Legal Fees Paid by RTC to Hogan & Hartson

(Audit Report No. 98-033, March 23, 1998)

The Office of Inspector General (OIG) has completed an audit of Hogan & Hartson, a law firm hired to provide legal services to the Resolution Trust Corporation (RTC). The audit was conducted by the independent public accounting firm (IPA) of Ollie Green & Company through a contract with the OIG, and covered billings paid by RTC during the period January 1, 1990, through December 9, 1993.

The objectives of the audit were to determine whether Hogan & Hartson?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 for RTC-related work during the audit period were $5,035,640. The audit sample covered $2,508,979, or 50 percent of the total. The IPA identified net questioned costs of $833,700.

That the Assistant General Counsel (AGC), Legal Operations Section, Legal Division, should:

(1) disallow $442,209 for missing time sheet charges,
(2) evaluate $185,676 in fees and expenses billed during the period in which
the firm did not have an effective legal services agreement (LSA) and ratify
amounts deemed reasonable and disallow any of the charges not approved,
(3) disallow $4,362 for excess time charges,
(4) disallow $4,131 for duplicate time charges,
(5) disallow $3,400 for unsupported time entries,
(6) disallow $1,757 for inadequately described charges,
(7) disallow $667 for attorneys who performed paralegal tasks,
(8) disallow $1,397 for review, revise, and edit charges,
(9) disallow $2,346 for unauthorized elementary legal research charges,
(10) disallow $533 for intra-office conference charges,
(11) disallow $1,468 for attorneys who performed secretarial activities,
(12) disallow $4,241 for duplication of effort and attendance charges,
(13) disallow $12,822 for unsubstantiated expenses,
(14) disallow $3,330 for facsimile charges that exceeded the firm?s actual costs,
(15) disallow $125,163 for document reproduction charges in excess of the
firm?s actual costs,
(16) disallow $2,786 for duplicate billings,
(17) disallow $1,907 for express mail charges that exceeded the firm?s actual
costs, and
(18) disallow $35,505 for unallowable expense charges.

The AGC?s response to a draft of this report provided the requisites for a management decision on each of the recommendations. Management disallowed a total of $114,488. Although management?s corrective actions on recommendations 1, 6 through 8, 10 through 13, 15, and 18 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 $442,209 for missing time sheet charges. Management allowed all the questioned charges. The firm responded that it used a computerized timekeeping system during the period in question and that some attorneys and other timekeepers entered their time directly into the system, while others prepared handwritten time sheets in various formats for a secretary to enter into the system. The firm stated that it did not require attorneys or other timekeepers to use a particular method for recording the information into the computer or maintain the tapes, time sheets, diaries, or other materials used by the timekeepers to make their entries into the computer system. The Legal Division stated that RTC and FDIC guidelines did not require the firm to use and retain handwritten time sheet entries, did not describe what records must be generated and maintained, or require the firm to establish a particular kind of record-keeping system. Accordingly, the Legal Division allowed all the questioned charges.

The IPA determined that $1,716,557 of the $2,158,766 in sampled time charges were adequately supported by original time records. However, in the absence of handwritten time records, the IPA could not independently satisfy itself that the remaining questioned $442,209 in computerized time charges were the unaltered original time charges. As a result of a joint project involving the Legal Division and OIG, the Legal Division transmitted electronic billing guidelines to outside counsel on December 31, 1997. Nonetheless, the IPA appropriately questioned the computerized time charges for lack of original support. Therefore, for recommendation 1, the OIG will continue to question $442,209.

In recommendation 6, the OIG recommended that FDIC disallow $1,757 for inadequately described charges. Management allowed all the questioned charges. The Legal Division reviewed the questioned entries and believes they are adequately precise given the guidelines in effect at that time. The OIG accepts management?s explanation and, accordingly, reduced questioned costs to $0.

In recommendation 7, the OIG recommended that FDIC disallow $667 for attorneys who performed paralegal tasks. Management allowed all the questioned charges. The Legal Division reviewed the questioned entries and believes that, on balance, the entries reflect the appropriate use of attorney time. The entries in question are typically for one-quarter of an hour for an attorney to review or revise a document. The small amount of time questioned indicates that the primary drafting was done by the paraprofessionals. Finally, the extraordinarily small percentage of entries questioned in comparison to the audit sample suggests that the firm carefully controlled the use of its professional staff. The OIG accepts management?s explanation and, accordingly, reduced questioned costs to $0.

In recommendation 8, the OIG recommended that FDIC disallow $1,397 for review, revise, and edit charges. Management allowed all the questioned charges. The Legal Division stated that the determination of whether an attorney used his time in the most cost-effective manner is inherently a judgment call. The Legal Division reviewed the questioned invoice entries and, similar to condition 7, concluded that the insignificant amount of questioned time compared to the audit sample did not indicate a pattern of excessive document ?polishing.? The OIG accepts management?s explanation and, accordingly, reduced questioned costs to $0.

In recommendation 10, the OIG recommended that FDIC disallow $533 for intra-office conference charges. Management allowed all the questioned charges. The firm responded that the allocation of professional resources is a judgment call that is more effectively made by an oversight attorney familiar with the issues than by auditors years afterward. The Legal Division stated that the minimal amount questioned clearly reflects an absence of a pattern of abuse or excessiveness by the firm. The OIG accepts management?s explanation and, accordingly, reduced questioned costs to $0.

In recommendation 11, the OIG recommended that FDIC disallow $1,468 for attorneys who performed secretarial activities. Management allowed all the questioned charges. The Legal Division stated that the entries do not reflect purely clerical matters. Absent proof to the contrary and the lack of a pattern of abuse, the Legal Division allowed the charges. The OIG accepts management?s explanation and, accordingly, reduced questioned costs to $0.

In recommendation 12, the OIG recommended that FDIC disallow $4,241 for duplication of effort and attendance charges. Management allowed all the questioned charges. The Legal Division reviewed the questioned entries and concluded that the allowance of the charges was a judgment call best made by the FDIC and RTC supervising attorneys. Specifically, the questioned entries addressed meetings and telephone conference calls with FDIC and RTC attorneys who, in turn, would have been in the position to immediately raise the issue of unnecessary attendance by the firm?s attorneys. The OIG accepts management?s explanation and, accordingly, reduced questioned costs to $0.

In recommendation 13, the OIG recommended that FDIC disallow $12,822 for unsubstantiated expenses. Management allowed $10,831 and disallowed $1,991. The Legal Division disallowed $1,121 for unsubstantiated photocopying and express mail charges and $870 for long distance telephone charges. However, the Legal Division allowed $10,310 of the $11,180 questioned telephone charges and $521 questioned local transportation charges. The firm stated that it used a computerized system to capture long distance calls made from the firm?s offices and that it added a 20 percent mark-up, 10 percent of which was to cover phone equipment rental and 10 percent to cover various telephone taxes not incorporated into the computerized system. In October 1992, the firm reduced its total mark-up to 10 percent to cover only the payment of telephone taxes. The firm further stated that it had over 300 lawyers and its monthly long distance bills came in several boxes of computer printouts. Therefore, the firm argued that it would have been administratively impossible to have a particular timekeeper review the previous month?s printout to assign the calls to a particular client?s matter.

Based on the firm?s explanation, the Legal Division concluded that the firm?s computerized system was an acceptable alternative to the actual phone bills. Further, the Legal Division stated that it was not reasonable to disallow 100 percent of the long distance telephone charges when it was obvious the firm incurred substantial costs. However, the Legal Division disallowed $870 that represented the firm?s 10 percent mark-up on phone equipment rental.

The OIG believes that the February 1992 RTC Guide for Outside Counsel is clear in its requirement that firms retain underlying supporting material, including expense adjustment records, for 4 years after final payment. To the extent the firm believed the administrative burden to satisfy the RTC requirement was unreasonable or ?impossible,? it should have sought specific and written pre-approval to use the computerized system. Lacking an analysis that the computerized system represented the firm?s actual long distance telephone charges, the OIG will continue to question $11,180.

With regard to the $521 for local transportation, the Legal Division stated that it did not require receipts for such expenses that were for less than $25. Absent further information in the audit report, the Legal Division assumed that the missing receipts were for less than $25. Based on an examination of the working papers, the OIG determined that $40 of the $521 was clearly less than $25 and, accordingly, reduced questioned costs by this amount. However, with regard to the remaining $481 in questioned costs, the OIG believes the burden is on the law firm to provide an itemized list of the specific expenses so that the $25 threshold can be applied. Without such a list, the OIG will question $481. In total, for recommendation 13, the OIG will question $12,782 ($11,180 + $481 + $1,121).

In recommendation 15, the OIG recommended that FDIC disallow $125,163 for document reproduction charges in excess of the firm?s actual costs. Management allowed $37,014 and disallowed $88,149. Management stated that it has been the practice of both the FDIC and former RTC Legal Divisions to permit firms to bill at the maximum ?cap? rate applicable for the time period involved. The FDIC specifically incorporated this policy into its December 1991 Guide for Outside Counsel, and it was not the intent of the RTC to impose a differing standard on its outside counsel with the February 1992 RTC Guide for Outside Counsel. Therefore, based on an analysis of the firm?s charges during the period in question, the Legal Division calculated that $88,149 of the $125,163 exceeded the applicable ?cap? rate. Accordingly, the Legal Division disallowed $88,149.

However, RTC guidelines provided that photocopy charges be billed at actual documented costs or at a standard cost based on a documented cost study. The law firm conducted a cost study that was adjusted by the IPA to remove overhead costs. The IPA calculated that the firm?s photocopy rate ranged from $.044 to $.059 per page, while the firm billed from $.15 to $.20 per page. The Legal Division subsequently revised its guidelines to allow firms to charge up to $.08 per page for photocopying. In view of the subsequent change to guidelines, the amount disallowed by the Legal Division does not appear to be unreasonable. Nonetheless, the IPA appropriately questioned the photocopying costs given the guidelines in effect at that time. Therefore, for recommendation 15, the OIG will question $125,163.

In recommendation 18, the OIG recommended that FDIC disallow $35,505 for unallowable expense charges. Management allowed $33,419 and disallowed $2,086. The Legal Division disallowed $1,137 for local meals, $225 for local parking, $45 for cabs and mileage home charges, $220 for valet parking, $70 for insurance, $160 for airline upgrades, $145 for internal binding charges, $67 for express mail charges, and $17 for bar charges. However, the Legal Division allowed $30,319 for unauthorized secretarial overtime, $2,116 for internal messenger charges, and $984 for search, index, and certificate charges. The firm argued that all overtime was orally approved by RTC oversight attorneys because of the short deadlines involved in various assignments. The Legal Division stated that neither FDIC nor RTC guidelines required written approval. The Legal Division confirmed from one remaining oversight attorney that he approved overtime use, if necessary, on the deals he supervised. The oversight attorney stated that he believed that other oversight attorneys likewise approved the overtime.

Nonetheless, the OIG does not believe that the one oversight attorney?s oral approval, which was qualified based on the necessity of the overtime, adequately evidences approval of all the overtime. Therefore, lacking specific written evidence or independent confirmation from the former oversight attorneys that the overtime was approved, the OIG will continue to question $30,319.

With regard to the $2,116 questioned for internal messengers, the firm argued that the messenger deliveries were a necessary by-product of work performed for RTC, many deliveries were made at RTC?s request, the amount charged to RTC did not exceed what a private vendor would have charged, and the use of an internal messenger service allowed the firm greater quality control. Further, the firm?s LSA allowed reimbursement for the actual costs of delivery services. The Legal Division allowed the charges because RTC?s policy was to reimburse firms for actual delivery charges and no evidence was developed to support that the firm charged other than its actual costs. The OIG accepts management?s explanation and reduced questioned costs to $0.

With regard to the $984 questioned for search, index, and certificate charges, the Legal Division stated that it is not uncommon for a law firm to perform these services, which are not typically absorbed into overhead. The OIG accepts management?s explanation and reduced questioned costs to $0. For recommendation 18, the OIG will question $32,405 ($30,319 + $2,086).

Based on the IPA?s audit work, $833,700 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 2, the OIG recommended that FDIC evaluate $185,676 in fees and expenses billed during the period in which the firm did not have an effective LSA and ratify amounts deemed reasonable and disallow any of the charges not approved. Management ratified all $185,676. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $0. After considering $114,488 in disallowances taken by management and management?s comments on the IPA?s findings, we will report questioned costs of $634,821 (including $462,753 in unsupported costs) in our Semiannual Report to the Congress.