On January 27, Dewey & LeBoeuf's partners were summoned to a meeting on the 22nd floor of the law firm's New York City headquarters to discuss the firm's finances. While most of them knew Dewey LeBoeuf faced challenging times, few were prepared for what they were soon to hear from their chairman, Steven Davis.

Using a PowerPoint slide show, Davis presented a grim picture: Of Dewey's approximately $250 million in net income for 2011, about half was committed to pension obligations to retired partners and compensation that was owed to certain partners for the two prior years. Just half the pie remained to distribute to disappointed partners.

The firm was living on the edge, Davis revealed. "You have to own this problem," he told stunned partners, according to a lawyer who attended. Davis declined to comment for this article.

Dewey was once among the 20 largest firms in the United States, with a global reach extending from Los Angeles to Abu Dhabi to Tbilisi, Georgia. But it has been decimated and is not expected to survive. Within a few weeks of the revelations by Davis, groups of partners began defecting. Now, about 200 of Dewey's roughly 300 partners have fled. Last week the firm notified its U.S. lawyers and staff that they could face mass layoffs and that a "closure" was possible. On Friday one of its last major rainmakers, Martin Bienenstock, said he was joining the Proskauer law firm.

Dewey has outstanding bank and bond debt totaling approximately $230 million, according to Bill Brandt, a restructuring adviser retained by the firm. A $75 million loan payment is due early next week, but the parties late Thursday agreed in principle on an extension of a week or two, Brandt said. A spokesman for the firm declined to comment.

Many of the causes for Dewey's troubles have by now been often cited: a sputtering economy, massive debt obligations, and multimillion-dollar, multiyear financial guarantees to partners. What appears to have brought Dewey to its knees, however, is a failure of governance that allowed these challenges to spiral out of control.

Interviews with current and former partners, consultants and others in the industry paint a picture of a firm run by a insular coterie of attorneys and administrators who often withheld crucial information from their partners, undermining their own credibility in the process. Born of a boom-era marriage between a firm with faded cachet and a wealthy if unglamorous suitor, Dewey was determined to buy its way into the pedigreed elite. But when the Great Recession hit, a sense of shared sacrifice and loyalty was in short supply.

WHEN DEWEY MET LEBOEUF

The beginning of the end, according to many former partners, predated the 2007 merger that tied Dewey Ballantine with LeBoeuf, Lamb, Greene & MacRae. While the firms appeared to complement each other on paper, they both brought some baggage to the union.

Dewey Ballantine, with roots going back to 1909, had deep ties to Wall Street and bore the storied name of former New York Governor Thomas E. Dewey. But over its last two decades its financial performance had slipped relative to its competitors. Before tying the knot with LeBoeuf, the firm considered a merger with the California-based law firm Orrick, Herrington & Sutcliffe. That deal fell through, and the departure of some key partners left Dewey Ballantine weakened. At the time, Dewey Ballantine also owed close to $80 million to former partners for deferred compensation and pension obligations, according to sources familiar with the firm's finances.

LeBoeuf, founded in 1929, specialized in representing companies in regulated industries such as insurance and energy. The firm had just had one of its best financial years ever, but its lawyers did not have a significant presence in flashier areas such as complex litigation and mergers and acquisitions. To upgrade its profile, LeBoeuf began offering handsome compensation guarantees to stars such as Ralph Ferrara, a litigation partner at prestigious Debevoise & Plimpton and a former general counsel for the Securities and Exchange Commission.

The principal architects behind the Dewey-LeBoeuf deal were Davis, then chairman of LeBoeuf, who made the initial approach, and Morton Pierce, then the chairman of Dewey Ballantine. Pierce was a key rainmaker and had long been considered one of the top lawyers in the field of mergers and acquisitions. He had represented Walt Disney Co in its $7.4 billion acquisition of Pixar in 2006 and The MONY Group in its $1.5 billion sale to AXA Financial in 2004.

Davis, who attended Yale for college and law school, had spent virtually his entire career at LeBoeuf, becoming head of the firm's energy and utility practice in 1994, then chairman of the firm in 1999. Davis first pitched the merger to Pierce in the spring of 2007, according to an October 2007 article in "The American Lawyer" magazine. When the idea was presented to LeBoeuf partners, some who were there told Reuters recently, they felt pressure to support it.

Partners in New York were asked to assemble in the firm's cafeteria and to cast their vote in public, according to former partners who attended. "If you voted against the transaction, it would be career suicide," said one who was in attendance.

The merger was announced in August 2007 and took effect two months later. Davis was elected chairman of the combined firm. In a press release, the newly christened Dewey & LeBoeuf said it had more than 1,300 attorneys in 12 countries and would have annual revenue of $1 billion. Davis said Dewey would "become one of the premier New York law firms with extensive global reach."

The deal's closure coincided with a red-hot financial market. On October 9 the S&P hit its all-time high.

"A FATAL DISEASE"

Within months, however, the subprime-mortgage crisis began unfolding, and by late 2008 the economy had ground to a halt. Like many firms, Dewey felt the effects immediately. Deals slowed to a trickle and income fell. In 2009 revenue dropped 15.3 percent, to $809 million, according to a prospectus the firm issued for a bond offering in March 2010. According to former partners, the firm never made its budget targets after the merger and failed to adjust spending accordingly.

"I look back, and a lot of things went wrong, but the real problem was to have a marriage where you're struck by a fatal disease," said Gordon Davis, a former Dewey real estate partner in New York who left this month for Venable. "There was almost no way to dig out of it."

The firm's culture of secrecy initially masked the extent of its troubles. Beyond the figures cited in the magazine, details of Dewey's financial picture were hard to obtain, even by its own partners, some former partners said. Rather than a traditional law partnership, with lots of committees and collective decision-making, Dewey was run more like a corporation, these people said, with Steven Davis, the chairman, playing the role of a powerful chief executive officer. Working closely with Davis were Stephen DiCarmine, executive director, and Joel Sanders, chief financial officer. Neither DiCarmine nor Sanders responded to calls seeking comment.

Typically, Davis and Sanders were the ones who presented financial information to the partnership. It couldn't be determined to what extent the three men shared information with their executive committee, which generally numbered around 30 people.

The firm's bond offering in March 2010 - for $125 million - was unusual for a major law firm, and was apparently not widely known by Dewey partners. Some only learned about the transaction when it surfaced in news reports the next month. "I read about it in the papers," said one former partner. "And I certainly didn't sign off on it."

Law firms typically finance their operations through contributions from their partners, and some firms obtain a revolving line of credit with a bank. Dewey's move suggested that it needed money it could not immediately repay. In April 2010, then-Dewey partner Richard Shutran told Bloomberg News that the bond's interest rate was more favorable to the firm than the rate offered by firm's bank lenders.

This week the New York Times reported that it had obtained the offering document for the bond, which touted Dewey's "strong financial condition and conservative debt profile" but did not disclose that it had quietly made major future financial commitments to a large number of its partners.

AN OCTOBER SURPRISE

Big law firms sometimes woo big stars by promising to pay them a fixed amount for a year or two, regardless of the firm's - or their own - financial performance. But most firms that do this use such guarantees sparingly. By all accounts, Dewey took the practice to an extreme. It made compensation guarantees for multiple years. It offered guarantees to lawyers who did not prove to be rainmakers. And it even gave guarantees to some existing members of the firm who had begun to complain that they had missed out.

Rumors circulated among Dewey attorneys about who had such deals, but management never shared that information with the whole partnership, according to former partners. The compensation committee typically made recommendations to the executive committee about the amount each partner should be paid. It's unclear who on those committees knew about the financial guarantees.

Then, at a partnership meeting in October 2011, Davis made a startling disclosure about the guarantees. During a question-and-answer period, he said the deals had been extended to about a third of the firm's 300 or so partners. The number shocked some lawyers. It also angered those who didn't have a guarantee and who had seen their compensation stagnate or drop in recent years.

RUN ON THE FIRM

By February, media reports began surfacing that the firm was not able to pay its partners what they had been promised. The press had also taken notice of the growing defections, notably a group of 12 top insurance lawyers who left for a competitor, Willkie Farr & Gallagher.

Davis, who had been re-elected chairman in August, tried to put out the fire. In an interview with "Fortune" that appeared online on March 22, Davis dismissed rumors that the firm was struggling to meet some of its loan covenants. He also defended its system of paying star performers.

"If the direction we're taking the firm in was somehow disapproved of, then the reality is that there ought to be a change in management," he told "Fortune." "I don't sense that."

But the partnership was unraveling. By April the firm had retained bankruptcy counsel, hired a crisis communications firm, and had removed Davis as chairman. Dewey started merger talks with at least two major firms, but they went nowhere. Meanwhile, rivals kept circling and poaching.

On April 27 the firm's management circulated a memo telling partners that the Manhattan district attorney was investigating "allegations of wrongdoing" by Davis. The district attorney's office declined to comment. Davis, who has hired a criminal defense attorney, said in an email to partners that "a dispassionate and disinterested review of the facts will confirm that I have not engaged in any misconduct." The inquiry was prompted by a group of partners who approached the district attorney, according to a source familiar with the matter. The precise nature of the allegations could not be determined.

Stuart Saft, who headed Dewey's real estate practice until he left this month, blamed his former colleagues who went to the DA for squelching merger discussions. "I can't imagine why the current partners who were there would do this, as it was shooting oneself in the foot," he said. The identity of those partners could not be determined.

Whether Dewey might otherwise have completed a merger will never be known. It's also unclear whether its unwinding will take the form of a bankruptcy or whether the firm will simply wither away as partners continue to leave over the next weeks. Given Dewey's immense liabilities, no one has offered a likely scenario under which the partnership could survive.

But certain things are clear. The collapse of Dewey leaves dozens of former partners unpaid, hundreds of associates and administrative staffers laid off - not to mention about 30 law students suddenly without a prestigious summer job. Creditors ranging from landlords to suppliers of paper to bondholders are starting to line up. The first of likely lawsuits against the firm - a case seeking class-action status on behalf of fired workers - has been filed in Manhattan federal court. And the name Dewey & LeBoeuf will serve as a cautionary tale for major law firms for a long while.

(Reporting by Andrew Longstreth and Nate Raymond Additional reporting by Noeleen Walder and Nick Brown; Editing by Eileen Daspin, Eric Effron, Amy Stevens and Douglas Royalty)

• A Permanent Economic Emergency