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Category: Fee Data / Analytics

Report: Wells Fargo Was Too Focused on Legal Spend

April 12, 2017

A recent Bloomberg Big Law Business story by Gabe Friedman, “Wells Fargo Lawyers Were Too Cost Focused, Report Says,” reports on the recent abusive sales practices of Wells Fargo.  The story reads:

After taking six months to investigate how Wells Fargo became enveloped in an abusive sales scandal, Shearman & Sterling has produced a 113-page report (pdf) that lays into the legal department for missing the big picture and focusing too much on legal cost containment.  The report was commissioned by the board of directors, which in September retained Shearman to assist an oversight committee in examining the scandal, in which bank employees created an untold number of fraudulent bank accounts in customers’ names in order to meet their sales targets.

The team of Shearman lawyers interviewed 100 people, mostly in senior management, and reviewed 35 million documents, collected from 300 custodians with FTI Consulting providing data analytics assistance, according to a note within the 113-page report.  It assesses each department in the bank, from human resources to audit, for its contribution to the scandal.  Although the law department is far from alone in the blame, the Shearman team repeatedly knocked the department under former general counsel James Strother for failing to see a pattern and recognize the seriousness in a growing number of incidents beginning in 2011 related to improper sales practices.

Right up until September 2016, “there continued to be a lack of recognition within the Law Department (as in other parts of Wells Fargo) about the significance of the number of sales integrity terminations, and the potential reputational consequences associated with that number,” the report notes.  “The Law Department’s focus was principally on quantifiable monetary costs — damages, fines, penalties, restitution.”

It adds, “Confident those costs would be relatively modest, the Law Department did not appreciate that sales integrity issues reflected a systemic breakdown in Wells Fargo’s culture and values and an ongoing failure to correct the widespread breaches of trust in the misuse of customers’ personal data and financial information.”

Former general counsel Strother, who retired last month, also comes up for serious scrutiny in the report including that the board’s risk committee felt badly misled for a presentation he was involved in.  Most notably, according to the report, in May 2015, three weeks after the Los Angeles City Attorney’s Office filed a lawsuit against Wells Fargo, accusing it of setting unrealistic sales goals that created pressure on employees to resort to opening fraudulent accounts, Strother and Carrie Tolstedt, head of community banking made a presentation to the board’s Risk Committee about the matter.

The Risk Committee specifically requested the number of employees that had been fired up to that point related to improper sales practices, which numbered around 2,600 at that point, the report states.  But this number was deleted from the presentation during a pre-conference call between members of the legal department and Tolstedt’s community banking department — for reasons no one could recall, according to Shearman.

Instead, the Risk Committee heard that only 230 employees had been fired and that “the root cause was intentional employee misconduct, not systemic issues,” according to the report. It was the first time that the committee even heard that there were as many as 230 terminations, and members “felt blindsided by the disclosure,” the report says. 

And in fact, the report notes, the actual number of people who had been fired or resigned as a result of investigations was closer to 2,600 at that time.  “Multiple Board members have stated that they felt misled by the presentation; they left with the understanding that sales integrity terminations were in the range of 200-300 and were largely localized in Southern California,” the report states.  “The Board was not provided with the correct aggregated termination data until well into 2016.”

While the report does credit some members of the law department with making “commendable attempts to address the sales abuses … through work on various committees,” it faults its members for not fully considering “whether there might be a pattern of illegal conduct” rather than a series of discrete legal problems.

Already, the report is being held up as a rare inside look at how a law department failed to mitigate a problem before it grew into a full scandal that resulted in major regulatory fines and executive management changes.  “This is the Wells Fargo Investigative Report.  It is well worth reading.  The next in the chronicles from Enron to GM,” Abercrombie & Fitch’s general counsel Robert Bostrom wrote on LinkedIn on Monday.

Amar Sarwal, vice president and chief legal strategist of the Association of Corporate Counsel, agreed that the report is likely to be studied by lawyers in the future.  “Normally you’re not going to have the confidential workings [of a law department] exposed like this,” Sarwal said.

The fact that it is written by a law firm, and critiques a corporate law department for focusing too much on cost containment and not seeing the big picture marks an “intriguing turnaround” from the normal roles, he added.  It is more common to hear corporate law departments critique law firms for being too focused on the billable hour and not spending enough time learning their client’s business.

The Shearman team was lead by New York partner Stuart Baskin, a former federal prosecutor in Manhattan.  Baskin previously represented J.P. Morgan’s board of directors as it dealt with the London Whale scandal, which involved a trader who accumulated an outsized position in the credit default swap market and lost $6.2 billion, raising questions about the bank’s risk management system.

Sarwal said the report puts a spotlight on the fact that all corporate lawyers, both in house and at law firms, face a tension between advising their client on a specific matter, and advising them on how to run their business.  “There’s this idea that the lawyers are the conscience of the company, but they’re not,” he added.

Instead, they operate within the hierarchy of the company and have to work with other executives to identify and solve problems.  He criticized the report for not contextualizing what else the law department had on its plate as the sales abuse problem unfolded, but nonetheless praised it as useful information.  “For GCs, this report is just another reminder that your job involves trying to change a real culture of human beings,” said Sarwal.

NALFA Quoted in ALM’s Daily Business Review

March 1, 2017

NALFA was quoted in the ALM’s Daily Business Review (DBR), the leading source of daily legal and business news in South Florida, in a news story by Monika Gonzalez Mesa, “Are Florida Billing Rates on the Rise? It Depends”.  The story reads:

At least six large Florida-based law firms raised their billing rates in 2016 and plan to do so again this year.  But the higher rates may not be typical for Florida firms across the board.

In a survey conducted by ALM, Akerman, Greenspoon Marder, Holland & Knight and Shutts & Bowen all projected that they will raise hourly billing rates by more than 3 percent in 2017, as they did in 2016.  Greenberg Traurig also said it raised billing rates by more than 3 percent in 2016 but expects the percentage increase to be lower this year.  And Carlton Fields reported that it, too, raised its billing rates in 2016, although the increase was not as high.  It says it plans to raise them again this year.

But many variables go into determining billing rates, and the upswing does not necessarily represent an overall trend for Florida law firms, lawyers say.  Billing rates vary widely with location, market competition, complexity of practice, demand for that practice and the individual lawyer's experience.  Firms strive to find the rate that covers overhead without turning off clients while still keeping the firm attractive to valuable existing talent and potential recruits.

"It's hard to get a general consensus on billing rates because they tend to be geography focused and practice driven," said Terry Jesse, executive director of the National Association of Legal Fee Analysis, a Chicago-based nonprofit.

Bankruptcy court records, however, can provide a snapshot of billing rates because attorneys are often required to list their rates when representing clients in bankruptcy.  ALM Legal Intelligence collected 2016's hourly billing rates for partners, associates, of counsel and paralegals from these published rates in the 20 largest federal bankruptcy jurisdictions.  The Daily Business Review compiled a Florida list based on this data, offering a view of billing rates in the state.

The largest group of Florida attorneys in the list reported rates in the $200 to $350 an hour range.  The next biggest block provided rates that ranged between $350 and $500 an hour.  A smaller but still significant tier billed $500 or more per hour.

Among the highest paid attorneys were Greenberg Traurig partner Paul Keenan, who billed $765 an hour, Paul Singerman, co-chairman of Berger Singerman, who reported a rate of $695 an hour, and Robert Furr, founding partner of FurrCohen, who listed his rate at $650 an hour.

"I know guys that charge even more than that—a lot more," said I. Mark Rubin, an attorney in Jacksonville, who was included in the top-tier of the list with a billing rate of $575.  "Our clients are willing to pay for our services because they can't get the type of representation we give anywhere else."

Rubin represents groups of small investors who were caught up in aggregated-investor building-purchase schemes in the early 2000s.  Many of the deals involved fraud and left seniors without access to their life savings.  Rubin said he was included in the 2016 ranking because he used bankruptcy court to keep a 30-story building from falling into the hands of a predatory lender.

Bankruptcy billing rates, however, don't necessarily reflect billing rates for other practice areas, lawyers say.  Often, bankruptcy cases involve limited funds and limited recovery, so when deciding what to charge, lawyers have to consider that their compensation—especially in trustee and debtor cases—will also be limited.

"Bankruptcy traditionally has higher hourly rates, not only because of the complexity, but because of the risk that lawyers have to take on," said Luis Salazar, managing partner at Salazar Jackson in Coral Gables.

Bankruptcies make up about 25 percent of Salazar's practice now, but seven years ago, when the economy was doing poorly, it was perhaps as much as 50 percent, he said.  "For our market I don't think you're seeing much increase in bankruptcy billing rates because the demand is not there," he said.

Salazar is listed as charging an hourly rate of $500 in 2016.  Now, he says, his hourly billing rate has gone up to $550.  But much of his work, he says, is now based on a flat fee or alternative fee agreement.

Another reason billing rates in bankruptcy cases may not accurately reflect the rates attorneys charge in other practice areas is that bankruptcy attorneys are not as constrained by the power and weight of market competition.  In bankruptcy court, it is judges who approve the billing rates.

"The [bankruptcy] rates tend to be a little higher than they would be in the market because you have a judge looking over the rate as opposed to the competitive market," said Gary Mason, founding partner at Whitfield Bryson & Mason in Washington, D.C.

Bankruptcy billing rates do offer a window into legal fees.  But they are a very small part of the market overall, lawyers say, making it difficult to extrapolate rates throughout the industry from that data alone.

In fact, legal billing rates vary significantly and depend largely on the practice area and the complexity of a case, attorneys say.

"If it tends to be very complex work, the rates are going to be higher—and generally the larger firms do that [kind of work]," Mason said.  "But you'll usually find smaller boutique firms that have similar high rates because they have specialized expertise."

In South Florida, lawyers say the highest hourly rates are in specialty areas: complex cross-border, mergers and acquisitions, antitrust litigation, project finance, international taxation and international arbitration.

"The highest rates we see in Florida pretty much max out at around $850 locally, but you do have a small cadre of Miami-based partners working on national major market matters who charge New York rates—over $1,000 per hour," said Joe Ankus, president of the Florida-based legal recruiting firm Ankus Consulting.

Ankus says that firms tell him what they expect their lawyers' rates to be when they hire lateral partners.  "While $765 is definitely in the top five-to-ten percent of rates for all of the South Florida legal market, it is not considered high for an AmLaw Top 25 firm with an office in Florida," he said.  "It would be closer to middle-of-the-road, depending on the practice area."

At the global firm Holland & Knight, a market analysis and information gathering process begins a few months before the firm implements a rate change.

"We try to gather as much information and market data as possible," said Holland & Knight Operations and Finance partner Douglas Wright.  "We use market data compiled by large accounting firms and other consultants to analyze and evaluate our rates.  We spend a lot of time poring over the data."

The distilled information is then shared with practice leaders, who further discuss current market considerations and demand for each lawyer in determining a rate, he said.

"From all of that process, we develop a rate for each individual lawyer, which is an attempt, again, to balance market considerations, client considerations, and to make sure the firm is in a position to demonstrate the value proposition that it brings to our clients," Wright said.

According to Jesse of the National Association of Legal Fee Analysis, antitrust litigation is generally the most expensive litigation, and white-collar defense also has a high hourly rate.  Bankruptcy tends to be more straightforward, he said, but the more complex the litigation, the higher the hourly rate.

"The lowest rates out there tend to be insurance defense rates because the insurance companies will give them a book of business," Jesse said.  "There tends to be a difference in how plaintiffs attorneys bill and defense attorneys bill.  Defense work tends to be on hourly-based, while plaintiffs attorneys can bill on a contingency."

Last month, the rates law firms charge for their services grabbed the public's attention in Florida when the state revealed that four law firms had billed $97.8 million since 2001 for their work representing Florida in a battle with Georgia over water rights.  According to a spreadsheet obtained by the Miami Herald and the Tampa Bay Times, Latham & Watkins charged $395 an hour for lawyers with three years or less experience, $575 an hour for lawyers with between three and ten years of experience and $825 an hour for work performed by partners.  Foley & Lardner charged $220 an hour for associates with five years or less experience, and $450 an hour for partners.

While hourly billing rates are not likely to disappear any time soon, lawyers say that over the past few years, clients have become savvier at looking for predictability, efficiency and good value.  For longer projects, they want to know what alternatives they have.  Salazar said his firm embraced the change and created a system based on project management methods from other industries to zero in on what clients are looking for.

"Most of the work we're doing now is either project billing-based or flat fee-based or some sort of alternative fee," he said, "For bankruptcy, there's still an hourly fee approach, but for nonbankruptcy matters, including commercial litigation, transaction and the compliance work we do, clients are really seeking some alternative billing basis."

What are Best Practice in Outside Legal Fee Analysis?

February 20, 2017

Legal fee analysis is the comprehensive review and analysis of attorney fees and costs in an outside legal matter.  Professionals who perform outside legal fee analysis include attorney fee experts, special fee masters, bankruptcy fee examiners, fee dispute mediators, and legal bill auditors.

The following best practices measures were developed over several years with input and consensus from thought leaders from across the legal fee analysis community.  These best practice measures promote values such as ethics, independence, and professional development.  These peer review driven standards help strengthen the legal fee analysis field by ensuring integrity in the process and and reliability in the results. 

This professional code of conduct is considered the professional mainstream of legal fee analysis.  All our members (i.e. fully qualified attorney fee experts, special fee masters, bankruptcy fee examiners, fee dispute mediators, and legal bill auditors) have pledged to follow Best Practices in Outside Legal Fee Analysis:

  1. Adhere to the proper standard of reasonableness.
  2. Observe a consistent and reliable methodology.
  3. Keep updated on the latest jurisprudence of reasonable attorney fees and expenses.
  4. Keep updated on the latest scholarship on reasonable attorney fees and expenses (i.e. empirical papers, studies, surveys, and reports).
  5. Participate in professional development and CLE programs on attorney fees and legal billing topics.
  6. Do not advertise false or intentionally misleading information or offer any guarantee of outcome.
  7. Do not charge on a contingency basis (i.e. based on the results obtained).
  8. Do not accept a case or client where there is an inherent conflict of interest.
  9. Keep all fee, billing, and work product information in strict confidence.
  10. Utilize technology where possible.

Please note: You don't need to be a NALFA member to follow Best Practices in Outside Legal Fee Analysis.

NALFA Podcast Interview with Law Professor Brian Fitzpatrick

February 15, 2017

NALFA hosts a podcast series on attorney fee issues.  We talk with thought leaders, attorney fee experts, and attorney fee newsmakers who've helped shape and influence the jurisprudence of reasonable attorney fees.  NALFA interviews members, faculty, judges, law professors, in-house counsel, and others on a range of attorney fee and legal billing issues.  All NALFA Podcasts are free.

In its inaugural podcast, NALFA interviewed Brian T. Fitzpatrick, Professor of Law at Vanderbilt Law School.  The NALFA podcast with Professor Fitzpatrick focused on his seminal research on class action attorney fee awards and his study of professional fee objectors in the class action model. This podcast talked about his background, explored his research, and considered what his work means for the plaintiffs’ bar and the future of class actions. 

The podcast discussion centered around the economics of class action fee awards and the current politics in the class action world.  Professor Fitzpatrick's scholarly work on attorney fees includes, An Empirical Study of Class Action Settlements and Their Fee Awards, Do Class Action Lawyers Make Too Little? and The End of Objector Blackmail?  This research was discussed in the podcast.

"These podcasts are the perfect broadcast format to discuss attorney fee and legal billing issues," said Terry Jesse, Executive Director of NALFA.  "Professor Fitzpatrick went beyond his research and shared his personal views, the current politics at play in class actions, and even proposed a new fee calculation method for class actions.  He also talked about his future research and his plans to write a book on the subject," Jesse said.  Click on the link below to listen to the NALFA podcast:

https://soundcloud.com/thenalfa/interview-with-law-professor-brian-fitzpatrick

Fee Analysis: Energy Bankruptcy Cases

January 9, 2017

A recent Texas Lawbook article, “Exclusive: Legal & Financial Advisers Feast on Bankruptcy Fees from the Oil Patch,” reports that, when times were good in the oil patch and crude was selling at a $100 a barrel just three years ago, lawyers and bankers scored record profits advising companies on a record number of mergers, acquisitions, joint ventures and securities offerings.

For the past two-and-half years, the energy industry has been in crisis.  Oil slipped to $30 a barrel.  Thousands and thousands of people lost their jobs.  A record number of oil and gas companies and the businesses servicing them declared bankruptcy.

The law firms and financial counselors working for those distressed energy operations, however, continue to pocket hundreds of millions of dollars thanks to the complex federal bankruptcy system.

The energy companies that declared bankruptcy during the past 30 months – a majority of them based in Texas – have paid their legal and financial advisers – nearly all of them based in New York and Chicago – more than $1.4 billion in fees and expenses during the past two and one half years, according to a Texas Lawbook examination of court records.

Those same lawyers and consultants have requested another $260 million in payments that are pending the approval of federal bankruptcy judges in Texas, Delaware, New York and Oklahoma.  In addition, there are more than 60 active bankruptcy cases in which the legal and financial advisers have not yet filed their fee requests for the fourth quarter of 2016 – fees that experts conservatively estimate will add another $80 million to the final tab.

Since July 2014, three law firms – Kirkland & Ellis, Weil, Gotshal & Manges and Skadden Arps – have been paid a combined $354 million for their representation of distressed energy companies during the past two and a half years, which does not include pending requests for payment or yet-to-be filed invoices for expected for work already completed.

“The business of corporate bankruptcy has become very lucrative for a small group of professionals,” Gary Kennedy, the former American Airlines general counsel who guided the Fort Worth company through Chapter 11 two years ago, said at a seminar at SMU Dedman School of Law last year.  “It has gotten so expensive that some companies can no longer afford to go bankrupt.”

Before the current oil and gas crisis, bankruptcy law practice had been in the toilet for years because many larger businesses chose to avoid bankruptcy court by using the shadow banking system of private equity firms and hedge funds to re-balance their financials.  Companies that did seek bankruptcy protection tended to file in Delaware or New York instead of Texas.  As a result, Texas law firms either fired lawyers who specialized in restructurings or had them focus on other practice areas.

All that changed in the second half of 2014 when the price of petroleum sank.  More than 1,280 Texas businesses have filed for bankruptcy during the past two years – many of them related to the downturn in oil and gas prices, according to new data research provided by Androvett Legal Media.  “Most bankruptcy law practices were pretty slow, but now most bankruptcy lawyers are either busy or crazy busy,” says Vinson & Elkins partner Bill Wallander, who leads the firm’s reorganization and restructuring practice.

“Energy has been the dominant theme – lots of upstream, some midstream and some oil and gas services companies filing for bankruptcy,” Wallander says.  The Androvett data shows that 752 businesses filed for bankruptcy restructuring in Texas federal courts in 2016 – up 42 percent from 2015 and up 80 percent from 2014.  The data demonstrate a clear connection between bankruptcy activity in Texas and the financial health in the oil patch.

New business bankruptcies filed in the Western District of Texas increased by 100 percent during the past two years – from 73 in 2014 to 146 in 2016, according to the Androvett study.  The jump was even bigger in the Southern District, where 293 companies filed for Chapter 11 bankruptcy protection in 2016 – up from 141 in 2014.

The Northern District witnessed a 49 percent escalation in corporate bankruptcies from 2014 to 2016.  Business restructurings in the Eastern District climbed 75 percent during the past two years.  More than 150 oil and gas companies filed for bankruptcy in 2016 – 71 of them were exploration and production operations with a cumulative debt of $56.8 billion, according to Haynes and Boone’s Oil and Gas Bankruptcy Monitor (pdf).

The Haynes and Boone data shows that 70 oil and gas services companies and a dozen midstream firms also filed for Chapter 11 protection last year.  “We are not seeing the wave of E&P bankruptcies that we witnessed earlier, but there is still a lot of distress out there, and there’s still a lot of first lien debt that is non-performing,” says Thompson & Knight partner Tye Hancock, who specializes in oil and gas bankruptcy.  “A lot of it depends on where the assets are located,” Hancock says. “The cost of performing in North Dakota is a lot more than in the Permian Basin.”

When Houston-based Stone Energy sought Chapter 11 protection on Dec. 14, it was the 114th E&P company to declare bankruptcy.  The total debt of those companies, according to Haynes and Boone, was $74.2 billion.  More than 110 oil and gas service companies with a cumulative debt of $18.8 billion have filed.  The 16 midstream firms that are in bankruptcy have a combined debt of $17.2 billion.

This article was posted with permission.  For a full version of this article, visit www.texaslawbook.com.

Report: Hourly Billing Still Commonplace

December 16, 2016

A recent Corporate Counsel story, “The Billable Hour Just Won’t Die, Report Finds,” reports that, while alternative fee arrangements are gaining popularity, data recently collected by the...

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