Legal Fees Paid by FDIC to Baker & Hostetler

(Audit Report No. 98-042, 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 Federal Deposit Insurance Corporation (FDIC). 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 FDIC from February 28, 1989, through December 9, 1993.

The objective of the audit was to determine whether the fee bills submitted by the law firm present fairly the expenses and activities of the cases for which the fee bills were submitted. Accordingly, Baker & Hostetler's fee bills were reviewed to determine whether they were: (1) adequately supported by source documentation; (2) prepared in compliance with applicable FDIC cost provisions; (3) consistent with the terms and conditions of the governing agreements; and (4) representative of the cost of services and litigation which were approved in advance by the FDIC. The total fees paid to the law firm for FDIC-related work during the audit period were $6,707,305. The audit sample covered $2,522,744, or 38 percent of the total. The audit resulted in net questioned costs of $766,631.

However, included in the questioned amount were unsupported charges of $371,501. 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 all 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 1 from $371,501 to $0. Accordingly, total adjusted questioned costs were revised to $395,130.

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

In response to a draft of this report, the AGC provided the requisites for a management decision on each of the recommendations. Management disallowed $87,767. Although management's corrective actions on recommendations 2 through 6 and 8 differed from the recommended corrective actions, the OIG considers management's response as providing the requisites for a management decision on each of the recommendations.

Specifically, in recommendation 2, the OIG recommended that FDIC disallow $344,969 for unauthorized personnel. Management allowed $323,095 and disallowed $21,874. The Legal Division stated that $291,034 of the questioned fees were for services provided between January 1, 1992, and October 19, 1992. An RTC legal services agreement (LSA) was executed on October 20, 1992. The auditors accepted the RTC LSA rate schedules as sufficient approval for FDIC matters but questioned time billed prior to October 20, 1992. The law firm provided a cover memo, also dated October 20, 1992, which stated that the LSA is effective for two years ending on December 31, 1993. The Legal Division concluded that this provision was ?apparently created to ratify Baker's efforts undertaken prior to LSA award as well as some future efforts and, accordingly, ratified the questioned amount.

The OIG disagrees with this position. The cover memo states the RTC LSA was effective for two years. However, this was standard language. There was no specific mention that the LSA was being retroactively applied. In addition, retroactively applying the LSA does not address the fact that the billers in questioned were unauthorized during the period prior to the LSA being executed. There is no indication the Legal Division determined the fees to be reasonable or the personnel appropriately qualified for services billed prior to October 20, 1992. Accordingly, the OIG will continue to question $291,034.

In addition, the law firm provided a January 29, 1993, LSA as support for two billers with questioned fees amounting to $1,351 and an April 15, 1993, rate schedule as support for one biller with questioned fees amounting to $570. However, the services for these three billers were provided in 1992. Therefore, the OIG will continue to question $1,921. The Legal Division agreed with the OIG's questioned amounts for two attorneys totaling $1,442. However, the Legal Division response omitted an entry for one of the timekeepers which caused the disallowed amount to be understated by $19. In addition, the OIG determined that $285 was previously questioned in the fees paid in 1989. Therefore, the OIG will question $1,176 ($1,442 + $19 - $285).

Further, the law firm asserted that $25,539 of the questioned amount was paid in 1989 and documentation requirements were not applicable. For two of the attorneys in question, the Legal Division located documentation which identified $180 as the authorized hourly rate, but the attorneys billed $210 an hour. The Legal Division disallowed $25,313 for the overcharges. However, the OIG will question $29,063 because management's calculation of the overcharges was based on the incorrect number of hours.

Finally, the law firm identified an attorney who apparently billed at a rate below the authorized rate. The Legal Division determined that the law firm was due a refund in the amount of $4,881. A law firm is authorized to bill up to the rates approved in its LSA rate schedule but may bill for rates lower than the authorized rates. There may have been a justifiable reason why Baker & Hostetler billed below the authorized rate for this particular attorney. The responsibility to justify the invoices rests with the law firm. The law firm submitted the bill more than 5 years ago, and it was approved by the responsible FDIC officials at that time. The OIG agrees to reduce its questioned costs to zero for this attorney, since the billed rate does not exceed the authorized rate, but does not agree with the Legal Division's position of granting a refund to the firm. Therefore, for recommendation 2, the OIG will question $323,194 ($291,034 + $1,921 + $29,063 + $1,176).

In recommendation 3, the OIG recommended that FDIC disallow $90,210 for unsupported expenses. Management allowed $32,353 and disallowed $57,857. The OIG concluded that supplemental documentation provided by the law firm supports $34,078 of the questioned amount. The Legal Division concluded that the law firm provided adequate support for $32,353 but did not specify which items were allowed. Therefore, the OIG was unable to reconcile the discrepancy between the amount allowed by the Legal Division and the OIG's calculation. For recommendation 3, the OIG will question $56,132 ($90,210 - $34,078).

In recommendation 4, the OIG recommended that FDIC disallow $12,238 for non-reimbursable overhead expenses. Management allowed $6,902 and disallowed $5,336. Based on a review of supplemental documentation provided by the law firm, the OIG generally agrees with the Legal Division's analysis. The OIG concludes that the law firm adequately supported $6,981 of the questioned $12,238, which is $79 more than the Legal Division determined was supported. This difference results because the Legal Division disallowed $94 more than the OIG calculated and the OIG continued to question $15 allowed by the Legal Division. Accordingly, for recommendation 4, the OIG will question $5,257 ($12,238 - $6,981).

In recommendation 5, the OIG recommended that FDIC disallow $6,842 for differences between fee bills and pre-bills. Management allowed the questioned amount. The IPA's working papers did not contain documented evidence that a law firm representative authorized any write-offs on the pre-bills. Accordingly, the OIG accepts the law firm's and Legal Division's position and reduced questioned costs to $0.

In recommendation 6, the OIG recommended that FDIC disallow $3,572 for clerical errors on fee bills. Management allowed $2,157 and disallowed $1,415. The law firm provided supplemental information which adequately supported $2,157 of the questioned amount. The Legal Division did not accept the law firm's argument on the remaining $1,415 that was questioned. The OIG reviewed the law firm's supplemental information and accepts Legal Division's position. Accordingly, the OIG reduced questioned costs to $1,415.