Chico's Law Firm and two Chicago Enrons...

[Csubstance@aol.com]

July 23, 2003

Good morning colleagues:

The story below appeared in Sunday's Chicago Tribune Business section (not 
the main news section, although it has national implications). The clear 
implication of the article is that Gery Chico (who is now a prominent candidate for 
U.S. Senate in the Democratic Party primary) helped cook the books at his law 
firm, which is now dissolving, leaving, among other things, its retired 
partners in the lurch.

But the legal Enron that Chico helped engineer at his law firm pales by 
comparison with the educational Enron that he helped oversee as Chicago's "school 
reform" school board president. And that will not be reported on or scrutinized 
in Chicago's monopoly media. 

The educational Enron of Gery Chico far exceeds the paltry damage he has 
helped do to one major Chicago law firm.

Gery Chico served as president of Chicago's school board from 1995 through 
2001. His term as Board President covered the same period Paul Vallas was "CEO" 
of the Chicago schools. The two were jointly responsible for all of the 
propaganda that came under the heading "Chicago School Miracle." As I reported here 
as early as January 1999, that was based on lousy tests (that's why they sued 
me for a million dollars, a lawsuit that continues to this day). As we 
reported in Substance (November 2000), the early cost was more than 10,000 additional 
dropouts in the first five years of corporate "school reform" Chicago-style.  

The New York Times is now looking askance at the Texas "Miracle" (Sunday 
editorial). It's time that we shared the same questions about the Democrats' 
companion "Miracle" -- the one here in Chicago. I think people here can help by 
writing to the Tribune demanding to know why it has not been as critical of 
Chico's educational management as it is now of his law firm management.

Chico's dishonesty in his corporate life as a partner in a wealthy major law 
firm pales by comparison with the hoax he and Vallas (and the major media 
here, especially the Chicago Tribune) perpetrated at the expense of the children, 
parents and teachers of Chicago during the years of the "Chicago Miracle." And 
remember: the Chicago lie is the basis for the exporting of the "CEO Model" 
for urban "school reform." Based on the claims of Chicago, that model has been 
exported to Detroit, New York, Philadelphia, and smaller cities.

For four years, I covered the monthly press briefings that Chico hosted on 
the 35th floor of the 10 S. Wacker Drive building in Chicago. Each month, on the 
day before the Board of Education meeting, Chico would dictate to Chicago's 
other media how the spin was to be put into place on the school board story. 
The Board of Education might be poised to waste another $10 million on software 
contracts or cronyism in construction jobs, but the Tribune's reporters would 
dutifully report on Chico's musings about some small potatoes programs for 
teacher training, or even (in one case) on how Chicago had just launched a 
pioneering contract to give Coca Cola the exclusive rights to vending in all Chicago 
public schools! Inside sources also told me that at least one reporter used 
to simply call up the Board's propaganda department and ask what the main story 
was for that month.

Chico's professional ethics at his law firm were foreshadowed by his work as 
President of the Chicago Board of Education (dubbed the "Chicago School Reform 
Board of Trustees" between 1995 and 1999). It's an example of the dishonesty 
of the Chicago Tribune that scrutiny of Chico's work only takes place when its 
victims are rich lawyers with friends on the Tribune's editorial board, and 
not when the victims are the more than 10,000 mostly black and Latino kids who 
were pushed out of Chicago's high schools under the accountability systems 
used by Chico and Vallas (and praised by the Tribune).

George N. Schmidt
Editor, Substance
5132 W. Berteau
Chicago, IL 60641

773-725-7502

www.substancenews.com

Did Chico cook law firm's books like he cooked Board of Education test score 
claims?
By George N. Schmidt
The following story is from the July 20, 2003 Chicago Tribune.

http://www.chicagotribune.com/business/chi-0307200253jul20,1,1864607.story?col
l=chi-business-hed 

Altheimer practices questioned
Partners now wonder about firm's management

By Ameet Sachdev, Tribune staff reporter. Tribune staff reporter Laurie Cohen 
contributed to this report

July 20, 2003

Last fall, Altheimer & Gray, a prestigious Chicago law firm, booked $6.3 
million in fees that it had not yet collected, making its full-year profits look 
rosier than they actually were.

A month ago the firm collapsed, stunning partners who had been assured as 
recently as May that it was financially sound.

Now partners question that accounting maneuver, which allowed the firm to 
obtain financing to prevent further slashes in partner pay. Some are also asking 
broader questions about how the firm was managed, including about secret 
advances to top lawyers.

A central figure is Gery Chico, chairman of the firm's executive committee, 
who is running for the 2004 Democratic Party nomination to the U.S. Senate from 
Illinois.

He is Mayor Richard Daley's ex-chief of staff and former president of the 
Chicago Board of Education.

The firm's partners were fully aware of its declining financial health, 
Altheimer's spokesman, Laurent Pernot, said in a response to written questions last 
week.He cited the sustained economic downturn as a principal reason for its 
demise. The firm depended heavily on corporate work.

Documents obtained by the Tribune and interviews with partners provide a rare 
glimpse into the inner workings of a worldwide law firm that was one of the 
nation's 200 largest.

While business was slowing last year, the firm's bank debt ballooned to about 
$24 million, widely considered a large amount given that its total annual 
revenue was $118 million.

Still, the firm opened a San Francisco office last fall and continued to give 
advances to a small cadre of partners.

Last year, such advances totaled $852,970, according to its financial 
statements.

Altheimer's collapse is the biggest Chicago law firm failure since 1997, when 
Keck Mahin & Cate went under. Altheimer had employed more than 300 lawyers in 
12 offices around the world.

Founded in 1915, it gradually built a reputation for handling complex 
corporate transactions, such as the $3.8 billion management buyout of Montgomery Ward 
& Co. in 1988.

Many partners say they were unaware of its precarious financial condition 
until June 27. That is when its executive committee called for a special meeting 
to vote on dissolving the firm.

The news seemed incongruous. The firm last year had renewed its lease at 10 
S. Wacker Drive and launched a major headquarters renovation.

The administrative staff would receive their last paychecks the following 
Monday, partners were told, and would receive no severance pay. Retired partners' 
benefits were to be discontinued immediately.

Fireworks erupted when some partners raised questions about undisclosed 
advances given members of the executive committee, including Chico. One committee 
member, S. Michael Peck, stood and said that just prior to the meeting he had 
paid back his advance.

A spokesman for the firm said that advances at Altheimer had been a 
long-established practice.

"There are no outstanding advances, loans or other obligations to partners," 
Pernot, the spokesman, said shortly after the dissolution announcement.

Myron Lieberman said that, from the time he joined the firm in 1980 until he 
retired as co-chairman in 2000, Altheimer never gave advances approaching last 
year's magnitude. He also said that he and his co-chairman, Norman Gold, 
never received advances.

"The real issue is who did we give the advances to," Lieberman said. "If we 
gave something, it was to some junior partner."

Chico, interviewed last week, declined to discuss the advances.

When Altheimer & Gray recruited Chico in 1996, he brought with him desirable 
connections to the Daley administration. The firm wanted to diversify beyond 
corporate and real estate work into government relations and lobbying.

That he did. A review of the firm's finances shows that Chico brought in more 
than $11 million in 2001, or nearly 10 percent of the firm's revenue of 
$118.3 million.

With Chico at the helm, corporations increasingly called on Altheimer to 
lobby on their behalf. For instance, at City Hall the firm lobbied on behalf of 
nearly 200 clients in 2000, up from 18 in 1995, the year before Chico arrived.

But in 2002 Chico's practice suffered. His fee collections dropped 38 percent 
to $6.8 million.

"I am part of the U.S. economy, where transactional work is substantially 
down," Chico said when asked to explain the fall-off. He said his business 
extended beyond lobbying to real estate, corporate, intellectual property and zoning 
law.

In 2002, the same year he announced his campaign for Senate, however, he 
billed only 152 hours, down frrom 1,384 in 2001. Chico said he did not think his 
campaign distracted him from his legal practice.

He did, however, solicit contributions from his own firm and partners, 
raising more than $100,000, according to reports filed as of March 31 with the 
Federal Election Commision.

Chico said he does not believe the law firm's collapse has had any impact on 
his campaign.

"I don't see the matters as linked," he said. "I think it would be wrong for 
anyone to make this a political issue."

Despite his involvement in politics, Chico remained Altheimer's biggest 
rainmaker. Among the firm's other big billers, Peck brought in fees of $5.1 million 
last year, down from $7 million in 2001. Litigator Jeremy Margolis, former 
state police director and legal adviser to former Gov. George Ryan, brought in 
$4.9 million in 2002, up slightly from 2001.

Every equity partner, including Chico, took a pay cut in 2002 because 
business was slow. Still, Chico remained the highest paid partner, receiving total 
compensation of $800,000, down from $1.3 million in 2001.

Chico became visibly upset when shown the billing record but confirmed the 
information.

Altheimer's own eventual collapse was foreshadowed in October 2002, the end 
of its fiscal year. The executive committee decided to book $6.3 million in 
uncollected fees as profit for that year. The partnership approved the move. The 
firm said the accounting approach was needed in order to avoid distorting its 
results from year to year.

However, this past April the firm's outside auditors, Altschuler, Melvoin and 
Glasser LLP, took exception to that accounting change. In its audit, it 
pointed out that "such client fees [should] be excluded" from profits.

One partner said such accounting practices were common at the firm.

Lieberman said that was not the case--at least, not for such large amounts of 
money. "It was certainly not a common practice at that magnitude," Lieberman 
said. "I never remember receiving a qualification like that from our 
accountants."

To make payments to Chico and other partners last year, the firm had to draw 
upon its credit line. By Oct. 31 the firm had borrowed $14.6 million on its 
$23 million credit line with LaSalle Bank. That amount was twice as much as was 
outstanding against the credit line at that date in 2001.

Having any outstanding balance at year-end at a law firm is unusual, said 
Ralph Savarese, a law firm management consultant and retired chairman of Howrey & 
Simon, a Washington, D.C., law firm. Law firms typically make big pushes for 
fee collections at year-end, he said, and that is when credit lines are paid 
down.

Altheimer kept borrowing to fund its operations. By the end of May, it had 
borrowed $22.3 million against its credit line and had only $1.6 million left in 
cash, down from $10.5 million on Oct. 31. In addition, the firm had long-term 
debt of $8.3 million.

Another sign of trouble was the quality of the firm's receivables--billings 
for legal work that have not been collected. Nearly 40 percent of the $31 
million in receivables were more than 180 days old.

"In general, bankers will say that after 180 days collection probability 
becomes low," Savarese said.

Despite its financial woes, Altheimer did not pull back on its far-flung 
worldwide offices.

The firm had first looked overseas in 1990, when it became the first American 
firm to open a beachhead in Poland. The firm's strategy was to capture 
business in formerly Communist countries, where many government-owned enterprises 
would become private businesses. Eventually it opened seven offices in eastern 
Europe and an outpost in China in 1996.

The firm in 1999 opened a London office, but the office never performed up to 
financial expectations, Lieberman said. It continued the expansion last fall 
by opening the San Francisco office. The executive committee sold the idea to 
partners by suggesting the firm could pick up cheap office space and good 
lawyers in the wake of that market's dot-com bust.

As Altheimer's financial situation continued to deteriorate this year, its 
executive committee made a last-ditch effort to salvage the firm. During the 
week of June 16, partners approached Sonnenschein, Nath & Rosenthal LLP, a 
Chicago firm, about a potential merger, people familiar with the talks said.

Sonnenschein turned down the proposal, they said, but it left open the 
possibility of hiring individuals from Altheimer if that firm decided it had no 
option but to liquidate.

A few days later Altheimer's executive committee recommended liquidation to 
the rest of the partnership.

"I knew there were tough times, but I had no idea they were going to 
dissolve," said Lieberman. "I am devastated."


Copyright © 2003, Chicago Tribune