understand what is happening to Zachary Warren — a millennial whose first dream job has turned into a nightmare — look no farther than prosectuor Vance’s press conference. He announced that seven former employees who worked in Dewey & LeBoeuf’s accounting department have already pled guilty “for their individual roles in the scheme.”

That’s how these things work. Government investigators start at the bottom of an organization, identify low-level employees who might know something, apply pressure, and acquire guilty pleas that create cooperating witnesses who can testify against the real targets. Indicting a low-level person can also have an in terrorem effect, demonstrating to others the government’s seriousness.

I’ve never met or communicated with Zachary Warren. But as with any attorney, a plea deal poses special problems that don’t affect non-lawyers. Reportedly, Warren passed the bar last July. Among other things, a guilty plea could end forever his ability to practice law. That would be a tough way to close out an investment of five years (law school plus two clerkships) and $150,000 in tuition.

Abandoning Common Sense

Warren’s co-defendants may have something to say about whether any crime occurred at all. The presumption of innocence has not yet lost all meaning. Still, some aspects of the case against Zachary Warren, seem particularly peculiar.

“Pestering partners at year-end to get clients to pay outstanding bills” is not exactly a policy-making position. How can anyone who worked in the bureaucratic bowels of a big firm for less than a year bear responsibility for what went wrong three years later? Should low-ranking administrative staff members everywhere start asking questions about what superiors want them to do and why? How should they assess the answers? When should they resign in protest?

Likewise, when Warren left Dewey in 2009, the partnership collectively was making hundreds of millions of dollars in profits. At the time, no one in the profession could have foreseen the firm’s disastrous demise in 2012. And before making too much of the juicy emails allegedly attributed to Zachary Warren, please pause, add a little context, and consider how all of us sometimes fire off quick, mindless responses to emails and text messages.

Most importantly, think about how you’d feel if someone you knew found himself in Zachary Warren’s position. Twenty-four years old and only months into his first job after college, he participated in an end-of-the-year revenue collection meeting with superiors. More than five years later, that meeting led to a “perp walk” with three codefendants, any of whom could have made or broken his career at Dewey & LeBoeuf.

Then think about the government’s awesome power to turn lives upside down in a pursuit that Warren’s lawyer called a “travesty.” You might conclude that he has a point. Anyone truly interested in what went wrong at Dewey & LeBoeuf should take a look at Chapter 8 of The Lawyer Bubble – A Profession in CrisisThen you’ll really wonder why Zachary Warren is part of this mess.

THE END OF THE LAWYER GLUT?

Could a years-long oversupply of new attorneys finally be on the wane? Based on the trend of recent headlines, it would be easy to reach that conclusion. For example, a December 2013 Wall Street Journal headline read: “First-Year Law School Enrollment at 1977 Levels.” The first sentence of the article described the “plunge” in entering law student enrollments.

Likewise, in January 2014, National Jurist reported on steep enrollment declines at particular schools from 2010 to 2013. The big losers in that compilation were “the University of LaVerne (down 66.2 percent) and Thomas M. Cooley Law School (down 40.6 percent).”

Most recently, the National Law Journal took a closer look at the 13 law schools that saw “1L enrollment drop by 30 percent or more in the span of 12 months, while an additional 27 reported declines of 20 to 30 percent in all.”

Taken together, these reports create an impression that the severe lawyer glut is ending.

How about a job?

For prospective law students, the size of any drop in overall enrollment isn’t relevant; employment prospects upon graduation from a particular school are. According to the ABA, just under 40,000 students began law school in the fall of 2013 — down eight percent from the entering class of 2012. That’s significant, but not all that dramatic.

Meanwhile, for the entire decade ending in 2022, the latest estimate (December 2013) from the Bureau of Labor Statistics puts the total number available positions for “Lawyers, judges, and related workers” at around 200,000. That net number takes into account deaths, retirements, and other departures from the profession. More sobering, it’s yet another downward revision from earlier BLS projections.

As the profession makes room for 20,000 new attorneys a year, why all the media attention about 1L enrollments “plunging” to a level that is still almost twice that number?

I think the answer is that some law professors are running around screaming that their hair is on fire because, for many of them, it is. The media are covering that blaze, but the larger conflagration surrounding the crisis in legal education somehow gets lost.

U.S. News to the rescue?

Professor Jerry Organ at the University of St. Thomas School of Law has an interesting analysis of the situation. Schools in trouble are “picking their poison.” One option is to maintain admission standards that preserve LSAT and GPA profiles of their entering classes. Alternatively, they can sacrifice those standards in an effort to fill their classrooms and maximization tuition revenues.

U.S. News & World Report rankings now have an ironic role in this mess. For decades, rankings have contributed to perverse behavioral incentives that have not served law schools, students, or the profession. For example, in search of students with higher LSATs that would improve a ranking, many schools diverted need-based financial aid to so-called “merit scholarships” for those with better test scores.

Likewise, revenue generation also became important in the U.S. News calculus. As the ABA Task Force Report on the Future of Legal Education notes, the ranking formulas don’t measure “programmatic quality or value” and, to that extent, “may provide misleading information to students and consumers.” They also reward “increasing a school’s expenditures for the purpose of affecting ranking, without reference to impact on value delivered or educational outcomes.”

Now the rankings methodology has presented many schools with a Hobson’s choice: If they preserve LSAT/GPA profiles of their entering classes, they will suffer a reduction in current tuition dollars as class size shrinks; if they admit less qualified applicants, they’ll preserve tuition revenues for a while, but they’ll suffer a rankings decline that will hasten their downward slide by deterring applicants for the subsequent year.

As some schools become increasingly desperate, they will be tempted to recruit those who are most vulnerable to cynical rhetoric about illusory prospects on graduation. The incentive for such mischief is obvious: However unqualified such students might be for the profession, the six-figure loans they need to finance a legal education are available with the stroke of a pen. Revenue problem solved.

Some law professors argue that the trend of recent declines in enrollment is sufficient to create a shortfall in law school graduates by 2015. Maybe they’re right. Time will tell — and not much time at that.

I think it’s more likely that over the next decade, a lot of law professors will find themselves looking for work outside academia. Meanwhile, their best hope could be to run out the student loan program clock long enough for them to retire. Then it all becomes someone else’s problem.

A CASE OF MOTIVATED REASONING

A recent survey, “What Courses Should Law Students Take? Harvard’s Largest Employers Weigh In?” by Harvard Law School Professors John Coates, Jesse Fried, and Kathryn Spier, has assumed a life that its sponsors never intended. For example, a recent Wall Street Journal headline implies that the survey provides a roadmap to success: “Want to Excel in Big Law? Master the Balance Sheet.” Likewise, some cite the survey in taking unwarranted shots at proposals to make law school more experiential.

Such misinterpretations of the Harvard survey might spring from a condition that psychologist Stephan Lewandowsky would call motivated reasoning: “the discounting of information or evidence that challenges one’s prior beliefs accompanied by uncritical acceptance of anything that is attitude-consonant.” In other words, people often see what they want to see, even when it isn’t there.

The HLS survey

Harvard sought curriculum input from an important constituency, namely, some big law firms. The questionnaire went to 124 practicing attorneys at the 11 largest employers of Harvard graduates in recent years, including my former firm Kirkland & Ellis. Among the respondents were 52 litigators, 50 corporate/transactional attorneys, and 22 regulatory practitioners. The tiny non-random sample is not even a representative slice of a typical big law firm practice.

Harvard didn’t ask attorneys to identify law school courses that might improve a student’s chances of getting a job. It couldn’t. The 11 firms represented in the survey hire virtually all new associates from their own second-year summer programs. They base those hiring decisions on first-year grades because, at the time they extend offers, there are no other law school grades to consider. Whatever courses students might take in the second or third years make no difference to their big law firm employment prospects.

Harvard also didn’t ask lawyers to identify courses that might help graduates become equity partners. That would be silly because there are no such courses. Even among Harvard graduates, fewer than 15 percent of those who begin their careers as new associates in big firms will become equity partners many years later.

So what did the survey investigate? The questionnaire could have read: You work in one of 11 big firms that serve corporate America. Your firm already hires many Harvard graduates. What courses can we offer that will make those newbies most useful to you when they start work?

Answering only the questions asked

Even within its narrow scope, the HLS questionnaire limited the range of permissible responses. For example, three questions focused exclusively on courses in “business methods” and “business organizations” (“BM” and “BO” — no laughing). Here’s Question #1:

“HLS has a variety of business methods courses that are geared towards students who have little or no exposure to these areas. For each of the following existing HLS classes, please indicate how useful the course would be for an associate to have taken (1 = Not at all Useful; 3 = Somewhat Useful; 5 = Extremely Useful).”

Respondents had to choose from among seven options: accounting and financial reporting, corporate finance, negotiation workshop, business strategy for lawyers, analytical methods for lawyers, leadership in law firms, and statistical analysis/quantitative analysis. Accounting and financial reporting placed first among all responses; corporate finance was second. Big deal.

Likewise, when asked to look beyond the seven business methods choices in identifying useful courses, respondents predictably chose corporations, mergers & acquisitions, and securities regulation as the top three. For decades, those classes have comprised the heart of most second-year students’ schedules. Again, no news here — and no magic formula that produces success in big law.

The options not offered

As for the misguided suggestion that the survey trashes experiential learning, only one survey question asked attorneys to identify the most useful courses outside the business area. Evidence, federal courts, and administrative law topped the list. But respondents didn’t have the option of choosing trial practice or any other experiential course because they didn’t appear on the questionnaire’s multiple-choice list of permissible answers.

So let’s return to some of the headlines about the HLS study.

Does the survey suggest that students taking business-oriented courses will be more likely to get jobs? No.

Does the survey suggest that students will be more likely to succeed — even in big law — if they take more business-oriented courses? No.

Does the HLS survey deal a blow to proponents of experiential learning? No. (In fact, an experiential option — negotiation workshop — did pretty well, placing third out of seven possible responses to Question #1.)

Desperately seeking something

In the end, any effort to overplay the survey collides with the authors’ concise summary: “The most salient result from the survey is that students should learn accounting and financial statement analysis, as well as corporate finance.” For that conclusion, no one needed 124 big law attorneys to complete an online questionnaire.

As the legal profession makes its wrenching transition to whatever is next, perhaps the unwarranted attention to the Harvard survey reflects a measure of desperation among those searching for answers. Motivated reasoning isn’t making that search any easier.

LESSONS FROM THE BUSINESS WORLD

The current issue of the Harvard Business Review has an article that every big law leader should read, “Manage Your Work, Manage Your Life,” by Boris Groysberg and Robin Abrahams. Unfortunately, few law firm managing partners will bother.

It’s not that big law leaders are averse to thinking about their firms in business terms. To the contrary, the legal profession has imported business-type concepts to create the currently prevailing model. Running firms to maximize simple metrics — billables, leverage ratios, and hourly rates — has made many equity partners rich.

The downside is that the myopic focus on near-term revenue growth and current profits comes at a price that most leaders prefer to ignore. Values that can be difficult to quantify often get sacrificed. One example is the loss of balance between an individual’s professional and personal life.

Looking at the same things differently

The HBR article contradicts a popular narrative, namely, that balancing professional and personal demands requires constant juggling. Over a five-year period, the authors surveyed more than 4,000 executives on how they reconciled their personal and professional lives. The results produced a simple recommendation: Rather than juggling to achieve “work-life balance,” treat each — work and life — with the same level of focused determination.

The most successful and satisfied executives (they’re not mutually exclusive descriptors) make deliberate choices about what to pursue in each realm as opportunities present themselves. In other words, they think about life as it unfolds.

According to the authors, the executives’ stories “reflect five main themes: defining success for yourself, managing technology, building support networks at work and home, traveling or relocating selectively, and collaborating with your [home] partner.”

Professional success

Defining professional success is the key foundational step and not everyone agrees on its elements. That’s no surprise.

But some gender distinctions are fascinating. For example, 46 percent of women equated professional success with “individual achievement,” compared to only 24 percent of men. Likewise, more women than men (33 percent v. 21 percent) defined success as “making a difference.” The gender gap was even greater for those defining success as “respect from others” (25 percent of women v. 7 of percent men) and “passion for the work” (21 percent of women v. 5 percent of men). (Respondents could choose more than one element in defining success, so the totals exceed 100 percent.)

On the other hand, more men than women thought that success was “ongoing learning and development and challenges” (24 percent of men v. 13 percent of women), “organizational achievement” (22 percent v. 13 percent), “enjoying work on a daily basis” (14 percent v. 8 percent). More men also saw success in financial terms (16 percent) than did women (4 percent).

Personal success

For men and women, the most widely reported definition of personal success was “rewarding relationships” (59 percent of men; 46 percent of women). (Surprised that more men than women picked that one?) Most other definitions revealed few gender-based differences (“happiness/enjoyment,” “work/life balance,” “a life of meaning/feeling no regrets”).

But big gender gaps again emerged for those defining personal success as “learning and developing” and “financial success.” In fact, zero women equated “financial success” with personal success, but 12 percent of men did.

Putting it all together

After defining success, the next steps seem pretty obvious: master technology, develop support networks, move when necessary, and make life a joint venture with your partner if you have one. But few law firm leaders create a climate that encourages such behavior. Short-term profits flow more readily from environments that a recent Wall Street Journal headline captured: “When The Boss Works Long Hours, Do We All Have To?” In most big law firms, the short answer is yes, even if the boss doesn’t.

In general, the HBR strategy amounts to tackling life outside your career with the same dedication and focus that you apply to your day job.

A few examples:

Are you becoming a prisoner of technology that facilitates 24/7 access to you? Then occasionally turn it off and spend real time with the people around you.

Are you concerned that you’re missing too many family dinners? Then treat them with the same level of importance that you attach to a client meeting.

These and other ideas aren’t excuses to become a slacker. After all, the interview respondents are high-powered business executives. Rather, they comprise a way to anticipate and preempt problems. As one survey respondent said, people tend to ignore work/life balance until “something is wrong. But,” the authors continue, “that kind of disregard is a choice, and not a wise one. Since when do smart executives assume that everything will work out just fine? If that approach makes no sense in the boardroom or on the factory floor, it makes no sense in one’s personal life.”

That’s seems obvious. But try telling it to managing partners in big law firms who are urging younger colleagues to get their hours up.

Here’s a thought: maybe attorneys should record how they spend their hours at home, too.

TROUBLE IN ALBANY

Recently, Albany Law School has attracted some unwanted publicity, but many other schools should be paying close attention. On February 3, the school offered buyouts to as many as eight tenured professors. That may not sound like a lot, but it’s almost 20 percent of the school’s full-time faculty.

Reversal of Fortune

Notwithstanding its relatively low position in the law school universe (U.S. News rank: #132), Albany Law School enjoyed a nice run from 2005 to 2011 — as did most of its peers. During that period, the school enrolled around 240 first-year students annually. Tuition rose steadily from $30,000 in 2005 to its current $42,000. During the period, student-faculty ratios dropped from 16:1 to 13:1.

But the last few years have been a different story. Even as it accepts almost 70 percent of all applicants, enrollment for the class of 2016 has plummeted to 182 — a 25 percent drop from 2005. The school placed a little more than half of its 2012 graduates in full-time long-term jobs requiring a JD. (As with many schools, the decline in first-year enrollment accelerated after detailed ABA-mandated employment outcomes first appeared in 2012 for the class of 2011.)

Tough Choices

Albany’s new dean, Penelope Andrews, began her tenure on July 1, 2012. Even a thorough understanding of the school’s problematic trend lines could not have prepared her for the challenges she soon confronted.

On December 16, 2013, Daniel Nolan, chair of the Albany board of trustees, circulated an email stating that “relevant financial circumstances facing the School require a headcount reduction, including faculty.”

A week later, at the request of a newly formed (in November 2013) Albany Law School chapter of the American Association of University Professors, Gregory F. Schultz, associate secretary and director of the national AAUP, wrote a lengthy letter to Dean Andrews. Schultz expressed concern that the law school’s claims about economic circumstances didn’t rise to the level of “financial exigency” required to justify terminating tenured faculty. Instead, he wrote, Albany’s threatened action appeared to be a pretext for steps that “would eviscerate tenure at the Albany Law School and, with it, the protections for academic freedom.”

He said, She said

According to JDJournal, “one of the professors at the school said that there is a ‘small but vocal minority’ of faculty at the school who want standards lowered in an effort to increase enrollment. This would then prevent layoffs…. It’s a very selfish, selfish endeavor. They are really trying to save their jobs, but they’ve ginned this up to make it look like we are denying academic rights.”

The New York Law Journal reported that “several angry Albany Law School professors deny the faculty ever suggested the school should lower standards to boost enrollment and avert layoffs.” On February 3, 2014, the board of trustees reportedly quashed the idea anyway:

“A review of our declining bar passage statistics (we are now the second lowest law school in New York State for bar passage), combined with the extremely difficult employment market for our graduates, compels us to believe that we must focus on quality of applicants, not quantity. To admit students in order to increase revenues due to projected operating deficits would be both unethical and in violation of ABA standards.”

A Way Out?

Presumably, offering voluntary buyouts to tenured professors could solve the problem for now. If a sufficient number of faculty members accept, layoffs won’t happen. That would defer for another day the fight over whether the school truly faces “financial exigency” justifying involuntary terminations of tenured faculty.

Others can debate whether Albany is operating at a loss and/or should draw down it’s endowment to cover shortfalls. More interesting questions relate to any law school’s possible responses to the larger phenomenon of declining applicant pools.

Some Albany Law School professors reacted with indignant outrage at the suggestion that a colleague might have urged the school to counter declining applications with lower admission standards. But the fact is that many schools have responded in exactly that way. Overall acceptance rates have risen from 50 percent in 2003 to 75 percent in 2012. It’s a cynical strategy, but it keeps seats filled with tuition-paying student dollars from federally-backed loans.

Other schools are cutting costs and economizing where possible. Those efforts are laudable, but they are short-term fixes. Any long run solution requires the involvement of tenured faculty who now have a choice: be part of the solution or become a growing part of the problem. Tenure is an important and valuable aspect of higher education. But it won’t be worth much to those whose institutions disappear.

In the end, the question is whose interests matter most. Dean Andrews deserves praise for confirming what sometimes gets lost in the noise as various stakeholders scramble to preserve their positions in the legal academy:

“Cutbacks are very, very hard. But what is motivating everything about what I’m doing is my student-centric approach,” Dean Andrews said. “Albany Law School and law schools exist to train students and it’s all about the students.”

Indeed it is.

A STORIED LATERAL HIRE

“Are Laterals Killing Your Firm?” is the provocative title of The American Lawyer‘s February issue. The centerpiece is a thoughtful article, “Of Partners and Peacocks,” by Bill Henderson, professor at Indiana University Maurer School of Law and Director of the Center on the Global Legal Profession, and Christopher Zorn, professor of political science, sociology, crime, law, and justice at Penn State University.

Henderson and Zorn conclude that “for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.” As I observed in last week’s post, most big law managing partners have conceded as much in anonymous surveys. Even so, the drumbeat of lateral hiring to achieve top line revenue growth persists, even in the face of dubious bottom line results.

A timely topic

One lateral hire outcome became particularly fascinating this week. On the way out of the top spot at DLA Piper is global co-chair Tony Angel. You might remember him from one of my earlier articles, “The Ultimate Lateral Hire.”

The American Lawyer 2012 Lateral Report identified Angel as one of the top lateral hires of the year — “a typically bold and iconoclastic play by DLA. For a firm to bring in a former managing partner from another firm is rare,” Am Law Daily reporter Chris Johnson wrote in March 2012. According to the article, the 59-year-old Angel was to receive $3 million a year for a three-year term.

With great fanfare, DLA touted its coup. “He’s got great values and he believes in what we’re trying to do and he shares our view of what’s going on in the world,” boasted then co-chair Frank Burch.

At the time, DLA’s press release was equally effusive: “Tony will work with the senior leadership on the refinement and execution of DLA Piper’s global strategy with a principal focus on improving financial performance and developing capability in key markets.”

Predictably, law firm management consultants also praised the move:  “It’s hard to get a guy that talented. There just aren’t that many people out there who have done what he has done,” said Peter Zeughauser. Legal headhunter Jack Zaremski called it a “brave move” that “might very well pay off.”

On second thought…

The current publicity surrounding Angel’s transition is decidedly more subdued. According to a recent Am Law article, Angel and his fellow outgoing global co-chair, Lee Miller, “will remain with the firm in a senior advisory capacity, the details of which will be worked out later this year.”

Two years, plus another 10 months as a lame duck, is a remarkably short period to occupy the top spot of any big firm. Only those who work at DLA Piper can say whether Angel’s brief reign was a success (and why it’s over so soon). Not all of them are likely to provide the same answer.

Separating winners from losers

In 2008, more than three years before Angel’s arrival, the firm’s non-equity partners found themselves on the receiving end of requests for capital contributions. According to Legal Week, “275 partners contributed up to $150,000 each to join the equity.” The move was “intended to motivate partners by granting them a direct share of the firm’s profits, as well as an equal vote in the firm’s decisions.” But it also helped “DLA reduce its bank debt.”

That equitization trend continued during Angel’s tenure. In 2012, the firm’s non-U.S. business reportedly added capital totaling 30 million pounds Sterling “as a result of the move to an all-equity partnership structure.” Again according to Legal Week, the firm’s non-equity partners in the UK, Europe, and Asia Pacific paid on average 61,000 pounds Sterling each to join the equity.”

Perhaps most new equity partners discovered that their mandatory bets became winners. After all, gross profits and average profits for the DLA Piper verein went up in 2012. Then again, averages don’t mean much when the distribution is skewed. According to a Wall Street Journal article three years ago, the internal top-to-bottom spread within DLA Piper was already nine-to-one.

Anyone looking beyond short-term dollars and willing to consider things that matter in the long run could consult associate satisfaction rankings for cultural clues. In the 2013 Am Law Survey of Midlevel Associate Satisfaction, DLA Piper dropped from #53 to #77 (out of 134 firms). That’s still above the firm’s #99 ranking in 2011.

The more things change

Management changes are always about the future. It’s not clear how, if at all, incoming co-chair Roger Meltzer’s vision for DLA Piper diverges from Angel’s. Age differences certainly don’t explain the transition; both men are around 60. Likewise, both have business orientations. Meltzer practices corporate and securities law; Angel joined DLA Piper after serving as executive managing director of Standard & Poor’s in London.

Maybe it’s irrelevant, but Meltzer and Angel also have this in common: Both are high-powered lateral hires. Angel parachuted in from Standard & Poor’s in 2011; Meltzer left Cahill, Gordon & Reindel to join DLA Piper in 2007. It makes you wonder where these guys and DLA Piper will be a few years from now.

BIG LAW LEADERS “GET IT”? SERIOUSLY?

biglaw-450

This article won the “Big Law Pick of the Week.” BigLaw‘s weekly newsletter reaches the world’s largest law firms and the corporate counsel who hire them.

The concluding lines of this year’s Client Advisory from Hildebrandt/Citi are defensive, if not petulant:

“Unlike the commentary of many observers of the legal profession suggesting that today’s senior management do not ‘get it,’ we believe the large law firms today have every capability to adjust to the changing market….”

That nifty non sequitur is also a rhetorical sleight of hand. Having “every capability to adjust” is not the same as actually adjusting. The suggestion that today’s senior law firm leaders “get it” implies that they are responding in healthy and productive ways to a period of dramatic change.

Well, most of them aren’t. Instead, they’re maximizing current income at great expense to the future of their institutions. But don’t take my word for it; take theirs.

Facts get in the way

Consider the dominant big firm strategy: lateral hiring and mergers to achieve top line revenue growth. In Citi’s 2012 Law Firm Leaders Survey, senior leaders self-reported that only 60 percent of their laterals were above “break even.” For 2013, the rate dropped to 57 percent. As for mergers, anyone who thinks bigger is always better should look at the decline in operating margins that has followed most recent big firm combinations. That phenomenon is called diseconomies of scale.

Moreover, even the self-reported “success rate” is inflated. It takes years to determine the true financial impact of a lateral hire, so most managing partners touting those efforts actually have no idea whether their recent acquisitions will benefit their firms’ bottom lines. In fact, if leaders already admit to mediocre results for the laterals they personally sponsored, imagine how much worse the reality must be.

Beyond the numbers

Notwithstanding previous failures on a massive scale, managing partners are still pursuing growth for the sake of growth. Unfortunately, it can be a loser in ways that go far beyond mere financial losses. The negative impact on a firm’s culture, morale, and long-term institutional stability can be devastating.

For example, the 2013 Hildebrandt/Citi Client Advisory reported that between 2007 and 2011, law firms increased the number of lateral partners by 10 percent. Meanwhile, homegrown promotions to partner during the period dropped by 21 percent. That trend is undermining already low associate morale.

The lateral hiring frenzy has demoralized partners, too. A loss of community afflicts partnerships of people who don’t know each other. That’s one reason that forty percent of respondents to Altman Weil’s May 2013 survey of firm leaders said their partners’ morale was lower than it was at the beginning of 2008.

Another reason for diminished partner morale is the way lateral hiring has contributed to higher internal equity partner compensation spreads. Bidding to attract so-called rainmakers has pushed the high end of the range up. So have existing partners who threaten to test the lateral market. In that zero sum game of dividing the partnership pie, the bottom end of the range has moved down. (For an example, take a look at James B. Stewart’s New York Times profile of a former Dewey & LeBoeuf partner who reportedly earned $350,000 while his “protector” earned $8 million.)

More collateral damage ignored

Accompanying the lateral hiring frenzy and short-term metrics that drive the prevailing big firm business model are destructive client silos. More than 70 percent of law firm leaders responding to the Altman Weil survey said that older partners were hanging on too long. In the process, they’re hoarding clients, billings, and opportunities in ways that block the transition of firm business to younger lawyers.

But leadership’s response to this problem is perverse: 80 percent of managing partners admit that they plan to continue tightening equity partner admission standards.

The ongoing failure of leadership also reveals itself in managing partners’ overall agendas. When asked to prioritize goals for their firms, they placed “client value” number eight — behind (1) increasing revenue, (2), generating new business, (3) growth, (4) profitability, (5) management change, (6) cost management, and (7) attracting talent.

Closer to the mark

In contrast to the Hildebrandt/Citi 2014 Client Advisory, the Georgetown Law Center/Peer Monitor 2014 Report on the State of the Legal Profession concludes that most law firm leaders don’t “get it” at all:

“[G]rowth for growth’s sake is not a viable strategy in today’s legal market…Strategy should drive growth and not the other way around. In our view, much of the growth that has characterized the legal market in recent years fails to conform to this simple rule and frankly masks a bigger problem – the continuing failure of most firms to focus on strategic issues that are more important for their long-term success than the number of lawyers or offices they have.”

The report explains that, in an effort to justify the counterproductive urge to grow, “law firm leaders feel constrained to articulate some kind of strategic vision…and the message that we need to ‘build a bigger boat’ is more politically palatable than a message that we need to fundamentally change the way we do our work.”

Similarly, the author of the 2013 Altman Weil survey, Thomas Clay, says that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”

Even clients recognize that most outside law firms aren’t adapting to new realities. An October 2013 Altman Weil Survey asked chief legal officers to evaluate the seriousness of their outside law firms in changing the legal service delivery model to provide greater value. On a scale from zero (not at all serious) to ten (doing everything they can), “for the fifth year, the median was a dismal ‘3.’”

Perhaps the authors of the Hilebrandt/Citi 2014 Client Advisory actually believe that most of their big law managing partner constituents “get it.” No one else does.

SPECTACULAR LIES

Question: “What happens after you’re kicked out of Harvard Law School for creating a phony transcript that inflates your grades?”

Answer: “You get an MBA from Stanford…and you get rich.”

Tragically, a real person, Mathew Martoma, lies at the center of that joke. He’s on trial for what the prosecution has called “the most lucrative insider trading scheme ever charged.”

When ethics is just a word

According to Bloomberg News, Martoma entered Harvard Law School in 1997 as Ajai Mathew Mariamdani Thomas. Born in Michigan and raised in Florida, he graduated from Duke University in 1995 with a degree in biomedicine, ethics, and public policy. Yes, ethics.

For the next two years, he worked at the National Human Genome’s Office of Genome Ethics in Bethseda, where he wrote three medical-ethics papers. Then he enrolled at Harvard Law, where he was a semifinalist in the school’s annual moot court competition, editor of the Journal of Law and Technology, and co-founder of the Society of Law and Ethics. Yes, ethics, ethics, and more ethics.

A bad turn

At Harvard, Thomas received “excellent grades,” but apparently not sufficiently excellent for him to show his parents (or so he later told a Harvard panel investigating his misconduct). So he created a phony transcript: Civil Procedure went from B to A; Contracts from B+ to A; and Criminal Law from B to A. He didn’t change his grades in Torts (B+), Negotiation (A-), or Property (A).

The fake transcript became the most important element in Thomas’ applications for a federal appellate court clerkship. A clerk for one of the judges thought something about the transcript seemed amiss and contacted Harvard’s registrar. The registrar confronted Thomas. According to the investigating panel’s subsequent report, Thomas told the registrar, “It was all a joke.”

Appearing before the Harvard panel, he dropped the “joke” defense. Instead, the panel noted that “Mr. Thomas was apparently under extreme parental pressure to excel academically.”

Thomas appealed the Harvard panel’s decision recommending his dismissal. According to the government’s motion in his current insider trading trial, he then fabricated a forensic report in support of his administrative appeal. The Harvard Law School faculty voted to expel him on September 17, 1999.

A fresh start

By 2001, Ajai Thomas had changed his name to Mathew Martoma and he was on his way to Stanford Business School. In 2003, he received an MBA and went to work for a Boston hedge fund. In 2006, he joined SAC Capital.

According to the NY Times, in January 2009 Martoma received a $9.4 million dollar bonus for his prior year’s performance in SAC’s healthcare group. During 2008, he’d made trades in Wyeth and Elan stock that netted his employer a lot of money, but also led to his current legal difficulties. Bloomberg reports that SAC fired him in September 2010 because, as one SAC executive allegedly put it, he was a “one-trick pony” whose trades in 2009 and 2010 lost money. A federal jury will decide his fate.

For your consideration

Wholly apart from whether Martoma is guilty of insider trading, his story provides an opportunity to contemplate issues that transcend him personally. For example, when should adult children stop blaming parents for their own misbehavior? Relying on that excuse blocks introspection that leads to personal improvement.

Likewise, did Martoma’s application to Stanford acknowledge his expulsion from Harvard? If so, how could Stanford have admitted him? If not, will Stanford rescind his MBA? The answers could have implications for the integrity of a world-class educational institution.

Finally, what insight into institutional behavior does Martoma’s experience provide? Harvard Law School gave him due process in a lengthy administrative hearing, deliberated carefully, and expelled him. The need to preserve the institution’s long-term values guided its conduct.

In contrast, SAC Capital apparently focused on short time horizons. A good year got Martoma big bucks; a bad year thereafter got him fired.

When it comes to their temporal mindsets, most big law firms today look more like SAC Capital than Harvard Law School. Following the business world’s approach — maximizing short-term results — has produced stunning equity partner profits. But sometimes, current profits have come at the expense of long-term values that don’t lend themselves to a simple metric. Those values include collegiality, loyalty, mentoring, institutional stability, and even client value.

So the next time someone says that the law is just another business, ask yourself if that’s a good thing. Consider whether some aspects of the law as a profession are worth preserving. And think about the unfortunate journey of Mathew Martoma.

“THE PARTNERSHIP” — SPECIAL PROMOTION

For a limited time only (until Sunday night, January 26), the Kindle version my novel, The Partnership, is available FREE on Amazon. Here’s the link: http://www.amazon.com/Partnership-Novel-Steven-J-Harper/dp/0984369104/ref=la_B001JSAEF8_1_4?s=books&ie=UTF8&qid=1390403837&sr=1-4

THE ONGOING LAW SCHOOL BAILOUT

Recently, Senators Dick Durbin (D-IL), Jack Reed (D-RI), and Elizabeth Warren (D-MA) introduced the “Protect Student Borrowers Act of 2013.” The bill would allow the Secretary of Education to require that colleges and universities pay a penalty for federal student loans in default. The penalty would increase with the school’s default rate.

Default is too long to wait before creating a better nexus between educators’ incentives and their graduates’ fate. Thousands of recent law graduates are living with the consequences of a system that immunizes schools from financial accountability for their students’ poor employment outcomes. Eighty-five percent of today’s newest lawyers have six-figure law school debt. Only about half of all 2012 graduates found full-time long-term jobs requiring a JD. The most recent Bureau of Labor Statistics employment report indicates that between December 2012 and December 2013, employment in the “all legal services” category actually declined by 1,000 people.

Demand down; supply still growing

As the profession was losing a thousand jobs last year, law schools graduated a record number of new lawyers — 46,000 — and big classes are in the pipeline. Sure, law school applications are down, but acceptance rates have gone way, way up to compensate. Recent BLS estimates suggest an ongoing lawyer glut for years to come. (For a more detailed analysis, take a look at Matt Leichter’s recent article in Am Law Daily.) And in the midst of this disaster, law school tuition keeps increasing. It’s all quite perverse.

Unfortunately, it’s also a predictable consequence of structural incentives. Most university administrators (and their law school deans) run their institutions as businesses. In the current system of financing higher education, that approach produces a myopic focus: maximizing short-term tuition revenues by filling classrooms. Added encouragement comes from U.S. News rankings criteria that, for example, actually reward expenditures regardless of added value or lack thereof. The vast majority of students borrow enormous sums to pay tuition. But — and here’s where educational institutions lack the constraints that they would encounter as true businesses — any later failure to repay those loans never becomes the school’s problem.

Instead, virtually all student loans come with the backing of the federal government. In case of default, the schools remain protected. So far, graduate student default rates have remained below those for colleges and vocational schools, but across the board, all rates are trending higher. (I wonder if low JD default rates are attributable, in part, to lawyers’ better understanding of the procedural steps that can forestall default. Attorneys also grasp the counterproductive futility of defaulting: educational debt survives bankruptcy and forcing the government to pursue a default just adds monetary penalties and collection costs to the tab.)

IBR is no panacea

Income-based tuition repayment plans may become an important potential relief valve to some indebted graduates. But IBR is new and it comes with lots of caveats. For example, during the time that a graduate remains in the program, interest on his or her overall debt continues to accrue. Exiting the system before completing the requisite repayment period (typically 25 years; 10 years for public service jobs) can produce an even greater debt than existed upon graduation.

Those who make it all the way to the end of the repayment period are off the hook for their loans and accrued interest, but debt forgiven through IBR is considered taxable income. If Congress doesn’t fix that problem, the result will be a big tax bill for a person who, by definition of ongoing participation in the IBR program, can’t afford it. Moreover, the forgiven amounts still have to come from the federal treasury at taxpayer expense, so there never was or will be a free lunch – except for the schools that received tuition but thereafter had no financial skin in the game. It has the feel of a law school bailout, doesn’t?

A better way

Maybe this three-step approach would help to restore a functioning market: 1) allow educational loans to become dischargeable in bankruptcy; 2) in the course of such a proceeding, require the bankruptcy court to determine whether educational debt was a significant factor in the debtor’s need for bankruptcy protection; and 3) in those cases where it is such a factor, permit the federal government guarantor to seek recompense from the educational institution whose conduct lies at the heart of the mess. (Requiring need-blind admissions as a prerequisite to participation in the federal loan guaranty program generally might counteract a school’s temptation to bias admissions in favor of those who can afford to pay.)

Most people profess confidence in free markets — some with an evangelistic zeal. If they really want to give the market a chance to work in the student debt setting, they’ll support a serious effort to cure the system’s current failures. Personal educational debt currently exceeds $1.2 trillion — more than all consumer credit card debt combined. Every day, that bubble is growing. Just ask a law student.

UPCOMING EVENTS

I have two appearances on MONDAY, JANUARY 13, 2014:

9:00 AM – 10:00 AM (EST)
New Hampshire Public Radio
“The Exchange”
(listen at: http://nhpr.org/post/law-schools-enrollment-problem)

And 4:00 PM – 5:50 PM (CST)
Northwestern University Law School
Guest speaker in course on “Pro Bono in Large Firms”
McCormick 371
375 E. Chicago Avenue
Chicago, IL (rescheduled from January 6 due to university closing)

ANOTHER REVIEW OF “THE LAWYER BUBBLE”

The latest review of my book, The Lawyer Bubble – A Profession in Crisis (Basic Books, 2013) appears in the January 5, 2014 edition of the Pittsburgh Post-Gazette: “[Harper’s] passion and varied experience make The Lawyer Bubble an engaging, persuasive read.”

You can read earlier reviews here.

UPCOMING EVENTS

I’m the invited guest speaker at the Tenth Annual Judge William Ingram Memorial Symposium, jointly sponsored by the Heafey Center for Trial and Appellate Advocacy and the Santa Clara University School of Law and presented by the William A Ingram Inn, American Inns of Court.

WEDNESDAY, JANUARY 8, 2014, 6:30 PM – 8:00 PM (PST)
Tenth Annual Ingram Symposium
Santa Clara Law School
500 El Camino Real
Santa Clara , CA

Because extreme cold closed the entire Northwestern University on MONDAY, JANUARY 6, my previously scheduled guest appearance at the Law School on that date will be rescheduled.

ART, LIFE, AND THE GOOD WIFE

The writers of the hit television series, The Good Wife, are onto something. Recently, Alicia Florrick and several senior associates left Lockhart & Gardner to form a new firm. They took a big client with them.

Art imitates life

One scene in particular is a reminder that fiction can reveal profound truth. Sitting in his office, Will Gardner concludes that Florrick and other former colleagues betrayed him just by leaving. He resolves that he’s going to get even by making his firm the biggest in the country: “I’m going to destroy the competition.”

Gardner wasn’t looking for a few talented attorneys who would serve particular client needs while enhancing the culture of his institution. He wasn’t seeking to shore up an area of lost expertise. He wasn’t even pursuing growth because it would benefit his firm financially. Rather, he wanted to preside over a big firm that would be significant – even intimidating – solely because of its bigness.

He instructed fellow partners to target rainmakers at other firms as potential lateral hires, announced the opening of a New York, and rolled out the firm’s new logo — “LG.” He wanted growth for the sake of growth. No other plan. No strategic vision. No institutional mission beyond getting bigger.

Real-life managing partners wouldn’t be so stupid, right?

Many large law firms are making news with their efforts to grow. This phenomenon is somewhat perplexing because law firm management consultants have reported for a long time that there are no economies of scale in the practice of law. In fact, they say, maintaining the infrastructure necessary to support growth pushes the bottom line the wrong way.

But in today’s no-growth era, many managing partners worry more about the top line. They want to acquire books of business through aggressive lateral hiring of other firms’ rainmakers and, in some cases, the ultimate lateral event – merger with another firm.

A path to where, exactly?

For the profession overall, the lateral hiring/merger craze is a zero-sum game. For individual firms asserting that clients somehow drive the process, it’s dubious at best.

“I’m pretty skeptical about the value these big mergers give to clients,” IBM’s general counsel, Robert Weber, said recently. “I don’t know why it’s better to use a bigger firm.” And that’s from a guy who spent 30 years at Jones Day — one of the biggest law firms in the country — before joining IBM seven years ago.

In The Good Wife, creating a big firm is part of Will Gardner’s personal vendetta. In the real world, vindictiveness isn’t the reason that most managing partners build bigger firms. But personal ego is often part of the equation. Many leaders see themselves as modern-day versions of Alexander the Great. The desire to stand atop an empire is irresistible.

In the coming weeks, Gardner will probably press ahead to create a large enterprise where name recognition alone confers an illusory prestige. Even if his fellow partners are inclined to question or, God forbid, disagree, they won’t speak up.

If Alicia Florrick were still there, she might have had the courage to challenge him. After all, she and Will had a steamy affair and her husband is now Illinois Governor-elect. But Alicia is gone and Will rules his firm with an iron fist, bare and unadorned with a velvet glove. At Lockhart & Gardner — as at many big firms – dissent is not a cherished partnership value.

There’s one more interesting aspect of Gardner’s battle cry. He hasn’t learned from his mistakes. In season two, Lockhart & Gardner merged with Derrick Bond’s Washington, DC firm. The clash of cultures and personalities nearly destroyed Gardner’s firm. Like all talented lawyers possessing the skill to distinguish away adverse precedent that doesn’t suit their current views, Gardner must think that this time will be different.

Luckily for him, Lockhart & Gardner is fictional. Notwithstanding his poor leadership decisions, the writers can craft a story line that will keep him and his firm going until the show’s ratings fall. Some real law firms won’t be as fortunate.

Failure of Leadership

The American Lawyer’s annual leaders survey reveals that most law firm managing partners are living in denial. When the changing world intrudes in ways that they can no longer ignore, another psychological state — cognitive dissonance — sets in as they try simultaneously to hold contradictory ideas in their heads. As a consequence, what is happening today at the top of most big firms is the antithesis of leadership.

Denial

In the Am Law leaders survey, 70 percent of respondents said that the sluggish demand for legal services in 2013 would continue through 2014. That’s not surprising. In 2012, only a fourth quarter surge saved many firms from the abyss. The unusual circumstances producing that phenomenon aren’t present this year.

If 2014 will be more of the same as firms compete for business in a zero-sum game, how do individual managing partners size up their situations? Unrealistically. Two-thirds of the 105 leaders responding to the survey of Am Law 200 firms were “somewhat optimistic” about the prospects for their firms in 2014. Another ten percent were “very optimistic.”

More than 80 percent expect profits per partner to grow in 2014 — and one-fourth of those expect growth to exceed five percent. They’ll use the same old model — 98 percent expect billable hour increases, even though three-fourths of respondents said their realization rates for 2013 are 90% or worse. They also said that only 18 percent of their matters include an alternative fee arrangement.

Cognitive dissonance

They can’t all be right about 2014 — for which an overwhelming majority say that “things will be tough for almost everyone else, but my firm will thrive.” More importantly, most of them won’t be right. So what are today’s leaders doing to prepare their firms for more of the harsh reality that they’ve already experienced for the past several years? Not much.

A staggering 85 percent of managing partners said they were somewhat worried (61 percent) or very worried (24 percent) about partners who are not billing enough hours. Almost 70 percent are concerned that some partners are staying on too long before retirement.

An Altman Weil Survey found similar results last summer. Seventy percent of law firm leaders said that older partners were hanging on too long. In the process, they are hoarding clients, billings, and opportunities in ways that impede the transition of firm business to younger lawyers. Yet the drive to maximize short-term profits led 80 percent of firm leaders to admit that they planned to respond to current pressures by tightening equity partner admission standards. Pulling up the ladder on the next generation is not the way to motivate the young talent needed to solve the transition problem.

Morale

All of this may be working well for some partners at the top of what remains a leveraged pyramid business model. But even among the partners, all is not well. The Altman Weil Survey reported that 40 percent of law firm leaders thought partner morale was lower than it had been in 2008. In other words, deequitizations and partnership purges during the Great Recession haven’t produced greater happiness in the survivor cohort.

The Am Law Survey confirms that this downward trend continues. In 2012, 63 percent of managing partners characterized the morale of their partners as “somewhat optimistic.” In 2013, it dropped to 56 percent — near the 2009 nadir of 54 percent.

Leadership lemmings

Every survey reveals that most big firm leaders have their eyes on a single mission: growth. Whether through aggressive lateral hiring or mergers and acquisitions, some managing partners are cobbling together entities that aren’t really law firm partnerships. They’ve forgotten that a sense of community and common purpose is essential to maintaining organizational morale. They’ve also forgotten that no law firm is better than the quality of its people.

Most leaders also acknowledge that a myopic growth strategy imposes significant financial and other costs on their institutions — overpaying for so-called rainmakers who are less than advertised; sacrificing the stability that comes from a cohesive culture in exchange for current top line revenues; incentivizing partners to hoard clients because billings determine compensation and client silos facilitate lateral exits; discouraging the development of talent that should comprise the future of the firm.

As managing partners build empires that they hope will be too big to fail, they might spend a little time considering whether their denial and cognitive dissonance are producing entities that are too big to succeed.

THE NEWEST BIG LAW PARTNERS SPEAK

A recent survey of associates who became partners in their Am Law 200 firms between 2010 and 2013 produced some startling results. The headline in The American Lawyer proclaims that new partners “feel well-prepped and well-paid.” But other conclusions are troubling.

More than half (59 percent) of the 469 attorneys responding to the survey were non-equity partners. That’s significant because for them the real hurdle has yet to come. Most won’t advance to equity partnership in their firms. But even the combined results paint an unattractive portrait of the prevailing big law firm business model.

Lateral progress

It should surprise no one that institutional loyalty continues to suffer as the leveraged big law pyramid continues to depend on staggering associate attrition rates. According to the survey, almost half of new partners said that “making partner is nearly impossible.”

It’s toughest for home grown talent. Forty-seven percent of new partners switched firms before their promotions, most within the previous four years. An earlier survey of 50 Am Law 200 firms made the point even more dramatically: 59 percent of those who made partner in 2013 began their careers elsewhere. Long ago, a lot of older partners became wise to this gambit. They learned to hoard opportunities and preserve client silos as the way to move up and/or acquire tickets into the lucrative lateral partner market.

Somewhat paradoxically in light of their lateral paths into the partnership, 90 percent of new partners thought that commitment to their firms was of great or some importance as a factor in their promotion to partner. Yet almost 60 percent said that, since making partner, their commitment to the firm had decreased or only stayed the same.

Why don’t they feel like winners?

More than 80 percent of respondents thought that the “ability to develop and cultivate new clients” was “of great or some importance” in their promotion to partner. Yet more than half of new partners said that they received no formal training in business development.

Other results also suggest that a big law partnership has become an increasingly mixed bag. Almost eight out of ten said their business development efforts had increased since making partner. How did they make room for those activities in their already full workdays as “on-track-for-partner associates”? Eighty-three percent reported that time with their family “had decreased or stayed the same.” More than half said that control of their schedules had decreased or stayed the same. Making partner doesn’t seem to help attorneys achieve the kind of autonomy that contributes to career satisfaction and overall happiness.

The meaning of it all

More than 60 percent of new partners were satisfied or very satisfied with their compensation. Maybe money alone will continue to draw the best law graduates into big firms. A more important question is whether they will stay.

Most partners running today’s big firms assume that every associate has the same ambition that they had: to become an equity partner. Meanwhile, they’ve been pulling up the ladder on the next generation. Leverage ratios in big firms have doubled since 1985; making equity partner is now twice as difficult as it was then. Does anyone really believe that the current generation of young attorneys contains only half the talent of its predecessors?

The law is a service business. People are its only stock in trade. For today’s leaders who fail to retain and nurture young lawyers, the future of their institutions will become grim indeed. As that unfortunate story unfolds, they will have only themselves to blame. Then again, if these aging senior partners’ temporal scopes extend only to the day they retire, perhaps they don’t care.

“I AM A DICTATOR.”

Some people think that law professors are boring. A dean in Cleveland is proving them wrong.

A year ago, Case Western Reserve Law School Dean Lawrence Mitchell burst onto the national scene with a New York Times op-ed selling a law degree as a great deal. Shortly thereafter, he gave a Bloomberg Law interview in which he continued to press his case. For his efforts, Mitchell took center stage in my article, “The Law School Story of the Year – Deans in Denial.”

Well, he-e-e-e-e’s b-a-a-a-a-c-k! Mitchell is now the leading man in what is becoming a tragedy for his school.

The principal antagonists

Raymond S.R. KU, became a tenured professor at Case in 2003, co-director of the Center for Law, Technology & the Arts in 2006, and associate dean for academic affairs in 2010. On Halloween 2013, Ku filed an amended complaint against Lawrence Mitchell and Case Western Reserve University for alleged retaliation because he opposed “Dean Mitchell’s unlawful discriminatory practice of sexually harassing females in the law school community.”

Lawrence Mitchell became dean in 2011. The complaint alleges that he arrived from George Washington University Law School with some personal baggage, including several marriages culminating in divorces, one of which involved a student. If the allegations about his conduct after becoming dean at Case are true, his behavior was both stupid and reprehensible. (Spoiler alert: the details are less titillating than most voyeurs might like — and the juiciest stuff is hearsay. UPDATE: Dean Mitchell has moved to strike many of the allegations as “immaterial, impertinent, and scandalous.)

Hubris revealed?

Buried in the salacious allegations that have generated media attention is paragraph 86 of the amended complaint: “In relation to the performance of his duties as dean of the Case Law School, Dean Mitchell stated vehemently, ‘I am a dictator.'”

Allegations aren’t evidence. Maybe he never said it. But what if he did? Maybe he was joking. Or maybe he believed it. Or, worst of all, maybe it was true.

In many respects — from framing a school’s mission to creating annual budgets to doling out office assignments — deans wield enormous power. But the best deans aren’t dictators; they’re consensus builders. They have line accountability to university provosts, presidents and trustees; however, they also have to deal effectively with students, alumni, and faculty. Any dean who likens his role to that of a dictator eventually becomes a problem for his institution.

Dollars behind the drama?

As the controversy swirls around Mitchell, a very good law school suffers. Case graduated 223 new attorneys in 2010. The entering first-year class of 2013 includes fewer than half that number — 100. Apparently, Mitchell’s year-end sales pitch landed on deaf ears.

In his Bloomberg Law interview last January, Dean Mitchell said, “Of course, we’re running a business at the end of the day.” From that perspective, perhaps Case University’s central administration doesn’t view things as badly as Case’s 1L numbers might suggest.

Specifically, there’s gold in law school LLM students, and Case has 85 of them entering its program this year. For a school with only 100 first-year JD students, that’s a lot. (The University of Chicago has 196 entering JD-students and 70 LLM-students.) In contrast to more extensive financial aid available for JD students, those seeking an LLM at Case are eligible only for “a limited number of merit scholarships…in the form of a partial reduction for tuition.”

What lies ahead?

Perhaps Mitchell’s business plan has been to follow the money, focusing on the lucrative LLM recruits. Maybe that’s his vision for the school as a profit-maximizing venture. Maybe that’s precisely the direction that his bosses want him to take. Maybe Case’s central administration has given Mitchell such latitude to wield power that he feels comfortable boasting about it. Or, as I suggested at the beginning, perhaps there’s no substance to any of the claims against him.

If it turns out that Mitchell’s superiors are rewarding what they regard as “business success” by allowing him to run the school as a dictator, they have forgotten an important truth. Sometimes dictators get deposed — especially if they’re defendants in lawsuits.