How Heller Ehrman Went Under

Venerable San Francisco law firm Heller Ehrman voted to dissolve last September, ending a practice that was nearly 120 years old.

Now we’re starting to learn more details of why it collapsed. According to a document filed in bankruptcy court last week, what undid Heller Ehrman was an overambitious strategy to expand globally, including its 2003 acquisition of the Venture Law Group, a Silicon Valley law firm that specialized in high-tech startups.

(Several of the VLG folks are now at Cooley Godward Kronish in Palo Alto, which calls itself the number 2 firm in the nation for representing venture-backed companies in financings.)

Assuming the document is accurate, the accounting practices used by Heller Ehrman are startling and should be avoided by any startup.

Heller was owned by several professional corporations that were in turn owned by Heller attorneys, the document said. To avoid having its income taxed twice, Heller distributed all of it at the end of each year, funding its next year’s operations with a single line of credit from Bank of America. Income did not catch up with operating debt until the following August.

In 2007, business declined after several major cases were settled or dismissed, and attorneys began to leave. In order to try to keep its attorneys, Heller:

  • Delayed paying its vendors
  • Paid attorney shareholders over $9 million in excess profits
  • Booked the profits as “shareholder loans”
  • Distributed another $100 million or so to attorneys as annual bonuses or pension payments
  • Returned $8 million in capital to departing attorneys
  • Borrowed $15 million from its projected 2008 revenue

The document also notes that less than two-thirds — 63 percent — of the money Heller owes to creditors has been collected so far. Heller’s unsecured creditors expect to file a full Disclosure Statement in September.