In Push for Transparency, a Law Firm Releases Its Financial Results

Call it the Dewey & LeBoeuf effect.

K&L Gates, one of the country’s largest law firms, disclosed its financial results on Thursday, sending tremors through an industry that has traditionally kept such information private.

A fast-growing Pittsburgh-based law firm with more than 2,000 lawyers, K&L Gates posted its 2012 numbers on its Web site, revealing its profits per partner, debt load and other key measures. The disclosure comes less than a year after the bankruptcy filing of the law firm Dewey & LeBoeuf, which collapsed amid questions about the integrity of its financial statements.

Peter Kalis, the chairman of K&L Gates, said in an e-mail that in some ways, the enhanced disclosures was a direct response to the Dewey debacle.

“The entire industry was tarred by Dewey, and the industry’s opacity and misleading statistics magnified the Dewey effect for all of us,”
Mr. Kalis said. “We wanted to head in a new direction and to promote change toward an informed transpareny.”

Large corporate law firms typically publish annual revenues and profits, but the release by K&L Gates is groundbreaking, legal industry experts say.

“This type of thoughtful, comprehensive, nuanced disclosure can only be good for our industry,” Bruce MacEwen, a legal industry consultant, wrote on his Web site, Adam Smith Esq.

Because they are private partnerships, the nation’s largest law firms have no obligation to report their financial results to the public. Yet in the wake of Dewey’s collapse, clients are asking more questions about the financial state of the firms they employ. In addition, prospective hires are also looking more closely at firms’ books.

Historically, the legal industry has looked to the American Lawyer magazine for financial information about the country’s largest law firms. But the integrity of the magazine’s annual “AmLaw100” rankings of law firm performance came! under scrutiny last year when it announced that it was making substantial revisions to two years of Dewey’s results. The magazine has defended its process and accused Dewey’s management of misleading them.

Like Dewey, K&L Gates has grown rapidly through acquisitions and recruiting high-priced lawyers from other firms. Its financial results, though, distinguish it from Dewey in crucial ways.

In contrast to Dewey, which struggled under a heavy debt load, K&L Gates has zero outstanding bank debt. In other “indicia of financial stability,” as it called a section of the disclosure, the firm cited cash balances of more than $220 million and the availability of $75 million under bank lines of credit.

The firm’s revenue dropped slightly from 2011, to $1.06 billion, with net income per “fully participating equity partners” reported at about $900,000. Including partners without full equity participating, the average was $636,920.

K&L Gates also disclosed that the highest paid eqity partner made 7.9 times the average compensation of the lowest paid equity partner, which is in the ballpark of the spread at many top law firms. By comparison, this ratio at Dewey, which doled out exorbitant guarantees to lure star lawyers away from other firms, had widened to more 25 to 1. One former Dewey partner described such a compensation structure as “something closer to feudalism than a true partnership.”

In response to whether he hoped that other firms would follow his lead and open up their books, Mr. Kalis said, “We’ll see in the times to come whether we’re a change agent for the industry or an isolated instance of transparency.”