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Lessons for Solos from Dreier LLP: If It Sounds Too Good To Be True…

by Carolyn Elefant on December 14, 2008 · 7 comments

in Ethics Issues, Law Practice Management

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With the law firm of Dreier LLP on the brink of collapse as the result of founder and sole equity partner Marc Dreier’s multi-million dollar criminal fraud, the firm’s lawyers are learning first hand that if  a work situation sounds too good to be true, then it probably is.  Not only will many Dreier lawyers find themselves out of a job but they also face considerable personal liability exposure if Dreier’s victims sue the firm, because Dreier allowed the firm’s malpractice insurance to lapse, reports the New York Times.

So how did some of New York’s “best and brightest” wind up in this precarious situation?  Because Dreier sold them a bill of goods, convincing lawyers to let him handle the business end of the firm so that they could focus on the practice of law.  From the Times story:

Dreier was the only equity partner in the firm, and deals were structured so that only he knew all the specifics and had access to all accounts, people with the firm said in court papers. Dreier persuaded lawyers that such an arrangement was best by stressing that it would allow them to concentrate on their first love, the law, while he worried about running the firm. There would be no executive committee. No partners meetings. Dreier would handle all administrative chores.

I’m not sure why this proposed arrangement didn’t set off any alarm bells among firm partners.  Surely they must have realized that as partners in a firm, they could face malpractice liability for their partners’ mistakes.  But instead of thinking rationally, these lawyers buried their concerns, allowing themselves to buy into the illusion that one can simply practice law without any regard to the messy business of running a firm.

In starting a practice, many new solos may find themselves faced with all kinds of too good to be true propositions from unscrupulous lawyers.  Some may offer to provide office space in exchange for a few hours of work a week, then turn around and expect you to work 25 hours a week to meet your rental obligation.  Or a lawyer might invite you to rent space in his suite saying, “Oh, we could use a family lawyer here for referrals,” and then six months later, when your business picks up, the lawyer may open his own family law practice and compete for your clients.  In another situation, a lawyer rented space to an acquaintance of mine, and started asking him to sign the pleadings.  Turned out the lawyer had been suspended from practice, and was using the acquaintance as a temporary front to allow him to continue to practice.

Bottom line:  analyze every proposal that you receive with the same due diligence that you’d extend to a client.  Get references on the lawyers involved and ask for an unbiased opinion from the bar’s law practice management advisor, a trusted colleague or even your spouse or a friend.  As the Dreier situation shows, too good to be true can quickly morph into worse than you ever imagined.

Readers – please share your own horror stories below.

  • Older and Maybe Wiser

    Sometimes, the signs of trouble are right before your eyes, but you choose not to see them. When I broke out, I entered into a space-sharing relationship with an acquaintance with what appeared to be an established practice. Had I taken thirty seconds to look at the library–and find out that the good-looking books’ pocket parts were five years out of date, I might have made a different decision, sparing myself three years of association with a (still) good friend whose practice was in shambles.
    Due diligence now might be making sure that the database accounts are working–and (sad to say) a look at current bankruptcy and foreclosure filings. As lawyers, we know what to look for and how to do it. We can’t forget to use those tools when we become entrepreneurs, too.

  • http://www.benglasslaw.com Ben Glass

    Its not enough to be a good lawyer or even to want to do good. Lawyers must understand and master the business side of the practice. Its a shame that its not taught in law school and its absurd that mandatory CLE states like Virginia deny credit to education about the business side of the law. This sounds exactly like how Bernard Madoff ran his now discovered Ponzi scheme: by inviting you to ‘play’ by convincing you that you were allowed in because you were smart. So once you get there you feel stupid to ask (obvious) questions because you (must be) smart. So you don’t ask till the walls come crumbling down!
    Memo to solo and small firm lawyers: You know what the Dreier law firm lawyers are going to do? Not go to Wall Street to sell derivatives. Nope! They are coming to set up a solo or small office near you.
    What are you doing TODAY to get another client!

  • http://www.lmmlawfirm.com David Leffler

    I just blogged about this today at http://tinyurl.com/599l5e (“I’m Beginning to Feel Like the Last Honest Person Standing”).
    You hit the nail on the head when you advice lawyers to “think rationally.” Too often lawyers do things in their business which they specifically advise their clients not to do.
    An extreme example of this can be seen in the film “Body Heat,” where William Hurt, playing a lawyer from a small town in Florida, reaches out to one of his former criminal law clients (played by Mickey Rourke) to find out how to torch his girlfriend’s husband’s car as part of a murder plot.
    In a great piece of delivery early in his career, Mickey Rourke says, “I got a serious question for you counselor: What the f*ck are you doing? This is not sh*t for you to be messin’ with. Are you ready to hear something? I want you to see if this sounds familiar: any time you try a decent crime, you got fifty ways you’re gonna f*ck up. If you think of twenty-five of them, then you’re a genius… and you ain’t no genius. You remember who told me that?”

  • http://www.californiasmallbusinessblog.com Joseph Dang

    Found this on twitter:
    http://is.gd/c0Ap
    SEC Receiver Pomerantz: Dreier LLP to File for Bankruptcy
    The Madoff scandal is getting a lot more press, and understandably so, but this one hits home for attorneys.

  • http://www.dreier.com Kyle Dreier

    I don’t have a horror story to share but I am rather miffed for multiple reasons. One in general about scandal, corruption and greed. All the makings of a made for TV movie … but we’re having to watch it unfold in real life. I say show no mercy to law breakers. Second, my sir name is Dreier and it saddens me to have it associated with this type of behavior. I grew up with Dreier being a name of honor, pride and integrity. I try to uphold to that standard. (http://mrcritical.com/shame-to-the-dreier-name/)
    For now, my best advice to others is build in accountability to avoid human nature getting the best of us.
    -Kyle Dreier

  • http://b-law.com Diana L. Bartolotta

    Carolyn,
    I find your comment about that the structure seemed too good to be true very interesting. I agree – most law firms are built around a partnership structure. Funny enough, I’m setting up my law firm the same way Mr. Deier did, because I think he’s right about how to run a successful law firm. It needs to be run like a business, with someone at the top, rather than using the more traditional, consensus-based decision-making practices.
    I think this issue arose because of the nature of Mr. Deier, and not because of the nature of his business structure. I mean, if he was going to embezzled funds and commit fraud, wouldn’t he have done this regardless of the business structure? I think that your point was that it would have been easier for the other lawyers to have discovered what he was doing and stopped him, if a traditional law firm structure had been in place, but I think he still would have created this scheme.
    I think the future of law firm practice management is to have someone to run the business, to allow the attorneys to be attorneys, and this is exactly how I’ve set up my practice. Perhaps a board of directors would be a good idea to have in place?
    I’m curious as to your thoughts on this, because I think the traditional model of partnership structure for law firms does not work, especially when serving a population that necessitates low profit margins, to make legal services affordable. By eliminating the partnership model, I am able to more efficiently run my law firm, resulting in lower overhead and ultimately higher salaries to my attorneys. I think the future of law practice management is to become smarter businesspeople, running law firms more like traditional companies, recognizing that we, too, make and sell widgets.
    Thoughts?

  • Patricia Dangerfield

    I would like to know if James M. Bergen or Robert Grand, partners at Dreier LLP, took the Merrill Lynch files with them when they left the firm. No malpractice insurance for the firm? What a mess.

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