Reference no: EM133338068

The Books Are in The Safe Scenario

It all came apart in less than a year: a booming products liability boutique headed by an ex-partner from a big firm-the scion of one of Maryland's most prominent legal families, an author, and a lecturer-in partnership with two of his old buddies, one a law school classmate.

Attorney Edward S. Digges of Annapolis, Maryland, left Baltimore's Piper & Maybury and set up his own firm with David A. Levin and James T. Wharton. David and James worked hard to please the clients. Edward was the managing partner, who took on all the onerous administrative tasks - billing for example. David and James were too busy to participate in the firm's managerial tasks and neither had any desire to do so.

One of the firm's clients, Dresser Industries, sued the firm, charging that Edward overbilled it by more than $2 million. His busy partners now found the time to demand to see the books, only to be told they were in the safe and not available. The next month, though, they saw the books and came to the conclusion that Edward had cheated them out of $1 million in compensation. They forced Edward out of the firm.

A few months later, Dresser won a motion for summary judgment, a determination of issues without a trial, against the firm (which now consisted of only David and James) for $3.1 million in damages for the overbillings. A problem that David and James had was an expert witness who testified that the two partners failed to come up with a mechanism that would have allowed them to oversee Edward's billings.

Edward pleaded guilty in federal court to fraud. He was sentenced to 30 months in prison, fined $30,000, and ordered to pay $1 million in restitution.

1. What went wrong with this partnership?

2. Why did David and James rather than Edward have to pay the client $3.1Million?

3. How could this situation have been avoided?

4. If you were involved in a partnership, what steps would you take to make sure you didn't get caught up in a situation such as this?