Lateral Fires

There is literature on how the financialisation of law firms, the obsession with PEP, keeping up with the Joneses, lateral hiring, and other forces can weaken the culture and ethicality of law firms (See here in particular). And law firms ability to conduct diligence (on their clients’ newly discovered dubiety following the Ukraine fallout) has also wandered closer to centre stage. How nice then to see two examples of the same phenomena in one case. Although in this case, it is not due diligence on clients but on incoming partners which is an interesting (and underreported) element of this most complex of cases. The recent case of ENRC v Dechert, Gerard and the Director of the SFO [2022] EWHC 1138 (Comm) provides an example of pantomime like proportions of the kinds of behaviour that partners keen to be big hitters in the profitability stakes might indulge in. I don’t need to say much. Just let me quote one passage from the 386 page judgment of Waksman J which begins with this enticing heading.

MR GERRARD’S FINANCIAL MOTIVATION

253. There is nothing wrong with a solicitor wanting to build up business for his firm and thereby bring financial and reputational benefits for the firm and himself. The fact that a solicitor has sought and managed to lead a large case cannot itself be a point of criticism; indeed it is likely to be praised, assuming it is work which the firm can competently and timeously undertake.

254. However, the points made against Mr Gerrard’s approach to getting work for ENRC in this case go well beyond what might be regarded as the norm. They are that he was so obsessed with making money from his work that he lost any real sense of objectivity, proportion or indeed loyalty to his client. And that in order to support his own reputation – and, in my view, his ego – he would make extravagant claims. Indeed, in answer to a question from me, he accepted that he was probably prone to exaggeration sometimes. I think that is something of an understatement.

255. To give but one example at this stage, Mr Gerrard told a number of people (Mr Findlay, Mr Trevelyan, Mr Prosper and Mr Gould) that he had been approached to be Director of the SFO previously but turned it down, or words to that effect. Mr Findlay recounted that he said this was because there was not enough money in it. There was in fact no evidence that Mr Gerrard had ever been approached for this job and indeed in evidence he did not suggest there had been. Yet his biographical entry on the Dechert website (at least up to 6 February 2016) stated “Mr Gerrard has in the past been shortlisted to be Director of the SFO”. As to 70 that entry, he said that actually he did not know if he had ever been shortlisted, in which case it is impossible to understand how this entry was responsibly put onto the website, especially as he agreed he had approved it. Had he been shortlisted, he would have known about it (which is the premise underlying this particular entry). At best, this was a considerable exaggeration of the reputation which he claimed he had at the SFO; at worst it is simply untrue. Either way, it was a misleading statement by a professional to potential clients.

256. As to earnings, in December 2009, having had a meeting with Dechert, he told the recruitment agent that a minimum of £20 million or possibly up to £30 million in fees would leave with him if he left DLA. He later said in January 2010 that another firm had recently offered him a guaranteed salary of £2 million per year for two years, which he turned down because of his international profile. In an email from Steve Feirson, a Dechert US Partner who was involved in the possible recruitment of Mr Gerrard and his team, he noted that they would be expected to generate about $21-22.5 million in the first 12 months. He noted that they had said that $15 million was “already in the door and is being worked on. The remainder would come in from work in the pipeline or to be pitched”.

257. Later on, as discussions continued, on 3 February 2011, Mr Feirson emailed Mr Levander, another US Partner, to say that Mr Gerrard needed to be assured that if he produced a £12 million practice, he could easily reach £2 million by way of remuneration from the firm (there being a base amount of £1.75 million).

258. However, in cross-examination, Mr Gerrard denied that there was an expectation that if he was hired, he would deliver a £12 million practice. He said that “at no stage in any of the discussions I had with Dechert did I indicate how much I would bill or generate.” In the light of the emails just quoted, that cannot have been true. The point is not so much that there is necessarily anything wrong with giving a predicted earnings figure; it is that Mr Gerrard saw fit to deny that he had done so.

259. It is worth noting that on 26 October 2010, Mr Defries, one of Dechert’s London partners wrote to Mr Feirson as follows:

“Just a short note on Neil Gerrard with whom I understand we are in an advanced stage of discussions. I came across him when I worked on the …European restructuring in the wake of the Chapter 11 filing. Weil Gotshal were the debtors counsel in the bankruptcy and because of the implications for the wider group, Weil’s London office was asked to assist the European subsidiaries of which there were about 120. Neil and his team were brought in by the directors I am not sure how. The DLA team was made up of Neil… The DLA team did not come across as an elite group in the many meetings I spent on the opposite side of the table to them. Neil was heavily involved at the beginning, and he did I think gain the confidence of the UK directors of. . . who seemed to place a lot of importance on what he said (but …and not the directors were paying DLA’s fees). If you had asked me or AlixPartners at the time whether the advice Neil’s team was giving was unduly negative and to an extent scaremongering in 71 order to increase DLA’s fees the answer would have been a resounding yes. The overall impression I formed of them is that they made a little go a long way, by which I mean that they were advising the UK directors (plus the European directors) on their potential liability under the various insolvency regimes applicable in the jurisdictions in which… had subsidiaries, without perhaps recognising that it was not in anyone’s interest for these local entities many of which held telecoms licences to be allowed to become insolvent. As a result I think Neil spent a lot of time charming the European CEO of… who then abruptly resigned once some emails emerged which cast doubt on her judgment as regards prior accounting practices… at in Europe. In summary, I think the technical legal advice they gave was ok, but it was straightforward issues they were advising on. ..They did not make themselves particularly popular with either… Weil or AlixPartners and came across as something of an irritant. Neil as I recall was capable of a lot of charm, but I did not see a great deal of substance from him in the meetings. I got the impression he used others to do the work.”

260. In many ways, those remarks will be seen to have been prescient.

261. Some of the observations made about Mr Gerrard (most of which were complimentary) by those Dechert lawyers who interviewed him (see the composite document of 24 February 2011) are also revealing. They refer to his ego, a lack of clarity on details of profits for the work he did, his ability to turn a small job into a large one and a strategy of “hero marketing” around him. These are not, by themselves, fatal criticisms. But they do give a clue to his modus operandi.

262. I have little doubt that Mr Gerrard had a large ego and a belief that he is always right and expected others to follow him implicitly.

263. I agree with ENRC that in the first part of 2011, and indeed prior to the SFO Letter, Mr Gerrard must have been under some significant pressure. He clearly needed, first, to bring over the ENRC case to Dechert and was worried at the prospect that DLA might put him on garden leave, although in the event it did not.

264. Notwithstanding Mr Gerrard’s assurances about fee income in the event that he moved, the only client that came to Dechert through him was ENRC, prior to April 2013, with some very small exceptions. Almost all of his income from April 2011-April 2013 was drawn from the profits from the £13 million billed to ENRC.

The whole case is bizarre, but lest one think it totally unique, the broader pressures, and the tendencies – perhaps more subtly expressed than the judge found here, to sell what the economists refer to as the dentist’s smile are not to be overlooked. The perils of lateral hires are typically described in the press terms of their disappointment financially, but there are other examples of lateral hires driving careers and firms to ruin (see this excellent book on US tax and firms) and Gerard’s must not be alone in the dread pressure to deliver once a lateral arrives.

2 thoughts on “Lateral Fires

  1. Interesting. One must wonder whether anyone ever really believed the SFO had conspired to increase Dechert’s fees? Or was the conspiracy “arguable”, but the SFO claim really about ensuring they had what they needed to crucify Gerrard? At least the judge seems to recognise that legal and ordinary meanings of the word are two different things.
    Having taken us through each disputed contact in detail, the judge finds that the SFO claim fails where it was always likely to. The SFO, even when misguided, was following its own agenda, not playing a part in a conspiracy to inflate fees. A regulator doing its job seems almost certain to mean fat lawyers’ for someone. It seems unconvincing evidence of a conspiracy for the same reason – even if the two are speaking to one another and even if (sometimes), they shouldn’t have been.
    The judicial good pub guide was an unexpected bonus. While understandably not familiar with either, Shaw’s Booksellers (a pub near the Temple) seems to make the cut, with law firms and chambers nearby (para 778). The Yorkshire Grey on Theobald’s Road (hardly a million miles from Gray’s Inn) emphatically does not (para 635).

  2. This article reminds me that the kinds of pressures put upon in-house lawyers applies equally well to private practitioners resulting in potential ethical issues.

    I have always thought that the decline in the true partnership structure of law firms has lead to the fast and loose behaviour illustrated in your article. Since when did the publication of financial results by private enterprises, similar to the requirements of public companies, become the norm. I suspect the legal press has something to answer for this. As for lateral hires, the legal recruiters are front and centre in this, now, common place practice. The fees they earn on placing partners and teams are extraordinary. They appear to me to be in the market to promote their own financial ends at the expense of the profession. The two firms which I had always held in high regard as exemplars for the partnership model and the inherent ethically built into it are Cleary Gottlieb Steen & Hamilton and Slaughter & May. Although they have succumbed to lateral hires of late but not of the sort it seems which stretches financial credulity leading to potential stresses on integrity and ethical behaviour.

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