'A Shameful Act of Utter Madness' - How a Pioneering ‘New Law’ Firm Fell to Pieces

“It was going places,” says an insider. “But then it all spun out of control.”

It ran like clockwork. In late June, the flourishing New Law market witnessed an unprecedented migration of talent when about 30 lawyers at Cubism Law fled the firm for arch rivals Gunnercooke and listed firm Keystone Law. Within a month, as departures continued, the firm engaged administrators. And, just six days later, it declared insolvency.

Founded by a former Fieldfisher partner and peopled by lawyers hailing from London’s boutiques and firms including Clifford Chance and Allen & Overy, the firm sprung from the simple idea of offering experienced lawyers a platform to ply their trade unfettered by the numbing internal politics and bureaucracy of traditional law firms. The wide appeal saw the firm grow to, at its peak, a 60-lawyer, multimillion-pound enterprise that had even pondered an AIM listing.

“There was something untoward going on”

But a decade and a half later, the now-defunct law firm is facing separate investigations by administrators and the Solicitors Regulation Authority (SRA), which was in August alerted to a shortfall in a major client account. And in the midst of it all, questions encircle the firm’s founder and what was a fateful decision that people close to the situation say goes to the heart of the ongoing regulatory and wind-up investigations.

Through interviews with 11 people and the analysis of documents, Law.com’s Legal Week unpicks the saga, and uncovers how a firm designed to challenge the legal market became a victim of exorbitant costs, deep divisions and greed.

Bright beginnings 

When Y2K broke, so too did the advent of New Law. It signalled the dawning of a much-needed refresh in the legal sector – liberated fee models, more efficient services delivered through more innovative means, rooted in flexible working structures and cutting-edge tech. Touting aphorisms like ‘we think differently’ and ‘inside-out thinking’, firms such as Axiom and UnitedLex in the U.S. and Keystone and Lawyers On Demand in the U.K. broke onto the scene, albeit championing different delivery models. And just as New Law gained enough currency as sound commercial enterprise, in 2003, Cubism arrived.

In the 16 years since its inception, the firm brought in major clients that might look more at home on the repertoire of a larger City firm: tycoons and household names including Domino’s Pizza and KFC. According to two former consultants, the firm had big-ticket work funnelled to it by the likes of K&L Gates and Mishcon de Reya. Neither firm responded to requests for comment.

“You can’t have a CFA-based practice which is not supported by a big, ordinary fee-paying practice”

Before the collapse, the firm’s website – which is no longer active – described itself as “a £10 million” business “supported by a highly committed team of finance, recruitment, HR, compliance, marketing and administration personnel”.

When it was founded by ex-Fieldfisher partner Andrew Pena, the firm’s ethos was predicated on the idea that consultants – New Law parlance for ‘partners’ – need not be ‘employed’, but, rather more flexibly, self-employed on a contractual basis. “Think of us as permanent freelancers,” says another former consultant. “I was sold on the idea because of the freedom of flexibility it afforded me, and you still got quality work,” says another ex-Cubite. “And you had the support of a firm, which dealt with all the admin. It was exactly what I needed at that stage of my career.”

Flexibility is a running theme. For another former consultant, “the attraction of not having to deal with management, which many of us had done up until that point, was too enticing”. “I had the flexibility to build a practice and, frankly, to be a lawyer,” they added.

Another former consultant said: “When I joined, all I saw was growth – it didn’t appear to have any frailty.”

So from these heady beginnings, how did it all go so wrong? To know this is to go to the very heart of the firm: its model, its partners, its management. And its founder.

“It was a desperate act of madness”

The firm was led by a management team helmed by Pena, who sat amid a group of non-lawyers including recruiting firm Chadwick Nott’s founder Simon Chadwick and businessman David Sedgwick, who was its chairman.

According to several insiders, the firm deployed a fee-split model, whereby consultants are entitled to a portion of the fees they bill, with the remainder channelled to the firm’s overheads.

“Depending on the deal, the split could be as much as 60/40 or even 80/20 in the consultant’s favour,” says one person with detailed knowledge of the firm.

A consultant’s contract seen by Law.com’s Legal Week shows a deal in which Cubism offered one lawyer 70% of net revenues they billed, 50% of gross revenues billed, and 20% of all fee income billed, with the opportunity to receive bonuses as a percentage of net revenue.

In another document, a consultant had negotiated a salary of nearly £150,000 for one of his junior associates.

“It’s fair to say Cubism was at the deluxe end of New Law, with work very much within the M25,” the person says.

Magic Circle sums

“There was little consistency of approach when it came to consultants,” says an ex-consultant who left some time before the collapse. “Everyone had their own little deal with Pena going on.”

Each deal was different. And some were, in the words of a former consultant, “very, very generous”.

According to a document seen by Legal Week, as recently as May of this year Pena agreed with one particular consultant that, given certain conditions, the consultant could hold up to 17.5% of Cubism’s issued share capital, initially on trust.

The conditions included: securing a minimum of £3 million of investment for Cubism; securing £250,000 in respect of a large litigation case concerning a property tycoon; and achieving a net yearly fee target of £2 million alongside a reduced fee-split.

This, one consultant says, was likely one among “several acts of desperation” that came to define the firm’s final phases.

“The deals were exceptionally generous. Fit for purpose in the good times, but not in bad times,” says a person familiar with Cubism’s internal workings. A former consultant adds: “It was a generous model. Some select consultants could expect Magic Circle sums.”

Fantastic offices

But the spendthriftiness extended far beyond bespoke pay deals. In 2018, the firm commissioned a report from law firm accountants Hazelwoods, which, according to a person with knowledge of the report, argued that the firm’s single biggest risk area was its office space – described by one former consultant as “extraordinarily expensive”.

Rival firm Keystone worked differently. Its model of bringing what are essentially self-employed lawyers under one banner, with lawyers generally working from home, has so far proved highly successful. With office space being among the core outlays for any firm, having lawyers work at home means considerably reduced overheads. But for Cubism, this presented an opportunity.

“Working from home is fine, but there was a draw to having a place you can call work,” says another former consultant. “And the offices were fantastic. And also free. It’s a big draw for some.”

Another says: “There were amazing facilities at a knockdown price.”

“The cash situation became worse and worse”

Given the free space, most came into the office four to five days a week. “It was attractive to people with teams,” one former consultant says. “Offering good-quality office space is attractive, but expensive.”

The firm occupied premises at 1 Plough Place in Holborn. According to a Companies House filing from February last year, the firm had “outstanding future minimum lease payments” of £295,390 in 2017, which rocketed to £483,876 in 2018.

Power struggle

Cutting-edge offices, a top book of business and experienced lawyers. To the casual observer, the business was running smoothly. But beneath the surface, cash shortages were piling up. “It looked like a fine strong business. But it wasn’t all rosy,” a former consultant says.

The consultant says the firm’s book of business became increasingly underpinned by conditional fee agreements (CFA) – a model known more popularly as no-win no-fee; or no-win, partial-fee.

One former senior consultant, who recognised the danger of operating a CFA-heavy business that relies on non-guaranteed fee outcomes, says: “You can’t have a CFA-based practice which is not supported by a big, ordinary fee-paying practice.

“The firm was always short of cash, and the cash shortage became greater and greater. Even though we took on a big commercial litigation piece in the summer of 2017, and it brought in a lot of money, as we became more involved in CFAs, the cash situation became worse and worse.”

And with a largely autonomous consultant base on fee-split contracts, the firm’s management started losing grip on its own model, a former consultant says, in which power became increasingly decentralised and dispersed, often unequally, among fee-earners who operated within their own self-determining silos.

“I felt totally overwhelmed; overpowered by feelings of loss, failure and shame”

As the firm started taking on a disproportionately high amount of CFA-backed litigation work, the employment law and personal injury teams were among the first to feel the shock. “With a fee-split self-employed model, it’s difficult to tell people ‘you’re doing too much CFA work’. But that was the business, and we had to cut teams back. The personal injury team had to be cut,” says one individual.

Ruptures between the consultants and the largely non-lawyer management team started to appear. A headline example concerned the case of property tycoon Oliver Morley, who recently brought a High Court claim against Royal Bank of Scotland. The case, once a glowing example of the kind of mandates the firm could draw, saw Morley accuse RBS of having “stolen” his property empire in a £37 million claim – a case funded by way of a “partial CFA”, according to a person close to the case.

However, Morley abandoned Cubism, two people close to the case say, after certain key lawyers started to leave the firm. Morley turned instead to boutique Cooke Young & Keidan, a person at the firm confirms, which faced down RBS’s advisers Addleshaw Goddard in court.

It left Cubism lacking a potentially business-saving revenue stream in the “hundreds of thousands” of pounds, says one person.

“These are human beings with hearts and minds, and they, like anyone else, can make mistakes and bruise”

In another example of when the firm appeared unable to keep hold of a key client, a consultant attempted to arrange a fee deal in which it was agreed the client would pay the firm in “chunks of £100,000”. However, a member of the management team saw that the deal could leave the firm without a much-needed guaranteed income stream, and wrote to the client, says a person close to the situation, saying, “we’re going to charge 1% interest a month”. Once this happened, the consultant says, the client went to another firm.

In a third example, with a view to keeping a high-profile client on its books, a consultant suggested crowdfunding a high-value litigation so that the client could start the litigation without being charged straight off the bat. “It could have been one of the best clients in the world,” the consultant says.

But the management weren’t going for it, and sent a letter to the client, an insider says. “They interfered with the case, saying the scope was too wide and that too much work was being done for free.”

“I wasn’t paid for weeks. Then weeks became months. Then I just gave up asking”

Having been promised freedom, lawyers grew increasingly frustrated.

In a model shift in 2017, consultants were offered even greater flexibility, but the firm became what one consultant called a “leaking ship”. The model was “fundamentally flawed” and it backfired as lawyers used that freedom to walk out the door.

“The model didn’t tie consultants to [the firm],” the person says. “The contracts with consultants were too flexible, as partners weren’t locked in. Some were on as little as one month’s notice. And they’d argue repudiatory breach if the firm tried to keep them.”

Uninhibited by onerous lock-ins, frustrated lawyers with substantial working caseloads started leaving the firm in a steady stream that only quickened earlier this year after “the situation became dire”, says an ex-consultant. It created a situation in which overheads, high as they were, “stayed the same” while “income dropped”.

The piling costs meant that external lawyers and barristers were often paid late, or not at all, with one such lawyer saying: “I wasn’t paid for weeks. Then weeks became months. Then I just gave up asking.”

Overblown pay packets, increasing CFA work, a growing list of creditors, high lawyer turnover and soaring lease arrears were the seeds of what one person with knowledge of the situation describes as “the beginning of the end”.

‘A shameful act of utter madness’

To plug an increasingly gaping hole in the firm’s working capital, funds were sought elsewhere. Bank loans, equity deals, and even a potential IPO on AIM, according to two people and a document. But to no avail.

“To operate a scalable platform, you have to get the economics of it right,” a person close to the firm says. “No investor would bite.”

As the situation deteriorated further, the firm’s founder, Andrew Pena, is alleged to have made a decision to do something a person with detailed knowledge of the situation calls “a shameful act of utter madness”.

According to four people with detailed knowledge of the situation, Pena transferred about £245,000 of client account money, which one source says belonged primarily to client KFC, into the firm’s office account without the client’s consent. KFC declined to comment.

Another claims that Pena had started withdrawing funds from the client account from as early as January 2017, and stresses that the £245,000 shortfall was made up of funds belonging to more than one client.

“Pena took money that wasn’t his,” claims another person with knowledge of the aftermath.

Another says he had used the money to “try to fund working capital, to fund trading and keep the business afloat”.

The person adds: “It was a desperate act to save the firm. It was sad that the leader of the firm would be reduced to something like this. He did it for his firm, not for his personal gain.”

“The end, when it came, was quick and brutal”

However, others contest this version of events.

Three of the people close to the situation suggest that Pena had used the money that was transferred from the client account to the office account to pay himself a “substantial” dividend. One of the people adds: “If you pay yourself a dividend, you have to have director approval. You can’t just allocate yourself dividends.”

Through these means, Pena was able to channel client funds to himself, the three people allege. “Invoices were raised, masquerading as billings,” one of the people adds. “There was something untoward going on.”

Another source claims Pena was not the only senior lawyer at the firm to receive dividends in such a manner.

When these claims were put to the SRA, whose investigation is ongoing, a spokesperson responded in a statement to Legal Week: “We are aware of the potential issues and are currently reviewing these before considering any next steps.”

Pena is expected to be interviewed as part of the SRA’s investigation, according to a person close to the matter.

Attempts to reach Pena for a comment or an explanation, via LinkedIn, phone and email during the course of four months, were not successful.

The ‘brutal’ end

According to three people with knowledge of the situation, the shortfall was dealt with such that there could be “no loss to clients”. The £245,000 hole was plugged by the remaining directors, with Sedgwick handing over personal funds to the tune of £120,000, according to a person close to the former chairman. “Money was put back, and the insurers were notified,” the person says.

Given the sizeable risk posed by the winding-up process, the firm’s administrators Quantuma had thought twice about taking on the case. Quantuma’s Andrew Hosking, who is joint administrator with Sean Bucknall, says: “We got the facts together and considered, can we do this? This is going to be a difficult one. Finally, we felt we could.”

“He paid himself a dividend using client money”

In an essay published on a LinkedIn profile under his name in October, Pena speaks of his feelings of shame and “loss”. The post reads: “It was July 2019 and the demise of the company I first founded in November 2003 was drawing to a painful close.

“The end, when it came, was quick and brutal – the words of ‘Viva la Vida’ echoing in my ears. I felt totally overwhelmed; overpowered by feelings of loss, failure and shame interspersed with a sense of total numbness and hopelessness.

“It seemed to me that this was the end. The errant man and his spirit, broken and, perhaps, forfeited forever.”

Another person with knowledge of the aftermath says that Pena was “immensely sorry” for his actions. “People do strange things in difficult times,” the person adds.

A former senior consultant says he had never before experienced such “high highs and low lows” as he did when he was a member of Cubism. “For any business, things can go wrong,” the ex-consultant says. “These are human beings with hearts and minds, and they, like anyone, can make mistakes and bruise.

“You want to avoid something like this happening? You have to be able to notice when those small cracks appear,” they add. “And that can often be during the good times.”