Dreier Troubles Show Danger of Single Equity Partner Structure
Arrested lawyer Marc Dreier was the only equity partner at the Dreier law firm, an arrangement that spells trouble for other partners there.
Such a partnership structure leaves the firm vulnerable to collapse, yet it may not protect nonequity partners from client and bank lawsuits, the American Lawyer reports.
In a National Law Journal article published last year, Marc Dreier explained that he earns all of the firm’s equity and controls its expenses. He said he pays partners a base salary plus bonuses based on business origination, a system that leaves partners feeling their work isn’t being diluted by subpar performers.
That structure has been called into question since Marc Dreier was charged on Monday with wire and securities fraud. He is accused of tricking investors into paying more than $100 million for phony debt instruments.
Altman Weil legal consultant Ward Bower explains that it’s a bad idea for any law firm to place all of the control with one person. “When that person goes, there goes the business,” Bower told the American Lawyer.
“It’s that simple. Nobody else has any right to any of the firm’s assets. It’s just not a business model that makes sense for a 250-lawyer firm. What if Dreier just got hit by a bus? What would happen then?” Bower asked.
Despite Dreier’s control of the firm, it’s unclear if it will protect partners in any suits filed by clients seeking missing escrow money or the suit filed by Wachovia over a $9 million loan default. Liability may partly depend on individual lawyers’ contracts and client billing records, experts told the American Lawyer.
Partners may also be forced to give back bonuses if the firm files for bankruptcy and a court finds Dreier used fraud to obtain the cash to make the payments, the story says.
