Taxes and death: The rise and demise of an American law firm

• Pages: 107-144
• DOI: https://doi.org/10.1108/S1059-4337(2010)0000052007
• Published date: 24 September 2010
• Date: 24 September 2010
• Author: Milton C. Regan

TAXES AND DEATH:

THE RISE AND DEMISE OF

AN AMERICAN LAW FIRM

Milton C. Regan Jr.

ABSTRACT

Misconduct by lawyers in law firms is often attributed to pressures from

increasing competition for legal services. Modern firms do face fierce

competitive pressures. We can gain more subtle insights, however, by

focusing on the specific markets in which particular firms operate and how

forms of influence in law firms interact with common patterns of behavior

in organizations. This chapter draws on this approach to analyze the

experience of Jenkens & Gilchrist, a national law firm that had to close its

doors in 2007 because of tax shelter work that triggered civil lawsuits and

government investigations.

1. INTRODUCTION: THE END OF A LAW FIRM

On March 31, 2007, the national law firm of Jenkens & Gilchrist closed its

doors because of wrongdoing by three of its partners. Two days before, the

firm had acknowledged liability of $76 million to the Internal Revenue

Service (IRS) for its lawyers’ promotion of abusive and fraudulent tax

Special Issue: Law Firms, Legal Culture, and Legal Practice

Studies in Law, Politics, and Society, Volume 52, 107–144

Copyright r2010 by Emerald Group Publishing Limited

All rights of reproduction in any form reserved

ISSN: 1059-4337/doi:10.1108/S1059-4337(2010)0000052007

107

shelters (Internal Revenue Service, 2007). That same day, the Department of

Justice announced that it had agreed not to prosecute Jenkens & Gilchrist,

based on representations that the firm would shortly cease operations and

that its representatives would cooperate with the criminal investigation of

tax shelter work at the firm (U.S. Department of Justice, 2007). Thus ended

the life of the fastest growing law firm in the United States less than a decade

before, and a pillar of the Dallas corporate establishment for over half a

century.

Jenkens & Gilchrist’s press release in connection with the nonprosecution

agreement said that certain of its lawyers ‘‘developed and marketed

fraudulent tax shelters,’’ and that Jenkens ‘‘failed to exercise effective

oversight and control over the firm’s tax shelter practice’’ (Jenkens &

Gilchrist, 2007). On June 9, 2009, Paul Daugerdas and two other partners in

the Chicago office, Erwin Mayer and Donna Guerin, were indicted for their

work on tax shelters (United States Department of Justice, 2009).

For some, the story of Jenkens & Gilchrist is simple: it’s another example

of how business considerations have led law firms in recent years to neglect

their professional duties. Both journalists and scholars have written

extensively about intensified competition in the legal services market over

the last quarter century (Hansen, 1995;Galanter & Henderson, 2008;

Galanter & Palay, 1991;Koppel, 2007;Regan, 2004;Triedman, 2007).

Observers suggest that this trend has produced especially profound changes

in law firms. Compensation, tenure, promotion, growth, governance, and

training are but a few of the dimensions of law firm practice whose

transformation has been attributed to the flood of market forces into former

competitive backwaters (Galanter & Henderson, 2008;Galanter & Palay,

1991;Regan, 2004).

An important theme in recent literature on legal ethics is that greater law

firm emphasis on business considerations has weakened lawyers’ commit-

ment to ethical behavior (Linowitz, 1994). One critique is that law firms now

give more weight to their own financial interest at the expense of clients. This

leads them to do things such as ignore conflicts of interest, pad their bills,

and eschew opportunities to provide more efficient services for their clients.

A related story of declining ethics in law firm practice is that firms are less

willing to take into account the impact of client activities on third parties

because they do not want to jeopardize their relationships with clients.

Companies who face fierce competitive pressures want lawyers who can help

them achieve their objectives, not ones who point out the impacts that doing

so will have on third parties. They want litigators who will press for every

advantage and counselors who will exploit every regulatory loophole, not

MILTON C. REGAN108

lawyers who feel bound by nebulous duties that supposedly arise from being

an officer of the court.

There is no question that competition is now a major influence in law firm

decision-making, nor that both lawyers and law firms face substantial

insecurity. Any account of behavior in law firms must take this into account.

Nonetheless, broad pronouncements of simple cause and effect based on

business pressure have limited explanatory power.

First, such explanations treat the legal services market as an undiffer-

entiated force that exerts the same type of pressure on all law firms. The

market tends to be depicted as a monolithic engine that pushes firms in every

case to choose the most profitable course of action. In any given situation, a

firm may give in to or resist this pressure, but it cannot escape it.

This story, however, does not describe in much detail the sources of these

competitive pressures, the particular forms that the pressures take in daily

practice, the business strategies that firms develop to respond to them, or

what characteristics can give firms an edge or leave them at a disadvantage in

dealing with competition. It ignores the increasing consolidation and

segmentation of the legal services market, and the ways in which different

firms and practice areas can face distinctive competitive dynamics. It also

neglects the fact that firms may adopt various formal and informal

safeguards to respond to the risks of misconduct posed by intensified

market pressures (Chambliss & Wilkins, 2002).

The failure to take such refinements into account can leave us ill-equipped

to understand how firms may operate under different competitive conditions,

adopt different business strategies, confront particular ethical issues, and

generate contrasting – and sometimesinternally inconsistent – organizational

cultures. Saying that market forces shape law firm behavior thus is useful as

far as it goes, but it does not go very far. As I will suggest, we can gain a

richer understanding of the events surrounding Jenkens & Gilchrist if we

appreciate the particular market segment in which it operated, the specific

concerns that led to the firm’s business strategy, and how Paul Daugerdas’

tax shelter practice offered an especially attractive opportunity to further the

firm’s ambitions.

A second tendency in discussion of business pressures on law firms is to

treat the firm as the individual writ large, which reacts more or less in direct

fashion to market pressures. This assumes that law firm behavior is the

product of a systematic assessment of various alternatives. Organization

theory cautions us against treating entities in casual anthropomorphic

fashion. Behavior is often the result of a complex mix of formal and

informal influence. Furthermore, people in organizations exhibit common

The Rise and Demise of an American Law Firm 109