How Jenkens lost its way

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How Jenkens
lost its way
Two friends are on a mission to get their flying car off the ground
Aiming to give
drivers
a bird’s-eye view
By TERRY BOX
Automotive Writer
[email protected]
MURPHY — At a time when
most men their age strive just to
stay active, Vernon Porter and
Clarence Kissell plan to fly.
Dr. Porter, 72, and Mr. Kissell,
70, are building a flying car — a
concept that has been around
since 1918 and has largely eluded
dozens of inventors, schemers,
◗ TRAVEL
scammers and dreamers.
Time is a challenge, for obvious
reasons. They hope to have an early
prototype aloft by this fall and
complete work on a final “buildable” prototype in five years or less,
says Dr. Porter, a cancer survivor.
Every day, Dr. Porter, a retired
Texas Instruments research scientist, and Mr. Kissell, a lifelong
See FRIENDS Page 22A
Artist’s rendering
THE GT FLYER
■ The flying car’s shell is
made of fiberglass and foam,
weighing just 1,200 pounds.
■ The car would have three
wheels, two in front, and be
licensed as a motorcycle.
■ In flight mode, it will cruise
at 150 mph.
■ The wings will fold back
into slots at the base of the
body when not in use.
■ The inventors estimate
that a finished GT Flyer
would cost $135,000.
firm’s problems.
It was time to execute the lastditch plan: dissolve the firm. Jenkens & Gilchrist couldn’t be saved.
So the firm’s leaders had to try and
save the people. “There is a timeBy KATIE FAIRBANK
line beyond which even the most
and TERRY MAXON
loyal people say no,” said former
Staff Writers
chairman Tom Cantrill. “It had
Four years of lawsuits and fed- just taken so long.”
eral investigations had worn down
Founded 56 years ago and once
the leaders of Jenkens & Gilchrist. the largest law firm in Dallas, JenMany of their biggest earners were kens is closing its doors for good
leaving the law firm and taking this weekend. What drove it to extheir prized clients with them. tinction was a combination of isAnd it had become hard to attract
See FIRM Page 18A
talent, with no end in sight for the
As law firm dissolves,
leaders have no doubt
tax scheme to blame
THE 1957 OAK CLIFF TORNADO
N’awlins revival
Preservation Hall keeps the
city’s jazz spirit alive. 1I
Also: Crescent City’s new
restaurants. 8I
◗ PARADE
Halle wants love
Halle Berry says her sights
are set on motherhood. 6-7
Also: Three recipes for
Easter dinner. 12-14
◗ WORLD
Kirkuk plan
A terror fell
from the sky
◗ NATION
Gonzales ‘honest’
President Bush called
embattled Attorney General Al Gonzales “honorable
and honest.” 4A
Also: Pet food recall expanded. 5A
◗ BUSINESS
Ready or not
As boomers hit retirement,
companies must rethink
jobs. 1D
Coming Monday: Investment Quarterly looks at
how the markets fared
during the first quarter.
By DOUG J. SWANSON
and EMILY RAMSHAW
Staff Writers
See TYC Page 2A
Duo has
success’s
number
◗ POINTS
Drug push?
Are you being prescribed
that drug because you need
it — or because the drugmaker is pushing your
doctor? 1P
SECTION A
Lottery ...................................2
Texas & Southwest..................3
Nation ............................4-5, 12
Science & Medicine ................13
World ..............................16, 20
Dateline ................................25
METRO — SECTION B
Regional Roundup....................2
SPORTSDAY — SECTION C
TV/Radio ...............................2
BASEBALL PREVIEW— SECTION CC
BUSINESS — SECTION D
GUIDELIVE — SECTION E
Movies.................................2-4
CLASSIFIED — SECTION F
SUNDAY LIFE – SECTION G
Puzzles.............................1, 4-5
TRAVEL — SECTION I
EMPLOYMENT— SECTION J
HOMES — SECTION L
CLASSIFIED/AUTO — SECTION M
NEW HOMES — SECTION N
POINTS— SECTION P
Editorials ................................2
Letters.................................2-3
Officers’ complaints
center on risks posed
by lack of staffing
It was one more brutal beating
at yet another Texas Youth Commission prison: the victim on a
concrete floor, unconscious as the
attacker kicked him in the head
again and again.
But this time — Jan. 3, 2006, in
San Saba — the person absorbing
the blows was not a juvenile inmate. He was J.D. Perry, a guard.
“He kicked my teeth out. He
kicked my head like it was a soccer
ball,” Mr. Perry said of a 16-yearold prisoner. “I didn’t wake up until they got me to the emergency
room an hour later.”
Mr. Perry, 53, suffered retina
damage in both eyes. He cannot
read or drive now — and, since his
medical termination by TYC, has
not worked. “They don’t take care
of their own,” he said of the state’s
juvenile justice agency. “They don’t
care.”
Iraq OK’d a plan to move
Arabs away from Kirkuk;
opponents say it could
harden divisions. 20A
Also: President Bush urged
Iran to release British
sailors. 16A
INDEX
Guards
suffer
at TYC
DigitalEXTRA
^ Video: Watch eyewitness accounts and footage of the ’57
tornado and a severe-weather expert’s analysis.
6 Link: Watch an animated version of how a tornado forms.
DallasNews.com /Extra
2007, The Dallas Morning News
MELANIE BURFORD/Staff Photographer
“I didn’t want to live,” Birdia Anderson said of the day she
found out three of her children had died in the tornado.
First of two parts
By DAVID FLICK and MICHAEL E. YOUNG
Staff Writers
A
mong all the memories of the 1957 tornado, the
saddest belong to Birdia Anderson.
Dallas police had turned her away from the
splinters of the family’s apartment, where she
had left her young children earlier that April afternoon.
When she arrived at Parkland Memorial Hospital, she
noticed relatives gathered
in a solemn knot around
Book chronicles Oklahoma’s
her husband.
deadly ’99 twister. 6E
“When I saw him,”
Mrs. Anderson recalled,
“he just said, ‘They’re all gone, Birdia Mae.’ ”
On that day, exactly 50 years ago Monday, Dallas’ most
famous storm took away three of Mrs. Anderson’s
children — her firstborn, Donald Ray, 6; her only
daughter, Marsha Ann, 18 months; and 3-year-old Bobby
Lynn, the child who looked most like his father.
In her first interview, Mrs. Anderson, 77, said she
remembers the rest of April 2, 1957, with merciless
clarity. The day was bright and sunny when she left her
children at their Arlington Park apartment near Love
Field to go to her job as a housekeeper in North Dallas.
See TORNADO Page 8A
With restaurants, bars,
N9NE Group serving
up fun in Victory Park
By MICHAEL GRANBERRY
Staff Writer
[email protected]
For Scott DeGraff, it’s first
about the deal and then the design.
He says he’s looking for “a sense of
surprise, making something from
nothing, doing the unexpected, the
near impossible. … It’s the drama
and the glamour of walking down
those steps.”
Mr. DeGraff is sitting on a couch
in Nove Italiano, the Victory Park
restaurant he helped design, from a
wine-cellar wall that lights up to
chandeliers that change colors to
high-definition plasma screens
that morph images of Renaissance
paintings.
“I don’t know how to turn on a
cash register,” says the 43-year-old
entrepreneur. “They wouldn’t trust
me with the keys.”
That’s his partner’s strength. He
See IN Page 10A
II
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BLACK
YELLOW
MAGENTA
CYAN
Page 18A
Sunday, April 1, 2007
A LAW FIRM’S DEMISE
M
The Dallas Morning News
DallasNews.com
Firm folds in scheme’s wake
Continued from Page 1A
sues, including misjudgments tied
to rapid growth and an aggressive
drive to bring in business.
But above all, a risky tax shelter
practice out of its Chicago office
brought about the firm’s end. The
tax scheme, which Jenkens long
defended but wound up admitting
was fraudulent, left a cloud that
would not disperse, according to
interviews with nearly three dozen
people inside and outside the firm.
Harry Joe, a longtime partner
who left for another practice in
mid-March, put it bluntly:
“Looking back with 20/20 hindsight, I believe it led to the downfall
of the firm.”
Small beginnings
The firm got its start in 1951
when Holman Jenkens and William H. Bowen, who had worked
for the oil-rich Clint Murchison
family, set up an independent firm
with two other attorneys. A year
later, Henry Gilchrist joined the
practice, which changed its name
from Jenkens & Bowen to Jenkens
& Gilchrist.
The firm started small and expected to stay small, typical of other high-end law firms of that era.
Its main client remained the Murchisons, even though it took on
other clients. It has sometimes represented The Dallas Morning
News.
Demand for its services grew as
Dallas and the Texas economy
boomed. Jenkens expanded, and
by 1982 there were 125 lawyers on
staff. A year later, a Houston office
was added; more were to follow.
But the Texas economy began
to tank. Oil prices fell. Energy and
energy-services companies failed,
and banks and savings and loans
folded. Jenkens found itself ensnared in a costly mess, because
several partners had represented
some of the failed S&Ls.
The firm’s partners and insurers paid $18 million to settle a potential Federal Deposit Insurance
Corp. lawsuit and a 1987 legal malpractice suit. A federal jury
brought in a $5.8 million verdict in
a securities lawsuit.
Jenkens may have survived the
S&L scandal. But the early ’90s
economy was lagging. A retrenchment was in order. David Laney,
who was elected president and
chairman in late 1989, began by
cutting about a quarter of the lawyers from the payroll — from as
many as 225 lawyers before the
cuts to about 165.
The firm had grown too dependent on the Texas economy.
“There was no question that the
strategy would have to include
growth. But growth by itself made
no sense. The focus was on how we
were going to grow,” Mr. Laney
said. “The underlying strategy that
we followed for most of that decade was clear: geographic market
diversification so all our marbles
weren’t concentrated in Texas, and
industry diversification so all our
lawyers weren’t practicing in energy, real estate, banking and related
litigation.”
The growth years
In the ’90s, Jenkens added and
expanded offices in Austin, Houston, San Antonio, Washington and
Los Angeles. In 1998, it took over
the top spot in The News’ annual
ranking of law firms by numbers of
attorneys in Dallas. It kept that position for five years.
In December 2000, Jenkens
announced it was merging with a
New York law firm to open up an
office in the Big Apple. In 2001, it
added a small office in Pasadena,
Calif. Jenkens now had more than
600 attorneys on the payroll.
Not every addition was an obvious fit. Some of the offices had a
culture that was far different from
the close, conservative Dallas
headquarters. But it was the 1998
decision to hire Paul M. Daugerdas
and open a Chicago office that
turned out to be the most porten-
JIM MAHONEY/Staff Photographer
Stan Moore is one of several former attorneys from Jenkens & Gilchrist who have moved on to Winstead PC in Dallas.
RISE AND FALL
The law firm Jenkens & Gilchrist peaked in numbers in 2001 after
it added a New York City office, but saw a steady attrition from
2002 onward. Here are the number of attorneys in the main
Dallas office and firmwide, with counts early each year.
700
" Total
" Dallas
600
500
281
400
300
190
200
100
0
136
’93 ’94 ’95
144
’96 ’97 ’98 ’99 ’00 ’01
’02 ’03 ’04 ’05 ’06
SOURCES: Dallas Morning News, Texas Lawyer
BETSY BOCK/Staff Artist
CHERYL DIAZ MEYER/Staff Photographer
Tom Cantrill (left), Jenkens & Gilchrist’s ex-chairman, and Patrick Mitchell, current
chairman, say the Chicago tax shelter practice did irreparable harm to the law firm.
“From the very beginning, the tax shelters that they peddled were flawed — from the very
beginning. I mean, there was no business purpose. There was no economic substance.”
David Deary, the lead attorney in a class-action lawsuit
against Jenkens & Gilchrist over its tax shelters
tous.
Mr. Daugerdas, the lead attorney in the Chicago office, was an intriguing person. A certified public
accountant as well as a tax lawyer,
Mr. Daugerdas had worked previously at Arthur Andersen LLP,
long before the accounting firm’s
involvement in the Enron meltdown, and then a Chicago law firm.
His work involved tax shelters.
In 1998, he pitched his ideas to
Jenkens’ directors. They realized
that bringing him on, along with a
few of his associates, could mean a
lot of money for the firm. The concept was that clients would be able
to shelter their income from taxes
through a complicated strategy
pushed by Mr. Daugerdas and others.
Those clients would pay a lot of
money to Jenkens for opinion letters that said it was “more likely
than not” that the tax shelters met
the federal tax code. The money
sounded good. Still, the proposal to
add Mr. Daugerdas and his tax
strategies made some Jenkens lawyers uncomfortable.
Part of the reason was Mr. Daugerdas himself. A self-assured
man, the Midwesterner with a
Mike Ditka-style accent could be
divisive — a “bully,” some of his former colleagues say. They didn’t feel
he would fit in well at the firm.
But the greater concern from
inside the firm was that the strategy was too risky. Tax lawyers by
their nature are conservative. Only
a small number of the specialists in
the late ’90s were embracing aggressive tax shelters.
A group of Jenkens tax specialists debated Mr. Daugerdas’ strategy. Some thought he had found a
loophole within the boundaries of
the tax code. Many others disagreed strenuously.
Few Jenkens attorneys understood the strategy. But when it
came time to make a decision, the
leadership trusted some well-re-
garded tax specialists who felt the
strategy was legal and could be defended.
David Deary, a Dallas lawyer
who sued Jenkens over the tax
shelters, said he thinks greed drove
the decision to hire the Chicago
people. “The revenue that they
could generate was so enticing to a
few people over there at Jenkens
that my impression is they were
blinded,” he said.
Ultimately, a majority of Jenkens’ shareholders voted to add
Mr. Daugerdas and his two colleagues and to open up a Chicago
office. No one will discuss how
close the vote was. But insiders say
that it was far from unanimous.
A fatal decision?
Having won his partnership
with Jenkens, Mr. Daugerdas went
to work finding clients interested
in sheltering their taxes and willing
to participate in the esoteric strategies he offered.
The tax strategies pitched by
Mr. Daugerdas “sounded intriguing,” Mr. Laney said. “But the last
risk we would have taken was one
that might lead to crossing swords
with the federal government. We
had been there before and would
not risk going there again. I envisioned Jenkens becoming a large,
diversified national, maybe someday international, firm with a permanent presence.”
He wanted to avoid doing anything to jeopardize the firm, particularly as he was one of the practice’s leaders who had to negotiate
Jenkens’ path out of the S&L mess
a decade earlier. But he and the
other decision-makers trusted the
tax attorneys who believed that Mr.
Daugerdas’ plan was both legal
and profitable and should be part
of the Jenkens practice.
“Had we not stubbed our toe in
Chicago, I don’t think we’d be
where we are now,” said Patrick
Mitchell, who took over as Jenkens’ chairman in late 2006.
“No doubt about it,” agreed
Tom Cantrill, Mr. Mitchell’s predecessor.
Mr. Daugerdas’ spokesman said
he “respectfully declined to comment” or answer written questions
from the newspaper. Mr. Daugerdas still lives in Chicago.
Mr. Daugerdas alone received
$93 million in fees from 1999
through 2003 from the tax letters,
according to The New York Times,
citing people who had seen documents in connection with a lawsuit
filed against Jenkens. The news re-
port said the Chicago office generated $267 million from those fees,
an extraordinary amount for any
law firm.
As Mr. Daugerdas and Chicago
prospered, so did the whole law
firm. Its profits from Mr. Daugerdas’ practice probably meant hundreds of thousands of dollars a year
in additional income for some of
the more highly compensated
partners, according to an insider.
One of the strategies promoted
by Mr. Daugerdas and his colleague was called COBRA, for
“Currency Options Bring Reward
Alternatives.” It involved a complicated strategy that used offsetting
currency options — one to buy one
currency, the other to sell another
currency — to create a paper loss
for its participants.
Among the buyers of the COBRA strategy were four people
who sold an Indiana computer
company and had to deal with a
capital gain of more than $70 million in 1999. The group, led by
Henry N. Camferdam Jr., paid
Jenkens more than $2 million for
an opinion letter saying that the tax
shelter “more likely than not” met
the tax code.
In a lawsuit filed in late 2002,
Mr. Camferdam and other plaintiffs said Ernst & Young, working
with Jenkens, suggested a tax
strategy to them that could reduce
or eliminate taxes on the capital
gains. But, the plaintiffs alleged,
the advisers and promoters knew
See TAX Page 19A
IRS cuts, growing wealth gave rise to questionable tax shelters
With some strategies,
abuse isn’t always clear
By KATIE FAIRBANK
and TERRY MAXON
Staff Writers
The COBRA tax strategy promoted by Jenkens & Gilchrist’s
Chicago tax lawyers was far from
unique in the past 10 years.
Investors could pick from an alphabet soup of tax shelters offered
by accounting and law firms,
banks and investment houses. The
strategies carried such bewildering titles as COBRA, SOAP,
PICANTE, FLIP, OPIS, BLIPS,
BOSS and Son of BOSS.
The tax shelters proliferated at
a time when many people grew
rich and had lots of money to shelter, thanks to the healthy stock
market and e-economy.
Meanwhile, the Internal Revenue Service didn’t have the resources to keep up. Instead, the
IRS saw its enforcement funding
cut by Congress, which had heard
horror stories about overly aggressive tactics by some IRS officials.
Between 1997 and 2002, the
IRS enforcement staff was reduced by 20 percent, from 25,215
revenue officers, revenue agents
and special agents to 20,113.
Increasingly concerned about
tax strategies designed to create
paper losses, the IRS warned that
the strategies had to have a sound
business purpose, and that purpose couldn’t be simply to avoid
paying taxes. The IRS also said the
taxpayer’s money had to genuinely
be at risk.
The agency now known as the
Government Accountability Of-
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fice, citing an IRS database, reported in 2003 that it had identified about $33 billion in potential
tax loss from tax shelters, mostly
between 1993 and 2003. That estimate included only the tax
schemes the IRS had identified.
Wayne Shaw, an accounting
professor at Southern Methodist
University, said tax shelters have a
legitimate purpose, as long as they
follow the tax code.
The problem is with those shelters considered abusive, with no
real business purpose other than
to avoid paying taxes, he said.
Even for tax professionals, it is
sometimes very difficult to interpret the federal tax code, particularly when people combine different sections of the code in creative
ways, Dr. Shaw said.
“Abuse is in the eyes of the beholder sometimes,” he said. “You
and I could look at the same transaction, with me believing it’s fair
under the rules and you believing
it’s an abuse under the tax rules.”
Generally, the shelters try to accomplish one of two things, Dr.
Shaw said:
■ Change the timing of when
A18 M 04-01-2007 Set: 23:14:33
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the income is taxed. For example, a
taxpayer would try to record a lot
of losses now through a shelter,
with the income to be recognized
in a later year.
■ Change the type of income,
notably from ordinary income to a
capital gain. For example, a shelter
would provide a loss against ordinary income, which is taxed at a
higher rate, and show the income
as a capital gain, which is taxed at a
lower rate.
[email protected];
[email protected]
BLACK
The Dallas Morning News
A LAW FIRM’S DEMISE
DallasNews.com
M
Sunday, April 1, 2007
Page 19A
Tax strategies
crippled firm
beyond repair
Continued from Page 18A
the shelter wasn’t legal.
Mr. Camferdam and the others
had reason to worry — the Internal Revenue Service had informed
them that they were being audited.
Growing storm
It added: “In truth, say the experts, a COBRA is about nothing
but saving taxes.”
Marshall Simmons worked as a
Jenkens lawyer from 1967 to 1982
and had rejoined the firm in 1995
as its risk manager. He said that
when the problems later arose, he
asked a partner at the law firm why
they had embraced Mr. Daugerdas
and the tax strategies.
“I was told there were two major factors. One was that when Paul
Daugerdas came and made his
presentation, he said no lawyer
had ever been sued for ‘more likely
than not’ opinions, which is what
we were giving them, ‘more likely
than not,’ ” said Mr. Simmons, who
retired in 2005.
“No. 2, we believed that while
these were aggressive, that they
MILTON HINNANT/Staff Photographer
had real value,” he said. “We didn’t
go into this thinking, ‘Well, let’s David Deary was the lead lawyer in a class-action lawsuit against Jenkens & Gilchrist with more than 1,000 plaintiffs. He says the
hope we don’t get caught before we law firm should have known that the advice it gave to the buyers of its tax shelters was flawed.
make a lot of money.’ We legitimately thought that these opinions
were valid.”
At Jenkens, though, there was
higher drama going on than a little
Paul Daugerdas joins the firm.
1951: The firm is founded.
2004: Mr. Daugerdas is replaced as
lawsuit filed by some disgruntled
managing shareholder in Chicago.
1983: A Houston office is added.
December 2000: The opening of a New
clients in a New York court.
York office through a merger with Parker
1984: An Austin office is added.
May 2004: A judge approves a $75 million
There was a palace coup under
1990: David Laney becomes chairman of
Chapin is announced.
settlement of the lawsuit.
way.
With many people making big
capital gains in the latter part of
the ’90s, the IRS and the Justice
Department became increasingly
concerned about tax strategies designed to create paper losses for
taxpayers. The IRS issued a series
of notices warning that the strategies had to have a sound business
purpose. The purpose couldn’t be
simply to avoid paying taxes.
In 2002, under pressure from
the IRS, Ernst & Young disclosed
the names of the tax shelter clients.
On Dec. 11, 2002, the IRS told Mr.
Camferdam and the others that
their tax returns were being audited. (In 2004, Mr. Camferdam was
assessed back taxes and interest on
his capital gain, plus a 40 percent
penalty.)
Upset, the group filed a lawsuit
nine days later against Jenkens,
Ernst & Young and others. The list
of defendants eventually included
the law firm.
2001: A Pasadena, Calif., office is added.
January 2005: The settlement increases to
Deutsche Bank AG; Deutsche
A new leader
February 1991: Merges with Shapiro, Edens
December 2002: Jenkens & Gilchrist is
$81.55 million.
Bank Securities Inc., which had
& Cook, adding 28 lawyers to 13-person
sued over tax advice.
April 2005: New York attorneys leave
William P. Durbin Jr., a partner
executed the currency option
Austin staff.
December 2002: William P. Durbin Jr.
Jenkens to join Troutman Sanders LLC.
trades; several other accounting who had joined the firm in 1983 afbecomes chairman of the law firm.
August 1992: A Washington, D.C., office is
January: Patrick Mitchell becomes
firms and law firms; and several ter a stint in the Missouri attorney
added.
chairman.
March 2003: David Laney leaves the firm
individuals, including Mr. Dau- general’s office, had recruited Mr.
and joins Jackson Walker LLP.
February 1993: A San Antonio office is
March: The IRS announces that Jenkens
Daugerdas and the Chicago office.
gerdas.
June 2003: The IRS sues Jenkens,
added.
has agreed to pay a $76 million penalty for
Jenkens balked at giving the He also had helped negotiate the
demanding that the firm disclose the
June 1997: A Los Angeles office is added.
its promotion of abusive and fraudulent
2000 deal to
IRS a list of its
1998: National Law Journal names Jenkens
names of tax shelter clients.
tax shelters. Jenkens operates its last day
start a New York
tax-shelter cus& Gilchrist the nation’s fastest-growing law
January 2004: Mr. Durbin resigns, a month
as a law firm. The 100-plus attorneys in
office.
tomers, citing
firm.
after being elected to a second one-year
Dallas wait for an announcement that they
Mr. Durbin
attorney-client
term. Tom Cantrill becomes chairman.
December 1998: A Chicago office opens.
will be invited to join Hunton & Williams.
rallied support
privilege.
from the ChicaIn
June
go and New
2003, the IRS
York offices to
The election left Jenkens deep- of the firm’s leaders went around the 2002 census to 144 attorneys tigation of the law firm. But the
sued Jenkens in
challenge Mr. ly divided. But with the help of ex- talking to various attorneys, asking by 2006. Throughout the firm, the U.S. attorney’s announcement
federal district
court in Chicago Holman Jenkens (left) helped Laney for the ecutive director Roger Hayse, Mr. if their minds would be changed if drop was also drastic, from 611 in said that the deal didn’t end ongoto force the firm set up the firm in 1951. Henry chairman’s po- Durbin in 2003 set about revamp- Bill Durbin were no longer in 2001 to 281 in 2006. Staff mem- ing investigations of Jenkens’ peosition in the ing the operation. Jenkens hired charge. Mr. Cantrill made a Sun- bers, who had no equity in the firm, ple, past or present.
to hand over its Gilchrist joined the practice
Jenkens operated its last day as
firm’s Novem- management consultants Bain & day call to Mr. Durbin, who was on also noticed the writing on the wall
clients’ names. the following year.
ber 2002 elec- Co. to look at its staffing, as well as vacation, and told him that he and began turning in their notices. a law firm Saturday, its offices elseMore and more
where already closed or with only a
needed to resign.
of the tax shelter buyers flocked to tion, according to people who were other parts of its business.
Trying to recover
handful of attorneys remaining.
Mr. Durbin did not respond to
“We thought if we could find a
the class-action lawsuit — which with Jenkens during that period.
Surprised by the opposition, several requests for an interview. way not to have those losses, that
Mr. Cantrill, who led the firm The 100-plus attorneys in Dallas
grew to more than 1,000 plaintiffs.
Mr. Deary, the lead lawyer for the Mr. Laney withdrew his name His wife said he was out of the was in the best interest of the firm,” through the S&L problems in the are waiting for an expected anMr. Cantrill said. “We brought that late ’80s, tried to stem the losses of nouncement that they will be invitplaintiffs, said Jenkens and the from consideration. He said in a country.
After news of the IRS investiga- to Bill’s attention, and Bill agreed. lawyers to other firms. He also ed to join Hunton & Williams, a
others gave tax advice that they recent interview that he had been
ready to step down as chairman tion broke, Mr. Durbin staunchly He knew there was a risk that we served as point man on negotia- national firm with a local office.
should have known was bad.
Many key Jenkens players are
“From the very beginning, the and that he was “tired, really tired” defended the validity of the tax ad- could lose some people. I’m sure it tions for the settlements on the
tax shelters that they peddled were after leading Jenkens for 12 years, vice and Jenkens’ stand not to re- wasn’t the best day in his life, but lawsuits and the IRS and Justice already gone. Mr. Daugerdas was
replaced in 2004 as managing
flawed — from the very beginning. and serving six years on the Texas veal the names of those who re- he also loves this law firm, always Department investigations.
With the exodus of good law- shareholder of the Chicago office,
loved this law firm.”
I mean, there was no business pur- Transportation Commission, five ceived the tax letters.
Even so, Jenkens and other
The next day, the lawyers ready- yers continuing, a group of veteran and his title was reduced to “of
pose. There was no economic sub- as its chairman.
“But the principal reason was principals in the tax shelters began ing their exits were asked to hang Jenkens attorneys, including some counsel,” meaning he wouldn’t
stance,” Mr. Deary said.
He blames Mr. Daugerdas and that a campaign for partners’ votes settlement talks with the plaintiffs’ on, told that the firm was willing to from the early 2004 revolt, went to share in the firm’s profits so much.
two Chicago attorneys, Erwin so contradicted the culture I envi- attorneys. In May 2004, defen- change. On Wednesday, Jan. 14, the firm’s leaders in early 2006. In December 2005, he and Mr.
Mayer and Donna Guerin, for put- sioned for the firm that, even if I dants and their insurers agreed to 2004, Mr. Durbin announced Something had to change, they Mayer were pushed out of Jenkens, firm officials said.
ting together the tax strategy. But could have mustered the energy to pay the plaintiffs $75 million. A publicly that he had reconsidered said: What was the plan?
Mr. Durbin in December
Mr. Cantrill and Mr. Mitchell
he doesn’t let Jenkens’ leaders off ‘run,’ I considered it inappropriate day later, the Illinois federal court his decision to serve a second term
and distasteful for the firm’s chair- ordered Jenkens to disclose the and was resigning. Mr. Cantrill, a said the first option was to have packed his things after 23 years
the hook.
compromise candidate, replaced Jenkens survive on its own, grow- and departed without any hoopla.
“Certain people, in my opinion, man to campaign either ‘for’ myself names of clients to the IRS.
Trouble arose when more than Mr. Durbin as chairman, and the ing lawyer by lawyer or through ac- Mr. Cantrill said Mr. Durbin had
in the management positions or ‘against’ any partner,” Mr. Laney
100 plaintiffs opted out of the class group of disgruntled lawyers quisitions of other firms as it had decided not to practice law anyturned a blind eye to what was go- said.
“Just as important a factor was settlement, choosing instead to stayed put.
done in the ’90s. Another possibili- more. “That led to a mutual deciing on,” he said. “The remaining
But the atmosphere had ty was for Jenkens to merge with sion: Well, if you’re not going to
groups in the Dallas and Austin of- the very troubling prospect of a po- battle on. Negotiators came up
fices, for example, really didn’t litical campaign splitting the firm with a richer, $81.55 million settle- soured. The threat of the tax law- another large firm with a national practice law, you probably
that I had worked over a decade to ment, announced in January suits and investigations by the Jus- reach. During 2006, management shouldn’t be part of the law firm,”
know what was going on.”
Mr. Mayer and Ms. Guerin did build and unify,” he said. “The best 2005. Jenkens was responsible for tice Department and IRS hung identified a number of good candi- Mr. Cantrill said.
Mr. Mitchell said he hates that
not return calls requesting com- thing for the firm, and at the time $5.25 million, with its insurers and ominously over Jenkens. Soon af- dates for a merger.
probably for me, was for me to step other defendants picking up the terward, attorneys upset with the
All those alternatives assumed the founders’ legacy won’t continment.
remainder.
constant upheaval and grim inter- that Jenkens would be able to wrap ue. “There’s no sense of accomMr. Deary said clients usually quietly to the sideline.”
Mr. Durbin’s one-year term ofBy that time, Mr. Durbin was nal politics began to leave. And not up the lawsuits and reach settle- plishment if there’s no Jenkens &
heard about the shelters from their
trusted accountants and financial ficially began Jan. 1, 2003, al- no longer running the firm. He had enough good people were being ments with the IRS and the Justice Gilchrist. But ultimately, Henry
Department in time to save the would be the first one to say [that]
advisers, who touted the safety as though in truth he took the reins as won re-election, the only contested hired to replace them.
Jenkens & Gilchrist is the people.
Jenkens & Gilchrist, named the firm.
well as the attractiveness of the tax soon as the election was settled. race in the firm’s history. But his
Mr. Laney was soon gone. He an- victory upset many inside the firm nation’s fastest growing law firm in
“Business people can deal with From my standpoint, you’ve got to
strategies.
“They would say the only down- nounced late that February that af- who felt he emphasized finances 1998 by the National Law Jour- known risks,” Mr. Cantrill said. “If focus on what’s best for the people
side to this — if there is one — is ter 25 years at Jenkens, he was rather than people. A large num- nal, wasn’t growing any longer. It you know where it stops, if you can of Jenkens & Gilchrist. If that
put a bow around it and say this is means we all move to other law
that if you’re audited, you’re going moving to another Dallas law firm, ber — the estimates range from 20 was shrinking.
The lawyer totals dropped — what we got, I think we would have firms, that’s what it means,” he
to have this great legal opinion Jackson Walker LLP, where he to 50 — were preparing to leave.
To head off the defections, one from 253 Dallas office attorneys in been successful in finding a very at- said.
from Jenkens & Gilchrist that, No. works today as a partner.
In a bit of irony, the class-action
tractive partner.”
1, is going to convince the IRS that
But by the time Jenkens an- settlement, delayed by a partial apthis is a great tax strategy and
nounced a settlement Thursday peal, will finally be paid to the
you’re going to more than likely
with the IRS and the U.S. attor- plaintiffs this week. Mr. Deary said
prevail with the IRS,” Mr. Deary
ney’s office in New York, it was too he is happy to have won the case
said.
late. The firm was in its last days, its and stopped the use of the tax shel“But if you don’t prevail, you’re
attorneys and staff spreading to ters. But he’s sad about the many
never going to have to pay a penalpeople at Jenkens affected by the
other law firms.
ty, because you have this great
In a statement released by the firm’s problems.
opinion letter. You’ve got insur“I think 99 percent of the lawU.S. attorney’s office, Jenkens adance, so there is no downside. And
mitted that “certain J&G attor- yers at Jenkens and the staff people
look, everybody in your position is
neys” in its Chicago office “devel- there are as much innocent victims
doing it,” he said, repeating the aroped and marketed fraudulent tax of the ‘Chicago 3,’ as I call them, as
guments he turned up in his invesshelters, with fraudulent tax opin- our clients are,” Mr. Deary said,
tigation of the shelters.
ions.” Firm officials overseeing the adding that “99.9 percent of the
In fact, Mr. Deary said, “if you
Chicago tax practice “placed un- people at Jenkens are good people
go to most objective professionals
warranted trust in the judgment and good lawyers. There were
that weren’t involved in this marand integrity of the attorneys prin- three bad apples, and the bad apket, they would tell you that they
cipally responsible for that prac- ples upset the applecart in a big
wouldn’t have touched this with a
way, and you see what happened.”
tice,” the statement said.
10-foot pole.”
The IRS announced that JenAmerican Lawyer, which wrote
[email protected];
kens had agreed to pay a $76 milabout Mr. Daugerdas and the tax
[email protected]
lion penalty for its “promotion of
shelters in its December 2003 isabusive and fraudulent tax shelters
sue, showed two law professors a
and violation of the tax law consummary of a COBRA shelter.
cerning tax shelter registration
Both professors said it “lacks ecoand maintenance and turnover to
nomic substances,” and the IRS
CHERYL DIAZ MEYER/Staff Photogra the IRS of tax shelter investor
1 Story: Why law firms fail.
and several former Treasury offiDallasNews.com/Extra
cials and private practitioners Ruth McKnight (center) shares memories from a company scrapbook with Tere Curtis (left) and lists.”
The settlements end the invesagreed, according to the magazine. Kim Higgins. Ms. McKnight retired after 52 years with Jenkens & Gilchrist.
MILESTONES IN JENKENS & GILCHRIST’S HISTORY
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