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Inside the Demise of Jenkens and Gilchrest

In today's Wall Street Journal, there's an interesting article, How a Bid to Boost Profits Led to a Law Firm's Demise by Nathan Koppel, about the events that lead to the demise of Dallas law firm Jenkens and Gilchrist, following payment of a $76 million penalty to the IRS for assisting clients with illegal tax shelter arrangements.

Turns out that Jenkens' involvement in tax shelters didn't generate in-house. Rather, the firm was approached by Chicago tax lawyer Paul Daugerda,s who sold tax shelters and advice to wealthy clients -- and offered to bring his business to Jenkens. The firm was impressed by the potential revenue and had recently lost some tax lawyers, so it brought Daugerdas on board. And though some firm lawyers worried that the tax shelters might raise a red flag for the IRS, they did not feel that they were engaging in conduct that crossed the line. Of course, as Koppel writes, that's not what happened:

That risk assessment proved catastrophically wrong. Mr. Daugerdas's tax work attracted lawsuits from tax clients and became enmeshed in a sweeping governmental assault on abusive tax shelters, sparking an exodus of lawyers and clients. In March, after the firm entered into a nonprosecution agreement with federal prosecutors and agreed to pay a $76 million IRS penalty, Jenkens & Gilchrist, which once numbered more than 600 lawyers, closed its doors for good. It was a rare case of a major law firm being entirely wiped out by a scandal.

Now that the firm has shut down, lawyers have had time to ponder their conduct. Daugerdas continues to maintain that the tax advice that he provided was legal under federal tax law at the time. But other lawyers such as Durbin, the managing partner, wonder whether their desire to increase profits and grow the firm clouded their judgment about the legality of the shelters. Likewise, though Daugerdas was difficult to deal with and some concerns emerged about his activities, no one took action to terminate him.

Once the IRS initiated its investigation, Jenkens had difficulty recruiting new lawyers and clients, and by March, the firm shut its doors. What's interesting is the way that the players have reacted to the closure of the firm. Incredibly, Daugerdas is suing Jenkens for additional compensation, while former managing partner Durbin has left corporate law and is studying Spanish with the intention of helping underprivileged Latino children. At least one lawyer learned something from this mess.

Posted by Carolyn Elefant on May 17, 2007 at 03:49 PM | Permalink | Comments (1)


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