Scott Flaherty, The Am Law Daily
In less than a year, Big Law has seen at least three lateral hires go seriously—even criminally—awry.
There was the case of former Arent Fox partner Robert Schulman, who was indicted last August and convicted in March on charges that he passed on an insider trading tip to an investment adviser. Schulman had moved to Arent Fox in 2015 from Hunton & Williams, about two years after his name came up in a U.S. Securities and Exchange Commission case related to the insider trading allegations.
Akin Gump Strauss Hauer & Feld found itself at the center of a lateral hiring mishap in February, when federal prosecutors accused a recently hired partner, Jeffrey Wertkin, of trying to sell a confidential whistleblower complaint. And in May, former Foley & Lardner real estate and banking lawyer Walter “Chet” Little was arrested in connection with an alleged insider trading scheme less than a year after jumping to Bradley Arant Boult Cummings. Bradley Arant dismissed Little quickly after word of his arrest.
Those cases serve as extreme cautionary tales. But legal industry and hiring consultants say a large percentage of lateral hires flop for more ordinary reasons, such as lackluster business prospects, poor people skills or a missing cultural fit.
Those lateral misfires cause real damage. Yet many firms, including at the top end of the legal market, don’t do the kind of vetting that might stop a problematic hire in its tracks.
“Fifty percent of all laterals will fail within five years. And that pretty much shows up across the board in every study that’s been done,” said Michael Ellenhorn, co-founder and general counsel of Decipher, a human resources and market intelligence business.
Missteps can be costly for law firms, which often shell out money for recruiters and may offer guaranteed compensation deals to their hires, especially in their first year at the firm. In all, Ellenhorn said, the cost of a failed lateral partner can be as much as 200-400 percent of that lawyer’s actual compensation, including the costs of replacing the lawyer after a departure.
Firms that do a lot of lateral hiring might also face higher rates on their legal malpractice insurance policies. A steady flow of partners coming in and out can make a firm look riskier to an insurer, industry consultants said. “It’s fair to say that when firms go and negotiate their premiums … one aspect that insurers want to hear about is what process people go to in vetting lateral partners,” said Howard Flack, a partner at the legal consulting firm Volta who previously headed up lateral partner recruitment and integration at Hogan Lovells.
Flack also pointed to a less tangible cost of hiring someone who doesn’t ultimately fit within the firm. “There’s an internal cost to bringing someone aboard that you cannot really quantify,” he said. “But you can conclude this: If you bring on board a culturally incompatible partner … then your partners are never going to introduce clients to that person.”
With those stakes, it stands to reason that law firms would take a close look at their lateral hires before bringing them on board. But firms are all over the map when it comes to doing diligence on candidates, said Decipher’s other co-founder and CEO, Howard Rosenberg. Some hire partners after little more than a handshake, while others do minimal screening such as checking references and obtaining a criminal background report.
Why don’t more firms take additional steps? They may be hungry to expand and therefore willing to take risks. Or a problematic lawyer may slip through the hiring process because an existing partner has vouched for the candidate, or even because the person has the right schools listed on his or her resume, according to Harrison Barnes, managing director of legal recruiter BCG Attorney Search.
“A lot of the firms are very desperate for [business drivers], and at the same time the partners need to have a place where they can work,” he said. And firms can’t always rely on recruiters, who typically have a financial incentive in getting a candidate hired at a firm, to do the kind of in-depth vetting that might uncover issues with a partner that don’t appear on a lawyer’s hiring questionnaire, Barnes acknowledged. He said he’s seen situations, for example, when recruiters far overstate the book of business of a partner they’re shopping around. “Recruiters are out of control too. As a recruiter we’re trying to sell someone,” he said. “So the firms have to look out.”
An Ounce of Prevention
Stringent vetting should be the norm for firms that might shell out millions of dollars to a lateral partner who ends up leaving within five years, according to Barnes, Flack and Rosenberg and Ellenhorn of Decipher. “I think the law firm needs to spend a lot of time interviewing laterals to get a good understanding of their reasons for moving,” said Barnes. Otherwise, he added, “it’s like buying penny stocks.”
“My view is, ‘Can you really afford not to do it?” said Flack. He said that detailed third- party screening is important. But it’s also crucial that firms have a high-level partner who meets with candidates and can “look at all the facts and circumstances,” considering not just a due diligence report from an outside service, but also his or her own impressions of the candidate and comments from other partners at the firm who interviewed the potential hire, he said.
Ellenhorn and Rosenberg also recommend including the firm’s general counsel in the process, since they can evaluate the potential legal and conflict risks of a new hire. “This is viewed as a mini-M&A opportunity for the firm,” said Rosenberg. “It’s a competitive advantage situation if they get it right.”