Legal Fees Paid by RTC to Baker & Hostetler

(Audit Report No. 98-041, April 13, 1998)

The Office of Inspector General (OIG) has completed an audit of Baker & Hostetler, 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 Urbach Kahn & Werlin, P.C. through a contract with the OIG, and covered billings paid by RTC from January 1, 1990, through December 9, 1993. The objectives of the audit were to determine whether Baker & Hostetler'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 $8,384,080. The audit sample covered $5,165,470, or 62 percent of the total. The IPA identified net questioned costs of $3,827,629.

However, included in the questioned amount were unsupported charges of $589,235. Specifically, the IPA was unable to test whether certain sampled invoices were supported by the firm's electronic time keeping system because the IPA did not have copies of all the invoices when this audit procedure was performed. The IPA eventually obtained copies of the invoices but was unable to complete testing because of time constraints. Subsequent to the preparation of the draft audit report, the OIG decided not to question these charges as unsupported. Rather, because the IPA was unable to apply auditing procedures to satisfy itself as to the reasonableness of these fees, we did not consider the scope of work sufficient to enable us to express an opinion on these fees. Therefore, we reduced questioned costs for recommendation 7 from $627,382 to $38,147. Accordingly, total adjusted questioned costs were revised to $3,238,394.

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

In addition, the OIG recommended that the AGC review block-billed charges for non-discounted travel time, unallowable fees, and vague descriptions (recommendations 3, 5, and 9) to determine whether additional costs should be disallowed. Also, the OIG recommended that the AGC (recommendation 16) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate.

In an April 6, 1998, response to a draft of this report, the AGC provided the requisites for a management decision on each of the recommendations. Management disallowed $256,932.1 Management also agreed with the OIG's recommendation to assess the appropriateness of unaudited billings. Management's response to the report was prepared without the benefit of a complete law firm response. However, management expects the law firm to provide a complete response and, therefore, the disallowances specified in its April 6, 1998, response may be affected by the firm's response.

The OIG concluded that the RTC report should be finalized without a complete law firm response. The draft report was issued on July 22, 1996, and the Legal Division afforded the firm numerous extensions to complete its response. Further, even during the audit, the firm did not cooperate. Specifically, the IPA was unable to schedule an exit conference with the firm despite several attempts by the IPA spanning a number of months. Also, the firm did not comply with the IPA's request to produce information regarding its other client names, thereby precluding the IPA from evaluating the firm's controls over identifying, tracking, and resolving conflicts or potential conflicts of interest. As a result, the OIG does not express an opinion on the adequacy of the firm's controls over identifying, tracking, and resolving conflicts or potential conflicts of interest.

Although management's response provided the requisites for a management decision on each of the recommendations, management's corrective actions on recommendations 3 through 12, 14, and 15 differed from the recommended corrective actions. Specifically, management disagreed with recommendations 3, 5, and 9 to review block-billed entries for non-discounted travel time, unallowable fees, and vague descriptions. Management acknowledged that the scope limitation resulting from the firm's block billing practice is a significant constraint on the audit process but the very nature of block billing limits a reviewer's determination of a violation.

The OIG believes that management should reconsider its position on reviewing block-billed entries for unallowable fees and vague descriptions (recommendations 5 and 9) given that management made substantial disallowances for these two findings. Although block billing limits prevents the auditor's ability to quantify potential billing violations, management could still review block- billed entries to determine whether a pattern of potential billing violations exists as a basis for negotiating additional disallowances with the firm. For recommendation 3, the OIG accepts management's position not to review block-billed entries because the questioned and disallowed amount was only $210.

In recommendation 4, the OIG recommended that FDIC disallow $62,394 for unallowable and inappropriate time charges. Management allowed $14,363 and disallowed $48,031. Specifically, management allowed $4,690 for multiple attorneys preparing for and attending depositions or for filing motions in court. Management also allowed $620 for duplicate attendance at outside meetings. The Legal Division stated that the attendance of multiple attorneys at a meeting, deposition or hearing does not necessarily imply wasted effort. Therefore, absent some indication that a reasonable division of labor did not occur, management presumed that multiple counsel contributed to the overall success of the legal matters. The OIG accepts management's explanation on these items and reduced these questioned costs to $0.

Additionally, management allowed $9,053, or 50 percent, of the $18,107 questioned for interoffice conferencing. The overall objective of the Legal Division was to obtain the best and earliest resolution of legal matters at the lowest practicable cost and, accordingly, the Legal Division expected law firms to avoid over staffing. In the absence of further explanation or justification by the firm, management concluded that the firm appeared to charge for its staffs meeting time and only allowed 50 percent of the questioned costs based on its review of various Court rulings on fee bill disputes. The OIG accepts management's position and will reduce questioned costs to $9,054. Finally, management disallowed the entire amount of $38,977 we questioned for administrative tasks, preparation of status reports and budgets, and excessive rates. Therefore, for recommendation 4, the OIG will question $48,031 ($9,054 + $38,977).

In recommendation 6, the OIG recommended that FDIC disallow $26,505 for excessive time charges. Management allowed $19,428 and disallowed $7,077. Specifically, management allowed $7,851 of the questioned charges related to support provided by the firm to an expert engaged by the firm. Management allowed the charges because specific guidance did not exist addressing the level of support the law firm could provide an expert hired to assist outside counsel on technical issues. The OIG accepts management's explanation and will reduce these questioned costs to $0.

Management also allowed all of the $11,577 questioned excessive charges for a lead attorney to conduct depositions and provide other consulting support on a particular matter. Management determined that the attorney's rate had been reduced by RTC oversight attorneys, thereby indicating that the attorney's charges had been reviewed and were otherwise determined to be appropriate. The OIG accepts management's explanation and will reduce these questioned costs to $0. The Legal Division disallowed the remaining $7,077 questioned excessive charges. Therefore, for recommendation 6, the OIG will question $7,077.

In recommendation 7, the OIG recommended that FDIC disallow $38,147 for unsupported time charges. Management allowed $2,848 and disallowed $35,299. The Legal Division allowed $37 of the $3,297 questioned for charges written up on the pre-bill because the $37 increase was a one time occurrence identified for a particular timekeeper and, as such, did not indicate any pattern of irregularity. Lacking documented evidence supporting the adjustment to the pre-bill, the OIG will continue to question the $37.

Management also allowed $2,811 for mathematical errors related to the subtotals of individual tasks based on the explanation provided by the firm in response to recommendation 6 on the audit of FDIC invoices. Specifically, the firm asserted that subtotals were correct and the differences occurred because the parenthetical time entry following the last narrative description was inadvertently omitted. The OIG reviewed the IPA's working papers and found that the explanation provided by the firm for the FDIC invoices did not apply for 13 of the 25 questioned RTC entries. Therefore, the OIG will continue to question these items totaling $1,604. Management disallowed $23,730 for time charges that did not agree with the pre-bill, $2,024 for fee bill footing errors, and $6,285 for differences between the pre-bill and invoice descriptions. Therefore, for recommendation 7, the OIG will question $36,940 ($37 + $3,260 + $1,604 + $23,730 + $2,024 + $6,285).

In recommendation 8, the OIG recommended that FDIC disallow $42,848 for services billed which were not adequately detailed. Management allowed $29,994 and disallowed $12,854. Management stated that the questioned entries appear so obscure that even a knowledgeable oversight attorney could not have gleaned full meaning from those entries and the entries were the same as inadequate and incomplete records. Nonetheless, management allowed 70 percent, or $29,994, of the questioned vague charges because it concluded that some work was done by the firm even though the firm could not express that work with clarity. The Legal Division disallowed 30 percent, or $12,854, based on disallowances for incomplete invoice entries made by the Courts in cases specifically cited.

Detailed descriptions have traditionally served as a basis for assessing the need, level, and quality of services rendered by a firm. To have met RTC's billing requirements, a charge must have been sufficiently detailed to ensure that the criteria for allowable fees and expenses were met. The questioned descriptions were vague and insufficient to adequately assess the reasonableness of services charged to RTC. The Legal Division acknowledged that the questioned entries were obscure and the equivalent of incomplete records. Therefore, for recommendation 8, the OIG will continue to question $42,848.

In recommendation 10, the OIG recommended that FDIC analyze the qualifications of employees working on RTC matters, but not listed on or performing services outside the time period covered by an approved LSA, determine how much of the $2,656,690 in questioned costs for these charges should be retroactively ratified, and disallow any of these charges not approved. Management ratified all the questioned charges. Specifically, management determined that time keepers could not have been entered into RTC's Legal Information System (RLIS) unless the firm had an LSA or had made a written request for an addition or deletion from the list and that request was approved by authorized RTC management. The Legal Division determined that some alleged unauthorized billers were listed in RLIS and were approved billers; however, the exact date of approval could not be determined from available records. Nonetheless, management concluded that responsible RTC personnel did review the qualifications of the firm?s employees listed on the LSAs and entered those personnel, rates and offices into RLIS and ratified the questioned charges.

In the absence of a complete response by the firm to the RTC draft report and because the firm was not fully cooperative either during or in response to the audit, the OIG will continue to question $2,656,690 despite the Legal Division's ratification of these charges.

In recommendation 11, the OIG recommended that FDIC disallow $112,223 for excess fees over the budget. Management allowed all the questioned charges. Management responded that RLIS would not have allowed a payment to be made in excess of the total amount budgeted for a matter. Moreover, management obtained budget and payment information from RLIS and determined that the total payments with adjustments were $760,627, or $10,473, under the $771,100 budget for this matter. The OIG reviewed the information provided by the Legal Division and determined that the IPA inadvertently included certain payments for another legal matter in its calculation. Accordingly, the OIG accepts the management?s explanation and reduced questioned charges to $0.

In recommendation 12, the OIG recommended that FDIC disallow $181,721 for all charges not billed at actual cost and unallowable expenses. Management allowed $138,663 and disallowed $43,058. Specifically, management allowed $129,725 of the $141,737 questioned photocopying expenses. Management allowed $59,055 of the questioned photocopying costs because these charges were for outside photocopying that were allowable expenses and for which management presumed to be billed at actual costs in the absence of evidence to the contrary. Management also allowed $70,670 of the remaining $82,682 questioned in-house photocopying charges because it only required law firms to conduct cost studies for photocopying expenses if the firm charged more than the Legal Division's established maximum allowable rates. Management determined that $12,012 of the questioned charges exceeded the maximum allowable rates.

The OIG agrees that $59,055 of the questioned $141,737 photocopying charges were for external photocopying based on additional documentation provided by the firm subsequent to the issuance of the draft audit report. However, the firm did not provide evidence that these charges were supported and, therefore, the OIG will continue to question those charges. For in-house photocopying, RTC guidelines provided that photocopying be billed at actual documented costs or at a standard cost based on a documented cost study; therefore, photocopying costs not supported by a cost study were questioned by the IPA. The Legal Division subsequently revised its guidelines to allow firms to charge up to $.08 per page for photocopying. Therefore, in view of subsequent revisions to guidelines, management's position on in-house photocopying does not appear unreasonable. However, the IPA appropriately questioned the in-house photocopying costs and, accordingly, the OIG will continue to question a total of $141,737 for photocopying.

Management also allowed $8,216 for facsimile charges because it was the practice of the Legal Division to allow up to $1 per page for outgoing facsimiles. Lacking specific evidence that the firm exceeded the reasonable $1 per page ceiling management allowed all the charges. RTC guidelines required that facsimile charges be at cost. There was no allowance or arbitrary maximum rate. The firm did not provide a cost study and the actual cost of facsimiles could not be determined. Therefore, the OIG will continue to question $8,216 for facsimile charges.

Additionally, management allowed $49 for personal telephone calls made on business trips because travel regulations allow up to $3 per call for personal calls made while on travel. Management also allowed $60 for filing fees because it generally allowed firms to charge for filing fees. Further, management allowed $297 for overtime taxicab fares because it was the Legal Division's practice to allow taxicab fare related to overtime. The OIG accepts management's position on each of these questioned items and reduced questioned costs by $406.

Management also allowed $316 for printing charges because firms were permitted to send large copying projects out to a copying service. The OIG reviewed the IPA's working papers and determined that these charges were supported by vendor invoices. Therefore, we will reduce questioned costs by $316. Finally, management disallowed the remaining $31,046 unallowable expenses. Accordingly, for recommendation 12, the OIG will question $180,999 ($141,737 + $8,216 + $31,046).

In recommendation 14, the OIG recommended that FDIC disallow $97,090 for undocumented reimbursable expenses. Management allowed $1,191 and disallowed $95,899. However, based on an analysis of management's response, it appears the Legal Division actually intended to allow $1,849 and disallow $95,241 because management double-counted a $658 disallowance. Specifically, management disallowed $95,241 because the firm did not provide support for the questioned items. Management allowed $1,210 of the expenses that were written off the pre-bill because documentation existed to support $1,162 for travel expenses and $48 for telephone expenses. The Legal Division also allowed $639 for transcript expenses even though these expenses were not supported by original documentation. The OIG will continue to question these charges because, according to the IPA, there were indications on the pre-bill that these charges should not be billed to RTC and the firm has not otherwise explained the charges. Moreover, the firm was required to retain original supporting documentation for reimbursable expenses and failed to do so. Therefore, for recommendation 14, the OIG will question $97,090.

In recommendation 15, the OIG recommended that FDIC disallow $6,062 for outside consultant fees and expenses. Management allowed all the questioned charges because specific guidance did not exist which defines the content required for subcontractor invoices or even an accepted standard for subcontractor invoices. The OIG accepts management?s explanation because the charges were in fact supported by invoices. Lacking a standard requiring the firm to maintain backup support for subcontractor invoices, the OIG reduced questioned costs to $0.

Based on the IPA's audit work, $3,238,394, as adjusted, was questioned in the draft report. After considering $256,932 in disallowances taken by management and management?s comments on the IPA's findings, we will report questioned costs of $3,084,389 (including $326,831 in unsupported costs) in our Semiannual Report to the Congress.