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EAT WHAT YOU KILL
The Fall of a Wall Street Lawyer
By Milton C. Regan Jr. The University of Michigan Press
Copyright © 2004 the University of Michigan
All right reserved. ISBN: 978-0-472-03160-3
Chapter One
From "Nobody Starves" to "Eat What You Kill"
IN FEBRUARY 1993, Larry Lederman picked up the phone in his fifty-fifth floor office at Milbank, Tweed, Hadley & McCloy in New York. Lederman, a corporate partner, was described as the "800 pound gorilla" at Milbank. He was the highest-paid and most powerful partner at the firm, earning $1.25 million a year. He had an extensive network of contacts with corporations and investment banks, which generated an impressive stream of steady profits. He had been lured to Milbank in late 1991 to shake things up, to transform the firm from an old-line elite institution to an aggressive market-driven enterprise.
Lederman called John Gellene ten floors below, and asked if he "was particularly busy." Gellene was a tall, thin, thirty-six-year-old bankruptcy partner with dark hair who radiated a quiet intellectual intensity behind his glasses. He currently was involved in the international bankruptcy of the company owned by British media tycoon Robert Maxwell. He had recently wrapped up another matter, however, and told Lederman that his work load had "dropped a little bit." Lederman then said, "I have a client named Bucyrus-Erie. They manufacture mining equipment and they are going to need to go through a financial restructuring and I want to get you involved." When Gellene told Lederman that he would take on the job, Lederman promised to send him some material on the company. He also suggested that Gellene call David Goelzer, the company's general counsel, to introduce himself. Thus began a series of events that would end with John Gellene in federal prison.
Lederman's presence at Milbank reflected a profound change in the formerly genteel world of the Wall Street lawyer. For one, he was a Jewish partner at a firm that for years had been the epitome of the White Anglo-Saxon Protestant establishment. For another, he had not become a partner by joining the firm as an associate and rising through the ranks. Instead, he had been recruited from another law firm-and one that had been in existence for only a few years. Furthermore, he had a reputation as an aggressive, sometimes abrasive entrepreneurial lawyer who had little interest in social niceties. This reinforced long-held ethnic stereotypes, and was in marked contrast to the long tradition of polite consensus by which the partners at Milbank and other Wall Street firms had run their organizations. Finally, Lederman had been a major player in dismantling the foundations of an implicit arrangement in which corporations never attempted hostile takeovers, and major law firms didn't compete for each other's clients or lawyers.
In short, Larry Lederman represented a changing of the guard-not only for Milbank Tweed, but for the formerly insulated world of the elite law firm. The story of this transformation is the key to understanding the nature of large firm law practice at the dawn of the twenty-first century.
THE WALL STREET LAW FIRM was born in the explosion of industrial activity in the United States during the last third of the nineteenth century. Most law practice before then had been conducted by solo practitioners. The most elaborate practice organization for most of the century was the two-man law office. Lawyers in such an office shared space and overhead costs, but often conducted their own separate practices without sharing clients. In some cases, the two men adopted a division of labor in which one served as courtroom advocate while the other handled nonlitigation matters.
Solo practice and the two-man office both reflected and reinforced the notion that the lawyer was an independent professional whose individual judgment should not be compromised in any way. Practitioners who shared a law office generally had no partnership agreement, nor did they adopt any measures designed to create an organizational entity distinct from their individual practices. The small scale of law practice was suited to an economy in which most clients were individuals or modest economic ventures dominated by a few people at most.
After the Civil War, however, the scale and scope of economic enterprise began to expand in dramatic ways. Railroads, oil exploration and refining, coal mining, and steel production were only a few of the activities whose size and geographic dispersion dwarfed anything that had come before. These and other industries strained the boundaries of existing organizational forms, legal rules, and capital markets. Furthermore, they provoked alarm in some quarters, which led to measures such as the creation of the Interstate Commerce Commission in 1870 and the passage of the Sherman Antitrust Act in 1890.
These developments created an unprecedented need for coordinated, intensive, and ongoing legal services. Lawyers were necessary to revise or invent forms of economic affiliation such as the limited liability corporation, the trust, and the holding company. The economic distress of railroads, for instance, led to the creation of the equity receivership, the forerunner of today's corporate bankruptcy proceeding. This device was designed to solve the problems of creditors with claims on assets, such as stretches of railroad track, that had no value apart from the system of which they were a part. In addition, in many cases lawyers took on the role of liaison to government officials and financial institutions that were assuming increasingly important roles in economic life.
Both the volume and complexity of the corporation's need for these legal services began to strain the capacity of solo practitioners and two-man offices. Lawyers therefore began cautiously to associate in somewhat larger numbers. The move to larger practices was prompted also by an increase in overhead costs, due to the introduction of new technologies such as the typewriter and telephone, and the need for larger reference libraries to contain the increasingly large amount of printed legal material. Adding even one or two lawyers to a two-man practice to share these costs could result in valuable economies of scale.
While lawyers began to practice in larger groups during this period, the increases were gradual, and the organizational forms were far simpler and less integrated than those of corporate clients. Eventual Wall Street powerhouses such as Shearman & Sterling and Davis Polk, for instance, did not have as many as four partners and associates until the 1910s. Lawyers in firms still tended to have parallel practices, and clients typically were regarded as those of the individual attorney rather than the firm. Aspiring young associates, known then as law clerks, learned the law by working without compensation with older practitioners, supporting themselves by serving clients outside the firm.
Why did law firms remain relatively small in the early decades of industrialization? One reason is that, until after World War I, the major economic players were individual entrepreneurs and wealthy investors, such as Andrew Mellon, Cornelius Vanderbilt, and Jay Gould. The attorney-client relationship was based on personal contact between such individuals and prominent members of the bar. Thomas Shearman, for instance, used his relationship with Gould to leave the law firm of the notable David Dudley Field to form his own firm with John Sterling.
Another reason for the limited size and integration of law firm practice was the persistent icon of the lawyer as an independent professional beholden to no one-the virtuous counselor who hung out his shingle and dispensed disinterested legal advice and general wisdom. Many members of the bar warned that lawyers' growing dependence on corporate clients threatened professional independence. They feared that lawyers were becoming mere servants of commercial interests, with little to distinguish them as a singular profession with its own distinct values and traditions. There was some resistance to the notion that a lawyer's freedom of action should be limited in any way by organizational needs and requirements.
The result was that law firm affiliations in the early industrial period were fluid and unstable. Powerful lawyers moved from one firm to another, taking their clients with them. Firms provided no systematic legal training, providing casual apprenticeships for aspiring young lawyers, many of whom were hired because of family connections. To some degree, this was a mirror of the tumultuous economic era, in which many enterprises were extensions of forceful individuals who battled fiercely among themselves for the spoils of industry.
It's striking that lawyers who served corporations were able to preserve their own separate practice organizations, rather than being absorbed as corporate employees. Engineers, for instance, were another occupational group aspiring to professional status in the late nineteenth century that provided services to corporations. In contrast to lawyers, however, the dominant career path for an engineer was to become a corporate employee and rise through the ranks to a management position. Lawyers were resistant to this path because they regarded it as inconsistent with the ideology of the individual practitioner.
Furthermore, corporate enterprises may have been slow to treat legal services as a cost of production. Corporations were subject to relatively little regulation, and may have regarded legal issues as a less regular concern than those relating to financial and operational matters. Furthermore, legal expertise was less amenable to routine organization according to scientific principles. This gave lawyers the opportunity to continue and expand their separate practice organizations. In addition, the existence of separate law firms may have been useful to corporations and their lawyers in arguing that the legal positions that they advanced were the product of neutral and objective analysis of the law, rather than merely self-interested claims.
Finally, notable lawyers of the time not only were able to provide narrow legal advice, but had connections to the world of financiers and government that were extremely useful to economic enterprises. This combination of legal, financial, and political services strengthened their positions and bargaining power vis-à-vis the corporations to which they lent assistance. Knowledgeable and well-connected lawyers, in other words, possessed some degree of market power with respect to their clients.
By the early years of the twentieth century, many industrial enterprises began to move away from the dominance of their founders. They took on a more impersonal and institutional identity as integrated and enduring entities with their own organizational dynamic. Personal connections continued to be valuable, but a class of corporate managers began to arise that emphasized the importance of rational systems and procedures to make operations more stable and predictable.
Some leading Wall Street lawyers believed that law firms likewise needed to become more integrated organizations. Loose forms of association, haphazard operations, and fierce competition eventually could prove ruinous for corporate law firms as a group, since it made their futures and even survival unpredictable. Furthermore, such instability could weaken lawyers' market power vis-à-vis their corporate clients, thus undermining the economic foundation of their claim to be independent professionals.
Whatever the reasons, firms began to take more systematic steps to build enduring organizations in the first two decades of the twentieth century. The most notable and influential example was the approach adopted by Paul Cravath for the firm that eventually became known as Cravath, Swaine & Moore. The Cravath model became the template for the Wall Street law firm. It provided a structure whose influence persists to this day.
Cravath joined the firm in 1906 and headed it until his death until 1940. As fellow partner and historian of the firm Robert T. Swaine noted, "Cravath had a definite philosophy about the organization of his law firm, its partners, its practice and its relation to its associates." First, Cravath determined that the firm would seek lawyers almost exclusively from recent law school graduates, rather than from those in practice elsewhere. He insisted that every incoming lawyer have a record of accomplishment in both college and law school. The first choice of the firm was "a Phi Beta Kappa man from a good college who had become a law review editor at Harvard, Columbia, or Yale."
As these criteria suggest, hiring was limited to members of a narrow social elite. One observer noted that firms want "lawyers who are Nordic, have pleasing personalities and 'clean cut' appearances, are graduates of the 'right schools,' [and] have the 'right' social background and experience in the affairs of the world." Thirty percent of Wall Street partners in 1957, for instance, were listed in the Social Register.
Second, Cravath broke with tradition by putting every associate on a salary. Prior to that, the firm had provided no compensation to associates, but simply provided them desk space in return for their assistance. The young lawyers had to support themselves from whatever business they could develop on their own. Cravath decreed that henceforth both partners and salaried associates must devote themselves exclusively to the practice of law "as a member of the Cravath team." Third, associates would be trained by the firm gradually to take on more responsibility as they gained experience. Ideally, they would not specialize in any particular branch of the law until they had gained exposure to all facets of the firm's practice.
Perhaps the most prominent feature of the Cravath system was the adoption of an "up or out" policy for associates. After a period generally not more than ten years, associates would be considered for promotion to partner. Only a small percentage of men would gain this honor. From 1906 until 1948, for instance, only 44 of 462 associates were made partners. Those passed over were expected to leave the firm, since, according to Swaine, a person with no hope of promotion "tends to sink into a mental rut-to lose ambition; and loss of ambition induces carelessness." The firm took responsibility, however, for finding positions for these lawyers. Many moved to Cravath's corporate clients, while others went to smaller firms to whom the Cravath firm referred work.
The "up or out" policy represented a break from the practice of keeping lawyers on for extended periods as permanent associates. Theoretically, all lawyers at the firm now were either actual or aspiring partners. This ostensibly preserved the ideal of the lawyer as an independent professional rather than an organizational employee.
Marc Galanter and Thomas Palay suggest that such a "promotion to partner tournament" enables law firms to match up partners who have experience and more responsibilities than they alone can handle with young lawyers who have neither. In their terms, partners have excess "human capital," while associates have excess labor. Partners lend their experience and clients to associates, who mix it with their labor to provide legal services. The promise of partnership gives associates an incentive to use partners' capital efficiently and to preserve its value. At the same time, the firm's commitment regularly to make a certain number of partners constrains partners' ability to exploit the work of associates for their own gain. Recent work has questioned whether the tournament is conducted on a level playing field, how many associates actually aspire to be a partner, and the extent to which the tournament is responsible for the rapid growth of large law firms. Nonetheless, the basic point remains that firms conduct competitions for partnership in which only a handful of associates gain promotion.
Despite the up-or-out policy, Cravath and other firms did retain a small group of permanent associates with no hope of promotion to partner. These lawyers typically handled routine legal tasks such as research on state securities law, or worked in specialized fields such as tax and labor law. In addition, firms that had dealings with local New York courts recruited permanent associates from local law schools such as St. John's, Fordham, and Brooklyn. Many graduates of these schools were from the same lower-middle-class background as court administrators and employees, often of Irish or Jewish ancestry.
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Excerpted from EAT WHAT YOU KILL by Milton C. Regan Jr. Copyright © 2004 by the University of Michigan . Excerpted by permission.
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