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I am beyond a rank!
Join Date: Mar 2003
Location: A pool of my own vomit
Posts: 734
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Zager/The Last Days of Brobeck
Fascinating article. I can't wait 'til the book comes out. Loved the frequent mentions of Zager, from him showing up at the meeting with a ML baseball cap and then him being the final deal-killer.
The Last Days of Brobeck
A few partners made a last-ditch effort to save the firm but too many of their colleagues were jumping ship.
Brenda Sandburg
The Recorder
04-11-2003
On the afternoon of Feb. 2, a Sunday, some 50 partners squeezed into Brobeck, Phleger & Harrison's San Francisco conference room to hear Stephen Snyder's plan to salvage the firm.
The room didn't have enough chairs, and half-million-dollar-a-year partners climbed onto countertops and crouched on the floor to hear his pitch.
Snyder's plan appears to have been a relatively simple one. He said he believed the firm had solid assets and enough lawyers to convince Citibank to back a reconstituted firm. Expressions of approval rippled through the conference room. "Everyone said if the bank provided financing of course they would" be willing to stick together, said partner Franklin "Brock" Gowdy.
As partners gathered in Brobeck's conference room that Sunday, the optimistic among them were taking the offensive. Snyder, for one, had spent his entire 31-year career at the firm and had a strong emotional attachment to Brobeck. He wasn't prepared to let the firm go without a fight.
"I was very sad to see this happen," Snyder said of the firm's dissolution. "I believed the basic economics of the firm were sound.
"I felt it would be horrible if someone didn't try to do this," he said.
The Hail Mary pass to save the firm is just one of the details now beginning to emerge about Brobeck's collapse. Nine weeks after the firm crashed, it's also clear that an even smaller group of partners than previously reported made the critical decisions that led to dissolution. Also coming to light are the lengths Morgan, Lewis & Bockius went to in its efforts to keep rainmakers from slipping away, and the deep anger and shock among top partners as they learned of the merger's collapse and the firm's demise.
"Old-line Brobeckians believe it was a terrific law firm and institution," said partner Ronald Moskovitz. "A great institution like Brobeck shouldn't disappear like this overnight from the face of the earth."
Tracing the last few weeks of the firm, it's now clear some partners were blinded by optimism, placing their trust in a merger with another firm and the loyalty of top-earning partners. Others, however, didn't believe Brobeck's problems could be turned around and prepared to jump ship. The firm's survival depended on key partners staying with the firm and a certain communal acceptance of the idea that Brobeck could stay afloat.
Neither happened.
Within a day or two of the Sunday partner meeting, Snyder, along with bankruptcy partners G. Larry Engel and Frederick Holden Jr., pitched their plan to Citibank. "I told them what the economics were, and they said they would consider it," Snyder said. "But there needed to be a certain critical mass."
Obviously, critical mass was something impossible for Snyder and his colleagues to achieve. In fact, just two days after the meeting, it was clear to Snyder that it wasn't worth taking a plan back to the bank. Partners were jumping ship en masse, many of them because of worries about their personal liability for Brobeck's debts. That liability, many said, might follow them to a new Brobeck.
"Those who expressed high interest on Sunday said by Tuesday or Wednesday that they were afraid," about the liability, Snyder said. "And others got new jobs."
Snyder's frantic attempt to save the firm shows the tumult at Brobeck during its final days. Coping with a $90 million debt and a flood of partner defections, Brobeck had pinned its hopes on a merger with Philadelphia-based Morgan, Lewis. When that deal fell through, Brobeck's nine-member policy committee quickly huddled. After what was by some accounts a stormy session, the group agreed to dissolve the firm.
The decision, announced by Chairman Richard Odom Jan. 30, shocked partners, who believed the firm had all but inked an agreement with Morgan, Lewis. It was also astonishing since about two months earlier -- at what turned out to be the last partner retreat -- managers had presented a much rosier picture of Brobeck's future.
AN 'ELEGANT SOLUTION'
The partner retreat on Nov. 8 and 9 at the San Mateo Marriott began on a gloomy note. Firmwide Managing Partner Richard Parker explained that the firm was in default on its debt to Citibank. Under the loan agreement, a default would be triggered if the firm lost 15 percent of its partners. Since the firm's ouster of former Chairman Tower Snow Jr. the previous May, 60 partners -- or about one-third of the partnership -- had left the firm.
Parker also told partners they were personally liable for a large portion of the debt. The amount of personal exposure was particularly surprising, one former partner said, since the partnership had voted on a much lower figure in January 2002 when the firm borrowed $40 million from Citibank. At that time the firm projected that average partner recourse would be $261,000 per partner by the end of the year.
"The new numbers disclosed at the partner meeting were a lot larger," the partner said, "maybe two or three times higher."
But after Parker laid out the firm's dire financial situation, partners John Hilson and Stephen Finn presented what they called an "elegant solution."
Hilson outlined a complex plan to restructure the debt, in which partners would forgo their first three months of distribution in 2003 to cut the debt by $26 million. And Finn explained how the firm could renegotiate its leases and cut back on excess space. With these measures in place, they said, the firm could finalize a merger with Morgan, Lewis.
"There was a real dramatic sense of concern" when the problems were laid out, Gowdy said. "Then when the solution was explained I think there was an uplifting sense -- like if you were going to the doctor and he said he had discovered a cancerous growth growing in your body and then said there's an operation that can fix it."
However, the fix depended on partners staying with the firm. They had some financial incentive to do so since Brobeck, on orders from the bank, was no longer returning capital to partners who left.
A formal vote on the plan to restructure the debt was not taken until December when a super majority of the partnership approved it. But at the November meeting partners were upbeat about the proposal.
"Someone stood up and said, 'I think we should hear from everybody if they're in or they're out,'" Gowdy said. No one voiced objections and "when asked 'is everyone for it?' they said 'yeah.'"
Partners were also gung-ho about the merger with Morgan, Lewis. Steven Zager, head of Brobeck's litigation department, came on stage wearing a Morgan, Lewis baseball cap to champion the deal.
"They'd asked me to report on my impression of Morgan, Lewis," Zager said. "I was uniformly enthusiastic. It looked like a promising opportunity."
THE PLAN UNRAVELS
On the surface, the partner retreat appeared to mark a new beginning for Brobeck. The previous months had been spent attempting to grapple with the loss of so many partners and the impact those departures had on the firm's morale and bottom line.
Partners stayed true to the agreement reached at the retreat to stick with the firm. Between November and January, only one partner exited. And Brobeck's merger committee -- consisting of Moskovitz, Hilson, John Larson and Kenneth Bender -- continued to forge ahead in negotiations with Morgan, Lewis.
But the crucial bargaining was out of their hands. The deal in the end depended on Morgan, Lewis getting at least some of Brobeck's top revenue generators.
Morgan, Lewis Chairman Francis Milone shuttled to Brobeck offices around the country to try to get key rainmakers on board. He met with Warren Lazarow, the head of Brobeck's business and technology practice for Northern California; Douglas Olson, head of the firm's intellectual property group, based in San Diego; and Zager, who was based in Austin.
Olson said he was prepared to stay at Brobeck. But after meeting with Milone in January, he said the two decided that conflicts would prevent the IP group from joining Morgan, Lewis. "There was no hesitation on my part or anyone in our group" about the merger, Olson said. "We had some really killer conflicts. It was not something you could step away from."
Losing the IP group was a blow. It was the most profitable group at Brobeck in 2002. That made it even more critical for the firm to retain its other rainmakers. But even before Milone visited Lazarow and Zager, the legal community was buzzing that they were interviewing with other firms. Zager added grist to the rumor mill when he removed personal belongings from his office over the Martin Luther King Jr. holiday weekend.
Milone's last visit was with Austin partners on Jan. 27. In a recent interview, Zager said all the partners in the office had individual 30-minute meetings with Milone to discuss the synergies between the Texas office and Morgan, Lewis.
Zager denied that compensation was a factor in his decision not to join Morgan, Lewis. Rather, he said, he was concerned about whether the merger would actually go through.
"I kept asking. 'when will this deal get done?' and I couldn't get an answer," Zager said. "The only date I was told was April," which he said would have meant suffering four more months of distraction. Two days after meeting with Milone, Zager resigned and joined Akin Gump Strauss Hauer & Feld.
Brobeck partners say Milone's failure to get a commitment from Zager was the last straw. Upon returning to Philadelphia Milone conferred with the Morgan, Lewis merger team. On Jan. 29 they decided to pull the plug on the deal and called Odom to let him know.
"We had essentially worked out all the substantial terms and concepts for a combination on the 28th," Moskovitz said. "John Larson and I were expecting to see a revised term sheet on the morning of the 29th."
Within a few hours, Brobeck's policy committee had convened. Nine partners sat on the committee, which oversaw the firm's decision-making.
Clearly, they weren't prepared for Morgan, Lewis' decision. And it's still not clear how many of the committee members actually agreed to dissolve the firm. One partner said some members of the committee were actually surprised by Odom's announcement the next day that the firm was "winding down." They were expecting to hear him say something different.
"I don't believe everyone on the policy committee had decided to do that," the partner said. "Some thought that the partners would be offered an opportunity to try to hang together and solve the problem" and that only if partners voted with their feet would the firm have to wind down.
One of the committee members said he was not even a part of the group's final discussions. "I was never consulted about that," Olson said. "When I heard about it I said 'who voted on that?'"
Olson added that he usually attended committee meetings via conference call or video conference and may have missed the crucial discussions that took place on the 29th and 30th.
While the policy committee's decision infuriated some partners, it apparently angered members of the committee as well. A partner said he'd heard the group's final discussions were quite tense.
"The management committee was fighting with each other at these meetings," said someone else close to the firm. "There was shouting and name-calling . . . They were so pissed off at each other they didn't want to be partners anymore."
Some partners say the committee might have felt it had no choice since the bank was set to take over the firm's finances. When the firm restructured its debt in January, a provision was added to the agreement specifying that the loan would be due immediately if partners responsible for 5 percent of 2002 revenue walked out the door. The departure of Zager and other partners was enough to trigger the default.
Citibank officials did not return phone calls for comment. But Brobeck partners say the bank was not informed of the committee's decision before it became public and was angry about it. Odom told partners at the Jan. 30 meeting that the committee was going to meet with the bank the next day to discuss the firm's plans to wind down.
Partners say they understand committee members did not take a vote among themselves on whether or not to disband the firm. And the full partnership did not have a chance to vote on the matter until weeks after the announcement when there was no turning back. The unilateral decision by a handful of partners appears to be in violation of the partnership agreement, which specified that dissolution could occur only by a vote of 60 percent of the partnership via a written ballot.
A number of questions remain unanswered about Brobeck's death. The partners with the most insight, of course, are the members of the policy committee. The group included Olson, Odom, Parker, Lazarow, Craig Andrews, Cecily Waterman, Nigel Howard, Debra Pole and Mark McKeen.
Only Olson would talk about Brobeck, and it's likely he may reveal more information in a book he is writing about the final days of the firm. Olson did say he had not expected Brobeck to collapse. During the first two weeks of January he and other committee members spent 10-hour days figuring out partner compensation levels.
"I wouldn't have done that if I didn't think Brobeck was going to be successful in the new year," Olson said.
PREVENTIVE MEASURES
Brobeck's demise will surely be a case study for the legal profession for years to come. The central question, of course, is: Could this have been prevented?
Brobeck partners say the firm's foundation was weakened by its immense growth during the technology boom from 1998 through the spring of 2001. During that period, a former partner says, Brobeck's capital expenditures exceeded $100 million. The money was principally used for lease improvements and expansion "with the object of growing the firm to 1,500 lawyers," the partner said.
During 2001 alone, the firm's capital expenditures totaled $40 million. Partners say that rather than borrowing money to pay for these expenses the firm took money out of its operating revenue. As a result, Brobeck had no money to pay partners in January 2002. The partners then decided to borrow $40 million from Citibank to pay out distributions.
Some partners believe Brobeck might have avoided its ultimate quagmire if partners had whittled back distributions to cover the expansion.
"If we financed capital expenses out of partner distribution over four plus years there would have been a different result," said Moskovitz, now a partner at Morgan, Lewis. "We wouldn't have spent as much or gotten into a situation where the bank could shut the lock box."
"If there's a lesson here," he added, "it's that capital expenditures for a law firm ought not to exceed depreciation, amortization and the amount of money partners are willing to have withheld from their distribution."
But another partner said that if the firm had cut distributions it would have led to an exodus of partners.
If instead of borrowing $40 million from Citibank in January 2002, "Brobeck had borrowed $10 million or $20 million less and tightened its belt," he said, "I think a lot of people would have left at that point."
In addition to over-expansion and debt, the firm was also torn apart by partner animosities. Resentful of Chairman Tower Snow Jr.'s management style, in the fall of 2001 a group of partners moved to block his reelection to a third term. Facing opposition, Snow decided not to run for the post and stepped down in November 2001 before his second term ended. Odom was then elected his successor.
Six months later the partnership voted to remove Snow from the firm, saying it was because Snow was plotting to take a group of partners with him to Clifford Chance.
While some partners blame Snow for the firm's rapid growth and its focus on the technology sector, others acknowledge that the entire partnership had a say in the firm's direction.
When profits per partner soared to $1.1 million in 2000, partners were happy to keep Snow at the helm. But when the bottom dropped out of the tech market and the firm was left with a ton of excess space and lawyers, they revolted.
"We were drunk on money," said another former partner. "We all share in this fiasco."
Still, many of the partners have decided to stick together. Morgan, Lewis eventually picked up 58 partners from Brobeck, including policy committee members Odom and Waterman, former chairman Larson, and Gowdy, who is now Morgan, Lewis' managing partner in San Francisco. Nineteen counsel and 76 associates also joined the firm.
Also among the new Morgan, Lewis team is Snyder, who joined the firm as of counsel.
Snyder expresses sadness about the collapse and the fact that the last-minute plan he'd pitched didn't work. Nevertheless, Snyder feels a loyalty to the crew of partners who stuck with Brobeck to the end.
"For every one guy who ran out the door thinking the ship was sinking, four or five quality lawyers stayed here," he said. "It's mainly because of these people that I'm doing this."
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And I believe the Jalapeno is actually the state pepper.
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