HK – The Perfect Crime?

In 1 on December 29, 2008 at 2:23 pm

The Perfect Crime?

Posted by Ashby Jones

reebokWilliam Ross, a professor at Samford University’s Cumberland School of Law in Birmingham, Ala., calls it “the perfect crime.” NYU legal ethics guru Stephen Gillers says there’s a “general consensus” that the practice is on the upswing. The practice? Law-firm billing fraud, and the WSJ’s Nathan Koppel takes a look at the issue through the lens of a series of incidents that allegedly took place in Holland & Knight’s Chicago office.

After Matthew Farmer, a 42-year old junior partner with the firm, suspected that his own hours on a trial for home builder Pinnacle Corp. had been inflated by the partner in charge of billing, 62-year-old Edward Ryan, he blew the whistle on the firm.

The firm took no action and denies Mr. Ryan or the firm did anything wrong. “The amount billed by Holland & Knight in the litigation was reasonable and appropriate,” says L. Kinder Cannon III, the firm’s general counsel. Mr. Ryan declines to comment. Last October, Mr. Farmer took a 7% pay cut to join Cohn Baughman & Martin, a 12-lawyer firm. He says he left because he was upset that Holland & Knight wasn’t acting against Mr. Ryan.

It’s a sensitive issue. But, lawyers out there, we’re curious: How prevalent is billing fraud at law firms? Have you seen it? Have you been pressured to pad hours? Have you suspected your colleagues?

Update The St. Petersburg Times on Thursday posted a copy of a letter that Matthew Farmer wrote to a judge earlier this year, detailing the alleged billing fraud that he discovered at Holland & Knight.

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This has always been fertile ground for scandal. Lawyers are judged not by the quality of their work but by the number of hours they bill; clients, often huge corporations, blithely pay these invoices without any oversight or parameters as to what is reasonable under the circumstances. So is it any surprise when bills are inflated? But soon, many companies, if they have not already, are going to get sick of being ripped off and start acting toward lawyers the same way they act toward the people they buy paper from.

Comment by Dennis BedardAugust 30, 2006 at 10:13 am

This happens all the time, every day at law firms around the country.

Comment by scandamonAugust 30, 2006 at 10:27 am

With the extraordinary hours pressure placed on every lawyer at the big firms, from brand new associates to even mid-level partners (except perhaps (?) the biggest rainmakers), it should come as no surprise to law firm management that overbilling (or just plain over-working) of matters occurs. I’ve round-tripped from big firms to in house several times in the past 20 years, and the focus on hours seems to have grown significantly in the past few years – in many cases largely crowding out other values such as good lawyering, client management, mentoring, etc. If the big firms don’t figure out a way to balance these factors more appropriately, we are going to see more and more cases like H&K – and the big clients will be whistleblowers too.

Comment by GCAugust 30, 2006 at 10:43 am

Hourly billing causes firms to lose clients who fear they are being duped; to lose associates tired of being judged based on hours alone; to lose marketing power because marketing is undervalued when compared to to billables; and to lose efficient production of work product (can you imagine how much a toaster might cost if the people working the assembly line were told they were paid based on the amount of time they spent crafting the toaster, rather than based on the output and number of toaster purchases?).

When will law firms abandon an out-dated model that clearly has little or no relevance in modern times?

Comment by alliAugust 30, 2006 at 10:49 am

…when clients go to some sort of payment for value, not for objectively messured inputs. Some big clients startng doing this some time ago.

Comment by Mark WeinsteinAugust 30, 2006 at 10:51 am

Those interested in the likely response of the Illinois Attorney Registration and Disciplinary Commission may wish to review the results of the ARDC’s investigation of the Chapman & Cutler attorney who (allegedly) billed 6,000 hours in one year. This was back in the 1990s, and was the subject of an article in, I believe, the WSJ. You can do the math, but to bill this many hours, you have to work 13-14 hours a day, 365 days a year (yes, that includes Thanksgiving, Christmas, Independence Day and New Year’s Day). This was reported to the ARDC, but to my knowledge, the ARDC did nothing.

Comment by Thirdman47August 30, 2006 at 10:52 am

What a surprise, a large firm is reported to the bar and nothing happens.

At most law firm, overworking associates is the problem, rather than overbilling itself; they usually have more than enough work to do. Of course, many lawyers are tempted by personal circumstance (trying to meet a billing quota, trying to make partner, etc.).

Overbilling is probably more typical at smaller firms that bill by the hour, when work becomes scarce and lawyers are tempted to inflate their timesheets.

Comment by JBAugust 30, 2006 at 12:01 pm

I have done thousands of write downs, but never a write-up. The problem is that selling hours, like a ditch-digger, is a fundamentally wrong way of valuing legal services. Clients do not benefit from hours, they benefit from trial victories, completed transactions and resolved problems.

Comment by AnonymousAugust 30, 2006 at 12:16 pm

I have no problem if a law firm says to me “we only worked 10 hours on your problem, but we saved you a million dollars, so our fee is going to be two times (or three times) our normal amount.” But I have a very serious problem if a law firm says to me (through its bill) we worked so many hours on your problem and in fact did not work that many hours. Question: should inside lawyers be imposing on outside lawyers some kind of audit requirement, some check of the bills against the handwritten time sheets (I assume there are still are such things)?

Comment by Inside GCAugust 30, 2006 at 12:38 pm

Correction on the math: You’d have to work about 16.3 hours every day of the year to bill 6,000 hours. How the Illinois ARDC failed to find anything wrong with this boggles the mind, at least until one remembers that the attorney in question was one of the legal ubermenschen at a heavy-hitting, white-shoe, old-line Chicago firm. If the same hours had been billed by an untermenschen lawyer doing scutwork in the suburbs, you can rest assured that there would be another pelt nailed to the wall of the ARDC outhouse.

Comment by Thirdman47August 30, 2006 at 12:47 pm

A description of the fraud by the Chapman & Cutler partner (and a similar fraud by his wife), see, starting with Part IV.

Comment by AnonymousAugust 30, 2006 at 1:00 pm

The funny thing about the ARDC case is that 6000 hour biller’s husband, who was the managing partner at Winston, was also accused of billing fraud. Shades of “Fun with Dick and Jane,” no?

Comment by JoeyAugust 30, 2006 at 1:04 pm

See (starting with Part IV) for a full description of the Winston & Srawn and Chapman & Cutler husband & wife overbilling/fraud scandal.

Comment by Just google itAugust 30, 2006 at 1:12 pm

Anonymous properly mentions the so-called “idiocy of the billable hour,” but there is no distinction between a ditch digger and a lawyer. When I hire a ditch digger, I don’t benefit from the hours spent, I benefit from the completed ditches. Yet the fact is that internal hourly compensation for employees is usually the norm WITHIN a firm, although when I hire the firm to dig my ditch, it usually bids on a non-hourly basis ($ per foot, whatever). Coase can probably explain why this distinction persists.

Doctors don’t charge by the hour. Auto mechanics may apply an “hourly rate” to services, but the disclaimer on the bill says that a certain service has a “flat” hourly fee, even if the actual hours spent are different.

What makes lawyers different? The “inherent uncertainty in the time required?” Sounds like special pleading.

Comment by Doug PappasAugust 30, 2006 at 1:44 pm

Where is the client? It’s all about OPM: Other People’s Money. Overbilling (too many real hours, or fake hours) disputes are usually limited to a situation where someone else’s money is being spent. The HK dispute is triggered internally. In the late 80’s and early 90’s, legal auditors were the product of insurance companies: the party benefiting (the insured) was not the party paying (the insurer). Later, fee examiners arose in big bankruptcy cases, where debtor was (really) almost always insolvent, so debtor or trustee was in essence spending the creditors’ money–another disconnect between paying and benefiting. The fact that we seldom see a dispute between a real client and its counsel suggests that the market may be more effective than we acknowledge. If IBM balks at a Cravath bill, IBM is able to address it, and we don’t read about it in the blawgs.

Comment by Doug PappasAugust 30, 2006 at 1:51 pm

Where was Pinnacle Corp. during all of this? I hope they were more careful with their other vendors/suppliers, especially in the honest construction business.

Comment by AnonAugust 30, 2006 at 2:16 pm

I wonder if this is the most comments any item on this blog has ever received? It’s clearly a hot button with many inside and outside lawyers. One comment on Anonymous’ post: This may be an arena where the bluest of blue chip firms (Cravath, Davis Polk, Sullivan, a few others) have a real advantage, in that they try hard to limit their work (transactional work anyway) to projects where they can bill a “success premium” and simply present a “for services rendered $xxx” bill at the closing – thus no worries about whether anyone padded hours or not. And of course small firms often have smaller, perhaps more vigilant, clients as a check against hours padding. So is it the firms in between those two models that have the most to worry about (and who we GC’s should worry about most)?

Comment by GCAugust 30, 2006 at 2:42 pm

This has been going on forever and nothing is done because the big firms are in bed with company general counsel who, in turn, are alumni of the big firms. Shareholders of public companies paying the bills should be outraged. Yet, Milberg Weiss gets indicted because it allegedly allowed referring counsel to split legitimately earned attorneys fees (reviewed by the Courts) with clients. What a double standard!

Comment by OutragedAugust 30, 2006 at 5:19 pm

To Inside GC — in our boutique firm with no committees and layers of uninformed review, the practice is to include a verbatim data entry version of the handwritten time sheets in every statement. It sounds a little old fashioned and cumbersome maybe, but no clients object to seeing their lawyers’ timekeeping diaries. As for auditing, a starting point or self-audit procedure that’s pretty standard among institutional clients is agreeing in advance on lineup card with substitutions made only on GC approval.

Comment by SF LawAugust 30, 2006 at 7:54 pm

To Outraged — I don’t think you should assume that just because a court reviews time records that they are “legitmately earned.” The court is looking at the same thing the GCs are looking at—who’s to say drafting that motion should have taken 14 hours vs. 16? How do you second guess how much legal research was enough? What if you’ve found nothing after 10 hours, and then, boom, you hit the treasure trove in the 11th hour? You go to a system where you pay for results rather than time? What incentive does someone have to work that 11th hour and save the client millions, when they could just quickly work a settlement, collect the fee, then move on? It’s like the old story with real estate agents—they’re getting their 3%, why should they put in the extra 20 hours to sell your house for $5000 more when it’ll only make them an extra $150?

Comment by DC law (tired)August 31, 2006 at 1:11 am

I have … always marveled at how many lawyers rob their clients by billable hour padding and get away with it. I personally experienced this many times. One of my most painful experiences was being grossly overcharged by my wife’s divorce lawyer. My lawyer, a very ethical one, condeded that the pill was padded but advised me to keep quiet about it. He said that all I could do was request the detail on the billable hours and her lawyer would fabricate it and the judge would uphold it. I love the phrase, “the perfect crime”. Hopefully this will stick and this chronic problem in many law firms will be brought to the public view.

Comment by Earl StewartAugust 31, 2006 at 8:21 am

Pilferring by lawyers is business as usual for many of them. Padding a bill is just one aspect of this. At the state and federal level they write the laws which enrich themselves. At the courtroom level, they only suffer if they expose wrongdoing within the profession, not for doing wrong themselves. That’s why you see very few lawyers ever held accountable, whether it’s for false billing, false accusations, or such. A profession that encourages specious arguments to advance an agenda is not one that can be trusted. None of this can be fixed as long as lawyers are voted into the legislatures.

Comment by Arthur IgnatiadisAugust 31, 2006 at 12:11 pm

. . . Neither the GC nor Ryan ever thought the bills would be seen by anyone else. . . . I will also point out that nobody should believe that Mr. Farmer is the hero here. He could have discharged his duty by reporting Ryan to the Illinois disciplinary committee. The fact that he also went to the press shows pure vindictiveness. He was always a disgruntled employee – the stuff about how he never thought he’d leave is bunk, pure and simple. Last thing – Farmer is now at Berkshire Hathaway’s captive law firm, where he need never look for a client again. Most people thought he had traded up when he left.

Comment by HK InsiderAugust 31, 2006 at 2:43 pm

Has the WSJ Law Blog sought to ask the opinion of the client (Pinnacle Corp.)victimized by the greedy partner? What does Pinnacle think? Are they pissed?

Comment by The ClientAugust 31, 2006 at 4:14 pm

This is precisely why our firm is so passionate about having abandoned the billable hour in favor of a fixed-price model. There are serious ethical concerns with billable hours, clients hate the model, lawyers hate counting their lives in 6 minute increments, and there really is no way for clients to know better if there is fraud. When things like this happen, how can clients ever “trust” their firms that bill by the hour? It is time for a call to action in our industry and among clients! Malcolm X said “If you are not a part of the solution, you are part of the problem.” To deny that billing fraud is widespread is to have your head in the sand. To admit it and not speak up and stop this outrageous practice is to be no better than the people who rip off clients and ruin what should be a noble profession. Will the leaders of this profession please stand up? Exemplar has taken its stand to make a difference in this profession and I hope that we inspire more professionals to do the same!

Comment by Christopher Marston, Exemplar Law Partners, LLCAugust 31, 2006 at 9:27 pm

As a follow-up to my previous entry and as an expression of commitnent to solving these problems in our industry, I extend an offer to the attorneys in this country who are business savvy, socially normal, and passionate about making positive change in the legal profession to email me about opportunities to be a part of the solution and join an innovative firm with a fixed-price model. I promise to respond!

Comment by Christopher Marston, Exemplar Law PartnersAugust 31, 2006 at 10:27 pm

These types of issues are precisely why we started Exemplar Law Partners, which has abandoned the billable hour model in favor of a fixed-price model. I have interviewed hundreds of attorneys, partners and associates alike, from some of the largest firms in the nation and many of them readily admit that billing fraud and bill padding is a part of “daily business.” How can you ever trust a firm that bills by the hour when some of the largest firms engage in this ptactice regularly? Malcolm X said “if you are not a part of the solution, then you are part of the problem.” If you think that billing fraud is not widespread then you have your head in the sand. If you know it is happening and are not standing up for ethics in our profession then you are no better than the firms who are ruining an honorable profession by committing fraud on the people they claim to serve. Will the true leaders in this industry please stand up? Let this be a call to action for clients and attorneys alike. I welcome the attorneys who are passionate about positive change to contact me directly about opportunities to be a part of the solution at our innovative firm.

Comment by Christopher Marston, Exemplar Law PartnersAugust 31, 2006 at 11:34 pm

Malcolm X said “If you are not a part of the solution, then you are part of the problem.” To deny that billing fraud is widespread is to have your head in the sand. To admit it and not take a stand against a practice that is ruining a noble profession by commiting fraud on the people they claim to serve is no better than committing fraud yourself. Will the leaders in this industry please stand up? It is time for a call to action. I welcome the other leaders in this industry to stand with me in making positive change. . . the beginning of which is the end of the billable hour model!

Comment by Christopher MarstonSeptember 1, 2006 at 9:21 am

I suspect junior associates subjected to a billing/bonus minimum have more of an incentive to overbill because, more often than not, a partner discounts their time and the client never gets charged. Of course, the firm gets screwed, I suppose, because they may be awarding bonuses to lawyers who never actually worked the requisite number of hours.

Comment by Junior associatesSeptember 1, 2006 at 4:43 pm

I’m a young attorney in New Orleans, and I am already looking to get out of the practice. I’ve seen so much game-playing and prattling and asshattery from people who are supposed to be respectable professional business attorneys to make me realize that this is not a place I want to be. And I’m sure that its very similar anywhere else. I wanted to help people, but that isnt happening. So goodbye, Bar Commission, and good riddance.

Comment by Ray AdamsSeptember 5, 2006 at 3:47 pm

I had a great experience…represented the husband in a divorce..gave him a detailed bill of hours. After the divorce, wife calls him and asks for his bill to compare to hers. Given the slight difference in hourly, maybe there should have been a small difference in total. He billed twice as many hours for the the same deposition, twice as many hours for the same time we were in court, etc. The wife’s bill was double the husband’s when I actually did more work! Worse, he just gave a bill for generic services rendered. But he got caught. How? Told the wife’s father the day before trial “we have to settle because I didn’t prepare for trial,” then when she forced an accounting, he billed for 10 hours of trial prep. Dare I say he was promptly grieved and she was refunded the money. He was also in a large firm. I was a solo.

Comment by SusanSeptember 5, 2006 at 7:32 pm

Did Holland & Knight ever deny (or even address) the specific allegations in the letter you link to at the top of this post? Has Martha Barnett, the firm’s former ABA president, weighed in on this one?

Comment by RJSeptember 5, 2006 at 9:59 pm


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