March 29, 2023

DealBook: At Cravath, Swaine & Moore, Loving the Work Led to Promotions

HEADY ENVIRONMENT When the author joined it, Cravath, Swaine  Moore, along with other big law firms, had its offices at One Chase Manhattan Plaza, home of the Rockefellers' bank.Mario Marino/JPMorgan Chase ArchivesHEADY ENVIRONMENT When the author joined it, Cravath, Swaine Moore, along with other big law firms, had its offices at One Chase Manhattan Plaza, home of the Rockefellers’ bank.

When I crossed the threshold of Cravath, Swaine Moore 36 years ago next month, fresh from the bar exam and Harvard Law School, I entered a new world and began what turned into a life-changing experience.

Cravath’s offices were at One Chase Manhattan Plaza, headquarters for the Rockefellers’ Chase Manhattan Bank and a magnet for prominent law firms. I was just a short elevator ride away from lunch with my friends at Davis Polk Wardwell; Milbank, Tweed, Hadley McCloy; and Willkie Farr Gallagher. All of Cravath’s lawyers and support personnel fit into two floors — 57 and 58 — and everyone knew one another, except for a cadre dispatched to Armonk, N.Y., for an I.B.M. case and small offices in London and Paris. As a newcomer, I shared an office with a more senior associate, who got the coveted window seat.

Cravath did its best to keep the outside world at bay and minimize distractions. Among these was what other lawyers were being paid. I was told when I arrived that my salary would be $16,500 and it was Cravath policy to always pay the highest rate. While my friends at other firms were speculating avidly about whether, say, Sullivan Cromwell would raise starting salaries and others would follow, at Cravath we knew that if they did, our firm would top them. We were all paid the same based on seniority, and bonuses were unheard-of, so there were no jealousies or resentments.

I never knew what partners made. I could only discern from the firm’s directory — the Park and Fifth Avenue addresses of their apartments and Long Island and Connecticut country homes, some with names like “Brook Farm” — that they didn’t have to worry much about it.

Considering that a cottage industry has since grown up around the notion of law as a business, there was surprisingly little talk of money, at least not with associates. One of my tasks was to organize the billing records for the senior partner I worked for. But all the client got was a simple statement, rendered in elegant script, “for professional services rendered,” followed by a large number. I once asked the partner if clients ever demanded a more detailed breakdown or questioned the sum. He paused as if that were a novel idea. “That’s not the kind of client we’d want to have,” he replied.

Even then Cravath lawyers worked long hours. In my book “The Partners,” I told the story of a young partner who billed 26 hours in a single day by flying to the West Coast, gaining three hours thanks to the time-zone change while working on the plane. But the firm also said it encouraged civic and philanthropic activities.

I played in a quintet that gave chamber music performances at retirement and nursing homes. One evening I was on the subway examining my music when a partner materialized at my side. He saw the score, seemed interested, and asked where I was going. Soon after, the partner I was working for called me to his office and shared an experience from his life. He’d grown up in New York and gone into the military. Boot camp had been a challenging but rewarding experience. The only time he’d been unhappy was after a weekend visit to the lights and diversions of Manhattan. By staying at camp, he had avoided those distractions, and came to enjoy the tough discipline of the Army.

I pondered that message. He never mentioned the quintet, but soon after that I dropped out.

After several years I felt it was time to consider my future. I had wonderful assignments and congenial and stimulating colleagues. Still, I could see the winnowing process firsthand. Of the 20 or so associates hired each year, one or two might be chosen to be a partner. Some years there were none. I waited each year with keen interest to see who was tapped for the equivalent of lifetime tenure. What did they have in common?

They weren’t necessarily the brightest. Everyone there had impressive test scores and academic credentials. They weren’t, as I had expected, the hardest-working. Everyone aspiring for partner worked long hours and gave the appearance of hard work. They weren’t the most personable. Cravath was refreshingly meritocratic, and gender, race, religion, sexual orientation, and social and academic pedigree all seemed irrelevant.

Finally it came to me: The one thing nearly all the partners had in common was they loved their work.

This came as a profound revelation. Of course they worked long hours, because it didn’t feel like work to them. They took great satisfaction in the services they rendered their clients.

You couldn’t fake this. The partners seemed to have some sixth sense. I enjoyed my work. But I had to admit I didn’t love it the way they did.

At times I found this mystifying. How could anyone tackle a complex tax problem with such enthusiasm? Or proofread a lengthy indenture agreement? Why couldn’t I love a prestigious, high-paying, secure job like they did?

At the same time, it was liberating. It was obvious to me that someone who loves his or her work, whatever that might be, has a huge competitive advantage, not to mention a satisfying and enjoyable life. Somehow people who love what they do seem to make a living. So I started pondering what I might love as much as some of my Cravath colleagues loved practicing law.

When I announced my departure and took a big pay cut to become a reporter, I know some of my colleagues took it personally. They felt I was rejecting not just them, but their profession. I’m not sure I was ever able to explain my thinking, but to my mind I was paying them the highest compliment.

Over the ensuing decades. Cravath doesn’t seem to have changed all that much (although I assume today it offers clients detailed billing records). But apart from Cravath and a few others like it, the world of big law firms has changed radically. Firms are huge, with thousands of lawyers. They have branches all over the world, with partners who may see each other only at an annual retreat, if then. They buy up entire firms, merge and separate, and discard unproductive lawyers. Many so-called partners are little more than associates with bigger salaries. How much money other lawyers make has gone from a taboo to an obsession. And everywhere I go, lawyers at big firms — associates and partners alike — tell me they’re unhappy.

I wonder how many lawyers at Dewey LeBoeuf loved their work? I know some did because I’ve talked to them. Perhaps if there were more of them, their colleagues wouldn’t have had the time or inclination for all the jockeying and infighting over financial guarantees and compensation that led to the firm’s demise.

James B. Stewart, who was trained as a lawyer, writes the Common Sense column for The New York Times.

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Wealth Matters: Deciding Who’s Rich (or Smart) Enough for High-Risk Investments

But it has broader implications. Should the United States government be deciding what people can do with their money? And how do you define who is wealthy enough — and smart enough — to invest in these offerings?

We’re talking about private placements — a term the financial industry uses for anything from real estate deals to hedge funds to last year’s much-talked-about offering in Facebook shares. What all these investments have in common is that they can be sold with fewer disclosures than public offerings.

They also often carry cachet, and those who get into them can end up with large returns. That may seem unfair to anyone excluded because of a lack of wealth. But these private investments can go to zero just as easily as they can climb into the stratosphere, which is why investors who cannot afford to lose a lot of money are barred.

Since 1982, specific dollar amounts have been used to define who is an “accredited investor,” the S.E.C.’s term for someone deemed sophisticated enough to invest in these nonpublic deals.

The two most commonly used measures are annual income — over $200,000 for an individual or $300,000 for a couple — and net worth, which was $1 million. In late December, the S.E.C. redefined how people should calculate their net worth. Per the requirements of Dodd-Frank, the commission removed the equity in a person’s primary residence from consideration. (But if the value of that house is less than the mortgage, that liability needs to be included.)

“It’s an interesting question as to why this qualifies someone as sophisticated,” said Robert E. Buckholz Jr., a partner at Sullivan Cromwell. “The income and the net worth requirements are a proxy for the ability to fend for yourself.”

But also in compliance with Dodd-Frank, the S.E.C. will spend the next three years determining whether to make further changes in the accredited investor requirements. While it is hard to say what the review will produce, it is worthwhile to look at how wealth and financial expertise have been confused.

WHAT THE RULE DOES In a 2009 article in The Washington University Law Review, Wallis K. Finger, now an associate at Schulte Roth Zabel, used humor to lay out the problem of using money as a proxy for sophistication.

“Paris Hilton almost certainly can purchase unregulated securities issued by hedge funds or other private investment vehicles,” Ms. Finger wrote. “Although her training and sophistication in the field of high-stakes financial transactions may be limited, the Securities and Exchange Commission would leave her to her own devices if she chose to invest in private offerings.”

For comparison, she created a woman named Sheryl who has a master’s degree in business from Harvard and a doctorate in financial systems analysis. “After all of this schooling, Sheryl is long on debt and short on assets,” Ms. Finger wrote. “She has several offers to work at the nation’s most prestigious investment brokerages. But if Sheryl wants to invest in a private offering, the S.E.C. regulations will not allow it.”

In other words, using money as a stand-in for financial sophistication is a fairly unsophisticated solution.

When news leaked out last year that Goldman Sachs was planning to offer private shares in Facebook to its wealthiest clients, there was outrage from people who were excluded. After much media attention, the firm limited the private offering to overseas clients to be sure it complied with S.E.C. regulations. (Anyone will be able to buy shares in the initial public offering of Facebook.)

In reality, most private offerings are far less glamorous and carry significant risks.

Barbara Black, a professor and director of the corporate law center at the University of Cincinnati College of Law, said she was more concerned about small offerings, like a local real estate partnership, where an entrepreneur tries to raise money by promising outsize returns to investors in the community.

“It may be perfectly fine, but the nature of things is that these are risky,” Ms. Black said. “You see litigation involving people who are wealthy, but you don’t think of them as super-rich — doctors, dentists, lawyers, some accountants. Are these really sophisticated investors?”

DOES IT WORK? The accredited investor regulation is by design paternalistic, but its arbitrariness is what bothers people.

Originally, the Securities Act of 1933 aimed to provide more information on securities to prevent investors from being manipulated. Those who were exempted from these requirements were believed to possess enough knowledge to make informed choices.

Using the example of doctors and lawyers investing in a local real estate deal, Yasho Lahiri, a partner at law firm Baker Botts in New York, said investors would be better protected with more disclosures, not by their degree of wealth.

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