In 1998, Chicago tax lawyer Paul Daugerdas approached a Dallas law firm, Jenkens & Gilchrist, with a proposition. He said he sold tax shelters and advice to wealthy clients, charging them, in part, a percentage of their tax savings. If Jenkens brought him aboard, he said, he could generate as much as $6 million a year in revenue, according to three former Jenkens partners.
To Jenkens, a medium-size firm with big growth plans, that was serious money, much more than any of its lawyers were then bringing in billing by the hour. And the overture came at the right time. Jenkens had recently lost some tax lawyers, and Mr. Daugerdas was offering to bring several others with him.
Some Jenkens lawyers worried that tax shelters might attract scrutiny from the Internal Revenue Service. “If there was a danger we were crossing the line, there was no sense in going there,” Toby Gerber, a former Jenkens partner, recalls saying at one management meeting.
But William Durbin Jr., who sat on the firm’s board and later became chairman, championed Mr. Daugerdas to fellow board members, who unanimously approved the hire. “We made the case he would be profitable from day one, which is a rather extraordinary feat, and that this was not a terribly risky” way to give the firm a presence in Chicago, Mr. Durbin recalled in a recent interview.
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.
In the wake of the fiasco, some partners have been wondering aloud whether the firm’s hunger for more profits and prestige clouded judgments about Mr. Daugerdas’s practice.
“The task of leaders is to say no to what is wrong and evil,” says Mr. Durbin. “I wish I could have been more courageous….I played a very large part in bringing about the demise of a firm that I had played a large part of for 23 years, and that I loved.”