♫ You load sixteen tons, what do ya get?
Another day older and deeper in debt..♫
One of San Francisco’s premier grand old law firms voted to dissolve today, according to The San Francisco Chronicle. Heller Ehrman ranked 2nd on the American Lawyer’s A-List of firms, “a measure based on a variety of factors such as profitability, pro bono representation, associate satisfaction and diversity ratings” according to the Chronicle. Founded in 1890, the firm had quite a history. It “led legal projects ranging from the financing of the Golden Gate Bridge to the overturn of the state’s ban on same-sex marriages”.
It survived wars, earthquakes, the Depression and social changes but was unable to survive the effects of a 3% drop in revenue in 2007. The firm is reported to have had an “unusual” financial structure that may have contributed to its downfall. It was a partnership of professional corporations. It is reported that in order to avoid double taxation, it distributed all of its earnings at years end. This left it financing its current operations by way of a line of credit, at least until cash flows caught up to the debt (known as being ‘out of the bank’ according to Heller Ehrman partner Stephen Ferruolo).
This raises several issues for law firms, particularly as we enter a period of financial instability and recession. Law firms are classically under capitalized but this particular financial structure resulted in the firm using debt to finance, at times, the firm’s operating capital. Structuring your business for tax advantages is fine so long as it doesn’t result in any distortions of the fundamental business foundations of a firm. In this case it appears that the desire to minimize tax overruled prudent financial management and capitalization principles (namely the debt/equity ratio).
A highly-leveraged firm is vulnerable to shocks. In Heller Ehrman’s case the triggering event appears to have been the loss of some large litigation cases that led to a 3% decline in revenues for 2007. As a result, key partners left the firm (the article doesn’t say so but reading between the lines, these departing partners must have been major revenue generating partners who saw their bonuses and/or draws reduced as a consequence). Once these key partners left, an inevitable chain reaction was started which resulted in a diminishing number of equity partners carrying a large debt load. Eventually the firm collapsed under the weight of its debt without the infusion of new equity and new equity partners.
After trying to find a merger partner and failing, the remaining partners must have found the last days to have been crushing – working like crazy only to find they are a day older and still deeply in debt to the bank. The dissolution must have been the only alternative left…
Hat tip to Pete Roberts for drawing this to my attention!
♫ Can I Trust You? Show me your honesty
Tell me you promise me the truth… ♫
Words and Music by: Rebecca St. James and Shaun Shankel
An Alberta law firm has been defrauded of more than $1.4 million dollars over a 3.5 year period by a former legal assistant of the firm, according to The Edmonton Journal (March 19, 2008). The legal assistant (a 36 year old mother of three) plead guilty to seven counts of fraud and one of forgery and was sentenced to 3.5 years in jail for her actions, according to The Calgary Herald (Sep. 10, 2008). The firm was left with little chance of recovering over $800,000 once the dust cleared (The Calgary Sun Aug. 23, 2008).
In an agreed statement of facts, the legal assistant (I won’t name her here – I think her family has been through enough) stated:
- She forged lawyer’s signatures on trust cheques
- She created false cheques
- She create false cheque requisitions
- She concealed her efforts by altering trust requisitions to transfer more funds than requested from private trust accounts to Bennett Jones’ pooled trust accounts, then writing cheques from the pooled account for her own benefit
- She paid off credit card debts, paid The Receiver General of Canada, Canadian Tire and others
- She removed the fraudulent cheuqes from the bank statements when they arrived and altered the statements to cover her tracks
- She doctored letters requesting the transfer of funds from a private trust account in Los Angeles to the firm’s pooled trust accounts in Calgary
A pre-sentence report by a forensic psychologist stated that she stole the money initially ‘because she could’ and that it ‘gave her a rush’.
OK..so what lessons are there in this case for partners, lawyers, administrators and accounting departments?
For one, being a large and trusted firm does not exempt you from the possibility of internal embezzlement. Bennett Jones is a large and trusted firm in every definition of the word.
Two, all trust accounts need to be under the full control of the accounting department. Reading between the lines, the legal assistant had access to both the bank statements and the cheques for a separate or private trust account that was the responsibility of a lawyer of Bennett Jones but was not under the full control of their accounting department. The best practice separation of duties and roles was, for some reason, not followed in this case. The safeguards that should be built into every accounting department were somehow bypassed.
Three, you can’t trust everyone, all of the time. There is a small minority of people who will succumb to temptation if the systems allow them to do so.
While Bennett Jones suffered a monetary loss, no doubt the damage to their reputation was worth far more…however, they chose to come forward and deal with the situation rather than dealing with it privately. To their credit, they chose to show everyone their honesty and told the truth, even in the face of full public scrutiny.
♫ I’ve been taking care of business, it’s all mine
Taking care of business and working overtime…♫
Words and music by: Randy Bachman.
LawPro Magazine (August 2008) has just hit the streets. In this latest issue celebrating the 10th anniversary of PracticePro, the risk management, claims prevention and law practice management initiative for LawPro, the wholly-owned insurance company providing professional liability insurance to the lawyers of the Law Society of Upper Canada, my friend, colleague and director of PracticePro Dan Pinnington took an innovative approach to this issue of LawPro. Along with articles looking at the increasing amount of attempted fraud against lawyers and such, Dan invited your humble scribe to contribute to a collaborative series of articles by such luminaries as Simon Chester, Connie Crosby, Dominic Jaar, Richard Potter QC and Steve Matthews. These articles all dealt with the central question: “What are the 10 Critical Issues facing the Legal Profession.”
This was a wonderful collaboration and I thoroughly enjoyed the opportunity to be a contributor. Of course to see what everyone wrote, you will have to visit the article on the web which can be found here.
I wish to say thanks! to my fellow contributors and I hope we can do this all again…(I rather suspect while we were taking care of business we were all also working overtime…)…
♫ Start a little conversation now, it’s alright, just take five, just take five…♫
I have been a fan of OnPoint Law Corporation’s “Take Five Newsletter” for some time. This free monthly resource summarizes 5 key cases from the British Columbia Court of Appeal in a clean, easy to read email. The latest version (August 2008) dealt with the Robertson v Slater Vecchio case regarding firewalls when lawyers transfer between firms and the implementation of the Law Society’s conflict guidelines in this regard.
Hats off to Sarah Picciotto and the rest of her legal research team at OnPoint Law Corporation! She is at the forefront of lawyers using off-site contract services in a cost-effective manner. You can subscribe to the Take Five newsletter by sending an email to: firstname.lastname@example.org. It’s alright – just take five!