Legal Fees Paid by RTC to Gilpin, Paxson & Bersch

(Audit Report No. 98-023, April 10, 1998)

The Office of Inspector General (OIG) has completed an audit of Gilpin, Paxson & Bersch, a law firm's hired to provide legal services to the Resolution Trust Corporation (RTC). The audit was conducted by the joint venture's Financial Management Associates through a contract with the OIG, and covered billings paid by the RTC from January 1, 1990, through December 31, 1993.

The objectives of the audit were to determine whether Gilpin, Paxson & Bersch's legal bills were adequately supported and in compliance with the cost limitations set forth by RTC and the Federal Deposit Insurance Corporation (FDIC) and that charges for legal services provided to RTC were reasonable. The total fees paid to the law firm's for RTC-related work during the audit period were $1,992,793. The audit sample covered $1,283,944, or 64 percent of the total. The joint venture's identified net questioned costs of $1,767,557. The questioned costs exceeded the amount of the audit sample because the joint venture's performed some tests on the entire audit universe.

Included in the questioned amount were blocked-billed charges of $272,473. Block billing is the term used to describe the practice of aggregating an attorney?s time charges for different tasks or activities, rendering reasonableness reviews of time charges difficult or impossible. Subsequent to the preparation of the draft report, the OIG decided not to question block-billed charges (recommendation 21) for services rendered prior to the time that RTC provided the firm's with specific billing guidance. Rather, because we were unable to apply auditing procedures to satisfy ourselves as to the reasonableness of the block-billed charges, we did not consider the scope of work sufficient to enable us to express an opinion on these fees. Therefore, we reduced questioned costs by $272,473 of block-billed charges identified in recommendation 21. Accordingly, questioned costs were adjusted to $1,495,084.

That the AGC, Legal Operations Section, Legal Division, should:

In addition, the OIG recommended that the AGC (recommendation 43) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate.

In response to a draft of this report, the AGC provided the requisites for a management decision on each of the recommendations. Management disallowed a total of $63,040, which includes $9,050 not questioned by the OIG. Specifically, management disallowed $9,050 in response to recommendation 2 to evaluate missing invoices, if located. Although management's corrective actions on recommendations 1, 3, 5, 7, 9, 12 through 15, 17, 18, 19, 22, 23, 24, 26, 29, 31, 32, 33, and 39 through 42 differed from the recommended corrective actions, we consider management's response as providing the requisites for a management decision.

Specifically, in recommendation 1, the OIG recommended that FDIC disallow $148,809 for attorney fees and expense billings not supported by sufficient documentation. Management allowed all of the questioned charges. The firm's stated that the missing invoices were inadvertently misplaced, but the firm's provided evidence that the invoices had been reviewed by RTC before payment. The OIG reviewed the documentation provided by the firm's and accepts management?s explanation and, accordingly, reduced questioned costs to $0.

In recommendation 3, the OIG recommended that FDIC disallow $216,123 in charges billed as a result of missing time records. Management allowed $214,258 and disallowed $1,865. The Legal Division acknowledged that the firm's did not maintain the time sheets as required by RTC. However, management did not believe that the firm's failure to maintain required documentation was a ?no cost alternative to outside counsel. Accordingly, after considering other factors, management disallowed $1,865. In the absence of time sheets, the OIG could not independently verify the questioned charges. Therefore, for recommendation 3, the OIG will question $216,123.

In recommendation 5, the OIG recommended that FDIC disallow $679,007 for missing pre-bills. Management allowed the questioned charges because RTC guidelines did not specifically require that firm's retain pre-bills. Moreover, the Legal Division determined that the absence of pre-bills was not a fatal deficiency because all questioned charges were subject to comparison with the firm's original time records. The OIG accepts management?s explanation and, accordingly, reduced questioned costs to $0.

In recommendation 7, the OIG recommended that FDIC disallow $9,584 for unauthorized rates previously billed by the firm's. The OIG reduced questioned costs from $9,584 to $5,622 because the RTC oversight attorney had previously disallowed $3,962. The Legal Division disallowed all the adjusted questioned costs.

In recommendation 9, the OIG recommended that FDIC review payments under the accelerated payment program that do not correspond to the firm's billing records and verify that all such payments were appropriate, including approval of all third party invoices. The Legal Division responded that the Dallas Office had completed its review of payments under the accelerated payment program. The Dallas Office stated that it resolved all outstanding issues and received repayment of all monies owed to RTC. Therefore, the Legal Division concluded further action on this recommendation was unnecessary. The OIG accepts management's explanation.

In recommendation 12, the OIG recommended that FDIC determine whether the firm's fully complied with the RTC directive dated September 9, 1991, that required firm's to return erroneous duplicate payments. The Legal Division determined that it would not conduct further inquiry into erroneous duplicate payments made before September 9, 1991. The Legal Division based its decision on the fact that the joint venture's only found a few instances of overpayments. Additionally, the Legal Division had completed the accelerated payments reconciliation and settled with the firm's. The OIG accepts management's position.

In recommendation 13, the OIG recommended that FDIC disallow $13,336 for outstanding credit balances until the firm's can reconcile the balances and demonstrate that RTC received full credit for the payments. The Legal Division allowed the questioned charges because the firm's provided a report to support its assertion that there were no overpayments on the invoices questioned. The Legal Division's Dallas Office and the OIG reviewed the joint venture's working papers and could not refute the firm's assertion with the information available in the working papers. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 14, the OIG recommended that FDIC disallow $15,285 in unreconciled overpayments made by RTC until the firm's can demonstrate that RTC received full credit for the overpaid amounts. Management allowed all of the questioned costs based on the explanation from the firm's and a review of the joint venture's working papers. Specifically, the firm's provided evidence that that no overpayment existed. Moreover, the Legal Division concluded that there was not enough evidence in the joint venture's working papers to disallow the costs. The OIG accepts management's explanation and, accordingly, reduced questioned costs $0.

In recommendation 15, the OIG recommended that FDIC review with the firm's the extent that portions of paid accelerated payment program invoices less than $1,500 were subsequently disallowed. The Legal Division conducted a nationwide accelerated payment program resolution project and specifically determined that it would not review invoices paid less than $1,500 based on its overall assessment of payments made under the project. Therefore, the Legal Division determined that it would not pursue this recommendation. The OIG accepts management's explanation.

In recommendation 17, the OIG recommended that FDIC disallow $8,163 for fees related to the firm's failure to consistently apply travel expense limitations. Management allowed $7,980 and disallowed $183. Specifically, management reviewed information provided by the firm's and determined that, except for two instances, the firm's discounted the travel time as required. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $183.

In recommendation 18, the OIG recommended that FDIC disallow $49,584 and evaluate fees and expenses billed during the initial period the firm's did not have a LSA in effect and ratify amounts deemed reasonable. The Legal Division allowed all the questioned charges because at that time RTC was unable to keep pace with the number of firm's requiring LSAs. Consequently, the firm's continued to perform work as ?inherited? counsel. As such, the firm's continued to perform in furtherance of RTC interests. The Legal Division concluded that the work performed by the firm's was accomplished at the direction of RTC and the firm's was entitled to payment for services rendered. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 19, the OIG recommended that FDIC disallow $203,977 and evaluate fees and expenses billed during the periods in which the firm's did not have a LSA in effect and ratify amounts deemed reasonable. The Legal Division allowed all the questioned charges. The Dallas Office advised that RTC policy at that time did not require another agreement to be in place after the expiration of an LSA for the continuation of old matters assigned under the prior LSA. The firm's did not receive any new matters during the time period questioned. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 22, the OIG recommended that FDIC require the firm's to satisfactorily demonstrate that block billing did not increase fee billings to RTC. The Legal Division responded that block billing was not specifically prohibited by RTC during the audit period. Subsequently, the Legal Division addressed the issue of block billing and, therefore, concluded further action was unnecessary. The OIG accepts management's explanation.

In recommendation 23, the OIG recommended that FDIC discuss the correct billing procedures with the firm's to avoid block billing in the future. Management stated that effective August 1995 all outside counsel were notified that block billing was prohibited. Consequently, the Legal Division determined further action was unnecessary. The OIG accepts management's explanation.

In recommendation 24, the OIG recommended that FDIC disallow $21,910 for research not delivered to RTC. Management allowed all the questioned costs. The firm's asserted that the research was deemed necessary by oversight counsel and the lead trial attorney. Specifically, the RTC supervising attorney actively directed the litigation, including issuing instructions regarding research. The firm's, therefore, assumed the oversight attorney's instructions constituted ROT's authorization and did not seek separate approval. The Dallas Office reviewed the joint venture's working papers and found that the working papers did not adequately document the reason the research was questioned. Therefore, the Legal Division concluded it would allow the questioned charges because of the lack of support and the acceptability of the firm's explanation. The OIG reviewed the joint venture's working papers and accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 26, the OIG recommended that FDIC disallow $6,106 related to the preparation of fee bills and status reports. Management allowed $5,642 and disallowed $464. Specifically, management allowed $5,642 for preparation of work plans and budgets specifically requested by RTC attorneys or paralegals. The work plans were not routine and were authorized by RTC counsel. Management disallowed the remaining charges. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $464.

In recommendation 29, the OIG recommended that FDIC disallow $28,933 for in-house photocopying. Management allowed $28,858 and disallowed $75. Management allowed $28,858 because it only required law firm's to conduct cost studies for photocopying expenses if the firm's billed more than the Legal Division's established maximum allowable rate. The firm's billed 1,491 copies at $.05 per page above the established maximum allowable rate. Hence, the Legal Division disallowed $75.

RTC guidelines provided that photocopying charges be billed at actual documented costs or at a standard cost based on a documented cost study and, therefore, photocopying costs not supported by a cost study were questioned by the joint venture's. The Legal Division subsequently revised its guidelines to allow firm's to charge up to $.08 per page for photocopying. Therefore, in view of subsequent revisions to guidelines, the amount disallowed by the Legal Division does not appear to be unreasonable. However, the joint venture's appropriately questioned the photocopying costs for lack of support. Accordingly, the OIG will continue to question $28,933.

In recommendation 31, the OIG recommended that FDIC disallow $13,840 for contract labor. Management allowed $5,517 and disallowed $8,323. Specifically, management allowed $5,517 because the former RTC oversight office confirms that RTC needed a review done quickly of ownership and membership files related to specific recreational properties. RTC agreed to pay the firm's for this service at the firm's minimum rate for paralegals of $35 per hour or a total of $5,517. The Legal Division disallowed $8,323 because the firm's could not provide any evidence that RTC authorized the firm's to bill twice the actual cost of contract labor to compensate the firm's for supervision, space, equipment, and other overhead costs. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $8,323.

In recommendation 32, the OIG recommended that FDIC disallow $1,760 for messenger and express mail services. Management allowed $1,737 and disallowed $23. Specifically, management determined that the $1,737 for courier service was authorized by the Dallas Office. However, management disallowed $23 for express mail service overcharges. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $23.

In recommendation 33, the OIG recommended that FDIC determine the total express mail discounts not allocated to RTC and then disallow the amount determined. Management determined that it would not be cost effective to conduct further audit activity to determine additional unreimbursable discounts. The OIG accepts management's explanation.

In recommendation 39, the OIG recommended that FDIC request the firm's to provide written certification that no representational conflict exists or existed while representing RTC except for those previously disclosed. Management responded that conflict issues were subject to self-certification under RTC policies and procedures. Therefore, absent evidence of a conflict, the firm's need not provide the auditors with complete access to its list of clients and the time records of attorneys working on RTC matters. Further, management stated that the firm's failure to identify any conflict would not only violate its certifications to the contrary, but would also constitute an ethical violation of the Code of Professional Conduct for attorneys. During the engagement process, each firm's committed to advise RTC of any conflict as it arose. The OIG accepts management's response to the recommendation. Nonetheless, while conflicts issues were subject to self-certification under RTC policies and procedures, a standard audit procedure was to review a sample of clients listed on timekeeping records to test the adequacy and accuracy of the firm's system for identifying, tracking, and resolving any conflict or potential conflict of interest, and to test the firm's compliance with RTC policies and procedures. This testing simply assures the accuracy of the firm's representations and its compliance with applicable policies and procedures. The Legal Division argues that absent evidence of a conflict, the firm's need not provide the requested information. As subsequently discussed in recommendations 41 and 42, the firm's did have conflicts of interest.

In recommendation 40, the OIG recommended that FDIC disallow professional fees for two attorneys who did not submit required conflict of interest certifications. Management stated that the two attorneys added to the LSA in 1991 signed individual certifications in 1994 as part of the audit. Accordingly, the Legal Division concluded that no disallowance is appropriate. The OIG accepts management's response to the recommendation, but believes the firm's untimely compliance (more than 3 years after RTC required) reflects a failure by the firm's to follow specific RTC instructions.

In recommendation 41, the OIG recommended that FDIC disallow $4,050 in professional fees for one attorney who was walled-off from the matter charged. Management allowed all the questioned charges. The firm's responded that the attorney, who developed a specialty in labor law, was asked to assist a subsidiary of the financial institution in responding to an employment claim. According to the firm's, representatives for the subsidiary were informed of the conflict situation and approved the assignment. The matter was referred to ROT's Outside Counsel Conflicts Committee. The Committee suspended the firm's from receiving any new referrals for 90 days beginning February 28, 1996, but imposed no monetary penalty. The Legal Division concluded that it had already taken the appropriate action of suspending the firm's from any new referrals in accordance with the Conflicts Committee's decision and decided not to disallow the $4,050.

The OIG asserts that the firm's violation of the conflict of interest policies is the pertinent issue. The RTC Guide for Outside Counsel and the firm's LSA carry the responsibility for the firm's to disclose subsequent, actual, or potential conflicts as soon as the firm's learns of their existence. Based on a review of the firm's policies, procedures, and controls, the joint venture's concluded that the firm's had the capacity to identify substantially all representational conflicts. Nonetheless, the firm's did not request a conflicts waiver for the attorney until May 1992, although the attorney was hired in January 1992. In connection with the renewal of the firm's LSA in May 1993, the firm's addressed the conditional waiver and did not disclose its failure to comply with the waiver. Therefore, even after obtaining a conditional waiver, the firm's knowingly failed to comply with it, or to seek the advice of the Outside Counsel Conflicts Committee. RTC established policies to protect its interests and prevent any damage from occurring. To make an exception to the conflict of interest policy defeats its purpose. The OIG will continue to question $4,050.

In recommendation 42, the OIG recommended that FDIC disallow $31,133 of professional fees and expenses paid to the firm's during the period when the firm's had agreed not to represent a particular savings association. Management allowed all the questioned charges. The firm's responded that the matters were assigned to the firm's by an asset management contractor because of an emergency situation involving the suspected dumping of environmental wastes. The asset management representative obtained permission from the RTC Dallas Office to engage the firm's. However, the firm's acknowledged that the asset management representative was not aware at the time that the firm's was restricted from representing the financial institution involved. When the conflict was discovered, no steps were taken to inform the RTC of its representation. The firm's asserted that it achieved ?extraordinary successful results notwithstanding the conflict. The matter was referred to ROT's Outside Counsel Conflicts Committee. The Committee did not impose a monetary penalty. The Legal Division concluded that it had already taken the appropriate action of suspending the firm's from any new referrals in accordance with the Conflicts Committee's decision (recommendation 41) and, therefore, allowed the $31,133.

The OIG asserts that the firm's violation of the conflict of interest policies is the pertinent issue. Although the firm's was requested to take emergency action before a conflict was discovered, upon discovery of the conflict, no steps were taken to inform RTC in violation of the applicable conflict of interest standards. RTC established policies to protect its interests and prevent any damage from occurring. To make an exception to the conflict of interest policy defeats its purpose. The OIG will continue to question $31,133.

Based on the joint venture's audit work, $1,495,084 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 6, the OIG recommended that FDIC analyze the qualifications of employees working on RTC matters but not listed on the firm's LSA, determine how much of the $6,109 in questioned charges should be ratified, and disallow any of the charges not approved. The Legal Division ratified $6,049 and disallowed $60 for charges by two timekeepers that were never added to the firm's LSA. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $60. After considering $63,040 in disallowances taken by management and management?s comments on the joint venture's findings, we will report questioned costs of $332,289 (including $276,254 of unsupported costs) in our Semiannual Report to the Congress.