Last fall, Altheimer & Gray, a prestigious Chicago law firm, booked $6.3 million in fees that it had not yet collected, making its full-year profits look rosier than they actually were.
A month ago the firm collapsed, stunning partners who had been assured as recently as May that it was financially sound.
Now partners question that accounting maneuver, which allowed the firm to obtain financing to prevent further slashes in partner pay. Some are also asking broader questions about how the firm was managed, including about secret advances to top lawyers.
A central figure is Gery Chico, chairman of the firm’s executive committee, who is running for the 2004 Democratic Party nomination to the U.S. Senate from Illinois.
He is Mayor Richard Daley’s ex-chief of staff and former president of the Chicago Board of Education.
The firm’s partners were fully aware of its declining financial health, Altheimer’s spokesman, Laurent Pernot, said in a response to written questions last week.He cited the sustained economic downturn as a principal reason for its demise. The firm depended heavily on corporate work.
Documents obtained by the Tribune and interviews with partners provide a rare glimpse into the inner workings of a worldwide law firm that was one of the nation’s 200 largest.
While business was slowing last year, the firm’s bank debt ballooned to about $24 million, widely considered a large amount given that its total annual revenue was $118 million.
Still, the firm opened a San Francisco office last fall and continued to give advances to a small cadre of partners.
Last year, such advances totaled $852,970, according to its financial statements.
Altheimer’s collapse is the biggest Chicago law firm failure since 1997, when Keck Mahin & Cate went under. Altheimer had employed more than 300 lawyers in 12 offices around the world.
Founded in 1915, it gradually built a reputation for handling complex corporate transactions, such as the $3.8 billion management buyout of Montgomery Ward & Co. in 1988.
Many partners say they were unaware of its precarious financial condition until June 27. That is when its executive committee called for a special meeting to vote on dissolving the firm.
The news seemed incongruous. The firm last year had renewed its lease at 10 S. Wacker Drive and launched a major headquarters renovation.
The administrative staff would receive their last paychecks the following Monday, partners were told, and would receive no severance pay. Retired partners’ benefits were to be discontinued immediately.
Fireworks erupted when some partners raised questions about undisclosed advances given members of the executive committee, including Chico. One committee member, S. Michael Peck, stood and said that just prior to the meeting he had paid back his advance.
A spokesman for the firm said that advances at Altheimer had been a long-established practice.
“There are no outstanding advances, loans or other obligations to partners,” Pernot, the spokesman, said shortly after the dissolution announcement.
Myron Lieberman said that, from the time he joined the firm in 1980 until he retired as co-chairman in 2000, Altheimer never gave advances approaching last year’s magnitude. He also said that he and his co-chairman, Norman Gold, never received advances.
“The real issue is who did we give the advances to,” Lieberman said. “If we gave something, it was to some junior partner.”
Chico, interviewed last week, declined to discuss the advances.
When Altheimer & Gray recruited Chico in 1996, he brought with him desirable connections to the Daley administration. The firm wanted to diversify beyond corporate and real estate work into government relations and lobbying.
That he did. A review of the firm’s finances shows that Chico brought in more than $11 million in 2001, or nearly 10 percent of the firm’s revenue of $118.3 million.
With Chico at the helm, corporations increasingly called on Altheimer to lobby on their behalf. For instance, at City Hall the firm lobbied on behalf of nearly 200 clients in 2000, up from 18 in 1995, the year before Chico arrived.
But in 2002 Chico’s practice suffered. His fee collections dropped 38 percent to $6.8 million.
“I am part of the U.S. economy, where transactional work is substantially down,” Chico said when asked to explain the fall-off. He said his business extended beyond lobbying to real estate, corporate, intellectual property and zoning law.
In 2002, the same year he announced his campaign for Senate, however, he billed only 152 hours, down frrom 1,384 in 2001. Chico said he did not think his campaign distracted him from his legal practice.
He did, however, solicit contributions from his own firm and partners, raising more than $100,000, according to reports filed as of March 31 with the Federal Election Commision.
Chico said he does not believe the law firm’s collapse has had any impact on his campaign.
“I don’t see the matters as linked,” he said. “I think it would be wrong for anyone to make this a political issue.”
Despite his involvement in politics, Chico remained Altheimer’s biggest rainmaker. Among the firm’s other big billers, Peck brought in fees of $5.1 million last year, down from $7 million in 2001. Litigator Jeremy Margolis, former state police director and legal adviser to former Gov. George Ryan, brought in $4.9 million in 2002, up slightly from 2001.
Every equity partner, including Chico, took a pay cut in 2002 because business was slow. Still, Chico remained the highest paid partner, receiving total compensation of $800,000, down from $1.3 million in 2001.
Chico became visibly upset when shown the billing record but confirmed the information.
Altheimer’s own eventual collapse was foreshadowed in October 2002, the end of its fiscal year. The executive committee decided to book $6.3 million in uncollected fees as profit for that year. The partnership approved the move. The firm said the accounting approach was needed in order to avoid distorting its results from year to year.
However, this past April the firm’s outside auditors, Altschuler, Melvoin and Glasser LLP, took exception to that accounting change. In its audit, it pointed out that “such client fees [should] be excluded” from profits.
One partner said such accounting practices were common at the firm.
Lieberman said that was not the case–at least, not for such large amounts of money. “It was certainly not a common practice at that magnitude,” Lieberman said. “I never remember receiving a qualification like that from our accountants.”
To make payments to Chico and other partners last year, the firm had to draw upon its credit line. By Oct. 31 the firm had borrowed $14.6 million on its $23 million credit line with LaSalle Bank. That amount was twice as much as was outstanding against the credit line at that date in 2001.
Having any outstanding balance at year-end at a law firm is unusual, said Ralph Savarese, a law firm management consultant and retired chairman of Howrey & Simon, a Washington, D.C., law firm. Law firms typically make big pushes for fee collections at year-end, he said, and that is when credit lines are paid down.
Altheimer kept borrowing to fund its operations. By the end of May, it had borrowed $22.3 million against its credit line and had only $1.6 million left in cash, down from $10.5 million on Oct. 31. In addition, the firm had long-term debt of $8.3 million.
Another sign of trouble was the quality of the firm’s receivables–billings for legal work that have not been collected. Nearly 40 percent of the $31 million in receivables were more than 180 days old.
“In general, bankers will say that after 180 days collection probability becomes low,” Savarese said.
Despite its financial woes, Altheimer did not pull back on its far-flung worldwide offices.
The firm had first looked overseas in 1990, when it became the first American firm to open a beachhead in Poland. The firm’s strategy was to capture business in formerly Communist countries, where many government-owned enterprises would become private businesses. Eventually it opened seven offices in eastern Europe and an outpost in China in 1996.
The firm in 1999 opened a London office, but the office never performed up to financial expectations, Lieberman said. It continued the expansion last fall by opening the San Francisco office. The executive committee sold the idea to partners by suggesting the firm could pick up cheap office space and good lawyers in the wake of that market’s dot-com bust.
As Altheimer’s financial situation continued to deteriorate this year, its executive committee made a last-ditch effort to salvage the firm. During the week of June 16, partners approached Sonnenschein, Nath & Rosenthal LLP, a Chicago firm, about a potential merger, people familiar with the talks said.
Sonnenschein turned down the proposal, they said, but it left open the possibility of hiring individuals from Altheimer if that firm decided it had no option but to liquidate.
A few days later Altheimer’s executive committee recommended liquidation to the rest of the partnership.
“I knew there were tough times, but I had no idea they were going to dissolve,” said Lieberman. “I am devastated.”
