53% of Top 50 Law Firms Overstated Profits to Goose AmLaw Ranking

Wall Street Journal, Law Firms' Profits Called Inflated:

More than half of the country's top 50 law firms may have overstated a key measure of profitability in a closely watched ranking, according to an industry analysis prepared by a major bank.

The findings— which were shared with The Wall Street Journal by a person briefed on the report— raise questions about which law firms are making the most profit as the legal industry slowly recovers from a prolonged downturn.

The ranking of "profits per partner," published annually by the American Lawyer magazine in May, is the most commonly used gauge of health in the $100 billion global corporate-law-firm industry. The figures are found by dividing net operating income by the number of equity partners at a firm.

Roughly 22% of the top 50 firms overstated their profits per partner by more than 20% in 2010, according to the person briefed on an analysis by Citi Private Bank Law Firm Group, a Citigroup unit and major lender to law firms. ...

In May, the American Lawyer reported that profits per partner at the 100 biggest law firms rose 8.4%, to an average of about $1.4 million in 2010. That was a sharp improvement from previous years when market turmoil took a toll on law firms. In 2008, profits per partner fell 4.3%, and in 2009, profits per partner rose only 0.3%, according to calculations by the publication.

But according to the person briefed on Citi's analysis, in addition to about 22% of the top 50 firms overstating their 2010 profits-per-partner figures by more than 20%, an additional 16% inflated their numbers by 10% to 20%. An additional 15% of the firms had profits-per-partner figures that were inflated by 5% to 10%, the person added, citing the bank's report.

Larry Ribstein (Illinois), The Mirage of Law Firm Profits:

Now maybe one can see why lawyers hate the idea of publicly traded law firms.  Imagine if law firms faced the scrutiny of public securities markets.  I don’t actually think that law firms are deliberately lying.  The problem is that they persist in using an easily manipulable number instead of a more reliable metric.

But since I think big law has already died I see this as rearranging the deck chairs on the Titanic after it has sunk.

• Above the Law, Are Biglaw PPP Stats Any More Reliable Than Law School Employment Stats?
• Josh Wright (George Mason), Announcing the TOTM Symposium on Unlocking the Law: Deregulating the Legal Profession
• WSJ Law Blog, Are Law Firms Overstating Their Profits?