Legal Fees Paid by FDIC and RTC to Dewey Ballantine

(Audit Report No. 98-046, June 3, 1998)

The Office of Inspector General (OIG) has completed an audit of fees paid to Dewey Ballantine, a law firm hired by the FDIC and RTC to provide legal services. The audit was conducted by the independent public accounting (IPA) firm of Williams, Adley & Company, LLP, and independent counsel of Robert Miller, through a contract with the OIG and covered billings paid during the period from January 1, 1990 through March 31, 1995.

The objective of the audit was to determine whether Dewey Ballantine's legal bills were adequately supported and in compliance with the cost limitations set forth by the FDIC and RTC and that charges for legal services were reasonable. The total fees paid to the firm during the audit period were $7,833,407. The IPA identified net questioned costs of $675,798 from an audit sample of $2,554,615.

The draft report recommended that the Assistant General Counsel (AGC), Legal Operations Section, Legal Division, disallow the following questioned costs:

The Assistant General Counsel (AGC), Legal Division, provided a response dated March 12, 1998 to the OIG's draft report. Management disallowed questioned costs totaling $232,731 ($232,938 plus disallowance increase of $12,891 in unsupported expenses, less overlapping amounts of $4,609, and less prior audit projection offsets of $8,489). Although management's corrective actions for recommendations 1, 2, 4, 6-9, and 11 differed from the recommended corrective actions, we consider management's response and subsequent discussions as providing the requisites for a management decision on each of the recommendations.

In recommendation 1, the OIG recommended disallowance of $350,070 for unsupported fees. The AGC's response disallowed $3,144 and allowed $10,351 based on the additional information provided by the firm. In addition, the Legal Division allowed $336,575 because of the age of the fee bills, the computer system used by the firm, and the lack of specific direction given to the firm by the FDIC on timekeeping records. (On December 31, 1997, the Legal Division published its electronic billing guidelines which were sent to all FDIC outside counsel.) The OIG will continue to question $336,575 because the OIG could not independently verify the questioned time charges. Therefore, the OIG will question $339,313 ($3,144 + $336,575 less overlapping amount of $406 in recommendation 11).

In recommendation 2, the OIG recommended disallowance of $92,708 for inappropriate staffing. The AGC's response allowed the questioned costs based on a review of the questioned entries and comments from four FDIC oversight attorneys who reported that they were pleased with the firm's work and responsiveness. The Legal Division believes that the firm's staffing did not appear unnecessary or without use to the effort the firm was providing. The OIG accepts management's explanations and will reduce questioned costs to $0.

In recommendation 4, the OIG recommended disallowance of $87,267 for unsupported expenses. The AGC's response disallowed $71,997 and allowed $15,270 based on the four year requirement to retain original records. Subsequent to the response, the OIG determined that the prior audit projection offset of $12,891 should have been $3,366. This revised offset amount was discussed with the Legal Division. Therefore, the OIG will question $77,319 ($100,158 less Legal Division allowance of $15,270, less overlapping amounts of $4,203 in recommendations 10 and 12, and the prior audit projection offset of $3,366).

In recommendation 6, the OIG recommended disallowance of $14,000 for multiple representation charges. The AGC's response allowed the questioned costs based on a review of questioned entries, the firm's response, and comments from of four FDIC oversight attorneys who reported that they did not have a problem with the firm's representation strategy. The OIG accepts management's explanations and will reduce questioned costs to $0.

In recommendation 7, the OIG recommended disallowance of $7,394 for unauthorized timekeepers. The AGC's response disallowed $337 and ratified $6,460 based on an analysis of timekeeper rates. In addition, the Legal Division allowed $531 for an RTC timekeeper who was listed on an FDIC LSA and allowed $66 for a timekeeper who explained that she was a ten year partner and her rate should be adjusted from $245 to $250. The OIG accepts management's explanations and will reduce questioned costs to $337.

In recommendation 8, the OIG recommended disallowance of $6,673 for overhead/administrative charges. The AGC's response disallowed $3,603 and allowed $3,070 based on a review of the questioned entries and the firm's response. The OIG accepts management's explanations and will reduce questioned costs to $3,603.

In recommendation 9, the OIG recommended disallowance of $4,777 for learning curve charges. The AGC's response disallowed $1,593 and allowed $3,184 based on a review of the questioned entries and the firm's response. The OIG accepts management's explanations and will reduce questioned costs to $1,593.

In recommendation 11, the OIG recommended disallowance of $2,615 for rate variances. The AGC's response disallowed $406 and allowed $2,209 based on the additional information provided by the firm. The OIG reviewed the firm's additional information and will reduce questioned costs to $406.

In addition to the recommendations previously discussed, the AGC's response agreed to the disallowances of $3,911 in recommendation 10 and $2,376 in recommendation 12. Subsequent to the response, the OIG determined that prior audit projection offsets of $2,772 and $2,351 had not been considered. These offset amounts were discussed with the Legal Division. As a result, the OIG will reduce questioned costs to $1,139 for recommendation 10 and $25 for recommendation 12.

Based on the IPA's audit work, $675,798 was questioned in the draft report transmitted to management. After considering additional information provided by the firm and management's comments on the IPA's findings, we will report questioned costs of $569,306 (including $416,632 for unsupported fees and expenses) in our Semiannual Report to the Congress.