Brendan McDermid/ReutersIrving H. Picard.
The job of unwinding Bernard L. Madoff’s huge fraud and recovering money for its victims has been lucrative, reaping hundreds of millions of dollars in legal fees. Late last year, a New Jersey law firm tried to poach the legal team handling that assignment.
It was an audacious move that would have transformed the New Jersey firm, Greenbaum Rowe Smith Davis, giving it a powerful presence in New York and the enormous stream of legal fees being generated by the Madoff litigation.
Irving H. Picard, the court-appointed Madoff trustee, and his chief counsel, David Sheehan, carefully considered leaving their firm, Baker Hostetler, but decided to stay after additional resources were committed to their group.
Though the deal never materialized, the dalliance highlights the intense demand at corporate law firms for lawyers with large, established books of business. While lateral hiring is nothing new, some of the country’s biggest law firms are recruiting top producers more aggressively than ever and offering record pay packages with multiyear guarantees, legal industry specialists say.
“We have entered the era of the superstar megarainmaker,” said Peter Zeughauser of the Zeughauser Group, a law firm consultancy.
This year, DLA Piper, a giant law firm at the forefront of this trend, hired James D. Wareham, a litigator in Washington who represents big corporations including Capital One and Chevron. DLA Piper is paying him more than $5 million a year, a substantial increase from his salary at his former firm, Paul, Hastings, Janofsky Walker.
Last month, O’Melveny Myers lost nine corporate partners that have Apollo Global Management, the large private equity firm, as a prized client. Seven of them left for Paul, Weiss, Rifkind, Wharton Garrison; two went to Weil Gotshal Manges.
Latham Watkins recently picked off seven partners from three competitors, including Proskauer Rose and WilmerHale, to establish an office in Boston, an important location for profitable legal work in the technology and life sciences industries.
The competition for top legal talent has caused the spread between the highest-paid partners and other partners at law firms to widen in recent years. The average partner at a United States firm earns $640,000 a year, according to a recent compensation study by Major, Lindsey Africa, a legal recruiting firm. Top producers at some of the biggest firms are paid as much as 10 times what an average partner at their firm earns, roughly double the gap of a decade ago, legal industry consultants say.
A number of factors are driving ever-higher compensation for top producers. A persistently weak economy continues to put pressure on the revenues of these firms, making them desperate to capture business that can generate big fees. Large corporations also continue to reduce the number of outside law firms they use, a trend that has forced firms to pay up for teams of lawyers in important practice areas where they lack a specialty.
Some corporate law firms, like Cleary Gottlieb Steen Hamilton and Cravath Swaine Moore, eschew the star system and maintain a more traditional partnership culture with compensation in a more narrow range. Still, the free-agent market for rainmakers has altered the corporate law landscape.
“We’re increasingly seeing big firms pay up for large teams of lawyers built around a rainmaker, or a big client, or a complex case,” said Jeffrey A. Lowe, a managing partner at Major, Lindsey Africa. “You could certainly see the appeal that the Madoff trustee and his team of lawyers would have to another firm.”
The Madoff trustee litigation has been a boon for Baker Hostetler, a 740-lawyer Cleveland-based firm. Mr. Picard and his team have filed more than a thousand lawsuits seeking to recover money for victims who sustained losses in the fraud. Among the defendants are more than a dozen banks, including JPMorgan Chase, and wealthy investors like the Wilpon family, which owns the New York Mets. In some lawsuits, Mr. Picard is seeking to recover cash withdrawn from the Ponzi scheme before its collapse; in others, he has asked for damages from defendants who he says knew or should have known about the fraud.
So far, Mr. Picard has recovered about $10 billion in settlements and asset sales, far more than what legal specialists had expected.
It has been a hugely profitable assignment, having brought in about $180 million in legal fees for Baker Hostetler. The firm is expected to receive roughly $603 million more for its work from 2011 to 2014, according to correspondence from the Securities Investor Protection Corporation, a private nonprofit entity backed by broker-dealers, which pays Baker Hostetler’s fees.
Mr. Picard, as trustee, has been paid $4.3 million through January, according to court records. He stands to make an additional $12.5 million over the next three years, the SIPC letter said.
The financial arrangement that Mr. Picard and Mr. Sheehan have with Baker Hostetler is unclear.
The Madoff case was a major driver in increasing revenue at Baker Hostetler by 17 percent last year, the third-largest increase among the country’s 100 largest law firms, according to The American Lawyer magazine. Since receiving the assignment, Baker Hostetler’s New York office, where Mr. Picard and Mr. Sheehan are based, has doubled to about 150 lawyers.
Though the Madoff litigation has brought many dollars and much prominence to Baker Hostetler, not every lawyer at the firm is thrilled.
A number of Baker Hostetler lawyers have complained that too many resources are being devoted to the Madoff case at the expense of the rest of the firm’s practice groups.
“We’re now the Madoff firm, just go to our Web site and take a look,” said a lawyer at Baker Hostetler who spoke only on the condition of anonymity because he was not authorized to speak publicly. “All you’ll see is Madoff, Madoff, Madoff.”
(While the firm trumpets the Madoff work on its Web site, the site contains smaller reports on other assignments.)
Another concern is a conflict-of-interest issue: Baker Hostetler would not represent many large banks and wealthy families because they were defendants in Madoff lawsuits. This would also make it a challenge for the Madoff team to join another large national firm with clients, or prospective clients, that have been sued by the trustee.
Last year Mr. Sheehan began discussing the possibility of leaving Baker Hostetler with Paul Rowe, the chairman of Greenbaum Rowe. It would have been a good fit. Joining Greenbaum Rowe would allow the Madoff team to operate on its own from New York with the backing of a 100-lawyer firm based in Iselin, N.J., best known for its litigation practices.
Mr. Rowe declined to comment.
Talks advanced far enough along that Greenbaum Rowe had secured two floors of empty space at 666 Fifth Avenue. But after discussions with Baker Hostetler management, Mr. Picard and Mr. Sheehan stayed put.
People briefed on the decision say that the firm did not increase their compensation, but instead devoted more resources to the Madoff litigation.
“The trustee and his counsel are committed to Baker Hostetler and look forward to the continued success that the firm’s legal team has achieved on the Madoff matter,” a spokesman for the firm said.
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