Legal Fees Paid by RTC to Rosenman & Colin

(Audit Report No. 98-004, January 9, 1998)

Summary

The Office of Inspector General (OIG) has completed an audit of Rosenman & Colin, 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 and Werlin, P.C. through a contract with the OIG, and covered billings paid by the RTC from January 1, 1990, through December 9, 1993.

The objectives of the audit were to determine whether Rosenman & Colin's legal bills were adequately supported and in compliance with the cost limitations set 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 $3,383,333. The audit sample covered $1,695,494, or 50 percent of the total. The IPA identified questioned costs of $1,186,755.

Recommendations

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

(1) disallow $84,943 for unallowable time charges,
(2) evaluate the block billed entries that contain unallowable time charges and determine what
portion of the fees should be disallowed,
(3) disallow $5,120 for the excess portion of unauthorized billing rates,
(4) disallow $17,378 for employees not listed on the legal services agreement (LSA),
(5) disallow $333,957 for excessive time charges,
(6) disallow $558,977 for vague descriptions,
(7) evaluate the block billed entries that contain vague descriptions and determine what portion
of the fees should be disallowed,
(8) disallow $3,565 for travel time not discounted by 50 percent,
(9) disallow $33,100 for unsupported time charges,
(10) disallow $12,320 for unauthorized research,
(11) disallow $51,507 for unallowable expenses, and
(12) disallow $85,888 for unsupported reimbursable expenses.

In addition, the OIG recommended that the AGC (recommendation 13) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate.

Management Response

The AGC's response to a draft of this report and subsequent discussions provided the requisites for a management decision on each of the recommendations. Management disallowed a total of $10,161. Although management's corrective actions on recommendations 1, 2, 3, and 5 through 12 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 $84,943 for unallowable time charges. Management allowed the questioned charges based on the firm's explanation that the questioned tasks were more than administrative in nature. Specifically, the services provided involved voluminous documents for a number of complex transactions that required skilled paraprofessionals. The supervisory attorney confirmed that work required accuracy because errors could have potentially exposed RTC to a risk of substantial financial liability. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 2, the OIG recommended that FDIC evaluate the block billed entries that contained unallowable fees and determine what portion of the fees should be disallowed. Management determined that it was unnecessary to review the block billed entries specifically identified because it had determined that the questioned charges were necessary given the volume of work and complexity of the cases. The OIG accepts the explanation provided by management.

In recommendation 3, the OIG recommended that FDIC disallow $5,120 for the excess portion of unauthorized billing rates. The OIG reduced questioned costs from $5,120 to $4,490 because the Legal Division previously disallowed $630. Management allowed all of the adjusted questioned costs because the firm submitted evidence that the supervisory attorneys generally disallowed unapproved rate increases. While the supervisory attorney generally disallowed the excess portion of unauthorized billing rates, the firm did not submit evidence that these items were authorized or previously disallowed. Therefore, for recommendation 3, the OIG will question $4,490.

In recommendation 5, the OIG recommended that FDIC disallow $333,957 for excessive time charges. The OIG agreed to reduce questioned costs from $333,957 to $326,957 because the Legal Division previously disallowed $7,000. Management allowed all of the adjusted questioned costs based on its review of the charges. Specifically, management found that the charges incurred were reasonable given the novelty and complexity of the legal issues involved in the cases handled by the firm. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 6, the OIG recommended that FDIC disallow $558,977 for vague descriptions. The OIG agreed to reduce questioned costs from $558,977 to $556,854 because the Legal Division previously disallowed $2,123. Management allowed all of the adjusted questioned costs because the firm provided documentation which detailed the circumstances surrounding some of the questioned entries. In addition, the Legal Division evaluated the supervisory attorneys' oversight of the firm and concluded that the supervisory attorneys were familiar with the work done by the firm and made deductions for descriptions considered vague or otherwise inappropriate. Moreover, a Legal Division representative independently reviewed some of the questioned entries and concluded that the descriptions were sufficiently precise under Legal Division guidelines. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 7, the OIG recommended that FDIC evaluate the block billed entries that contained vague descriptions and determine what portion of the fees should be disallowed. Management determined that it was unnecessary to review the block billed entries specifically identified because it had determined that the questioned charges were sufficiently precise under RTC guidelines. The OIG accepts the explanation provided by management.

In recommendation 8, the OIG recommended that FDIC disallow $3,565 in travel time not discounted by 50 percent. The OIG agreed to reduce questioned costs from $3,565 to $2,096 because the Legal Division had previously disallowed $1,469. Management allowed all of the adjusted questioned costs because it determined that hours charged on the invoice appropriately represented a 50 percent time reduction. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 9, the OIG recommended that FDIC disallow $33,100 for unsupported time charges. Management allowed $26,278 and disallowed $6,822. Specifically, management allowed $26,278 for time charges that could not be verified to attorney time records. The firm explained that it did not centrally maintain copies of time sheets but that its computerized records accurately reflect the original time and other billing data as entered and constitute original documents since the data is precisely the same. The Legal Division allowed the charges because the Legal Division had not mandated that time sheets be maintained in manual form, nor had the Legal Division promulgated any policies regarding internal controls and audit trail features which must be present in electronic billing systems. In the absence of published mandatory guidelines on electronic billing systems, the Legal Division will not disallow any of the questioned costs related to missing time sheets. The Legal Division disallowed the $6,822 remaining unsupported time charges.

According to the IPA's working papers, because the firm did not require that timekeepers maintain original diaries or other records used for inputting information into the firm's time and billing systems, the IPA evaluated the firm's timekeeping system and concluded that the firm's system could be relied upon. Subsequently, the IPA verified invoice entries by reviewing micro fiche of daily time entries. The IPA was able to verify time entries for $1,608,398 of the $1,634,676 professional fees sampled. However, for the $26,278, the IPA found no time entries for the time billed to RTC and the firm offered no explanation for the discrepancy. Therefore, for recommendation 9, the OIG will continue to question $33,100.

In recommendation 10, the OIG recommended that FDIC disallow $12,320 for unauthorized research. Management allowed the questioned charges because the former RTC supervisory attorney verified that the research had been approved. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 11, the OIG recommended that FDIC disallow $51,507 for unallowable expenses including meals for employees not on travel status, local travel charges, clerical overtime, in-house messenger service, postage and supplies, and unauthorized outside service charges. The OIG reduced questioned costs from $51,507 to $42,118 because the Legal Division previously disallowed a total of $9,389 for meals incurred by employees not on travel status, in-house messenger service, clerical overtime, and ordinary postage. For the remaining charges, management allowed $38,779 and disallowed $3,339. Specifically, management allowed the $38,464 questioned for clerical overtime and outside services because a former RTC supervisory attorney verified that the charges were authorized. The OIG accepts management's explanation about the questioned clerical overtime and outside services and will reduce questioned costs by $38,464.

Management also allowed $315 questioned for postage and supplies because the firm provided evidence that the supervisory attorneys had generally disallowed these types of charges. However, the OIG reviewed the information provided by the firm and found that the information did not show specific disallowances for all the questioned items. Lacking evidence that these items were specifically disallowed, the OIG will continue to question the $315. Finally, management disallowed $3,339 for meals incurred by employees not on travel status and local travel charges. Therefore, for recommendation 11, the OIG will question a total of $3,654.

In recommendation 12, the OIG recommended that FDIC disallow $85,888 for unsupported reimbursable courier, travel, telephone, photocopying and facsimile expenses. The OIG reduced questioned costs from $85,888 to $84,493 because the Legal Division previously disallowed $1,395 of the unsupported courier charges. Management allowed all of the $84,493 adjusted questioned costs. Specifically, management allowed a total of $7,473 for the remaining unsupported courier and travel charges because the firm provided evidence that the RTC supervisory attorneys generally disallowed these types of expenses when support for the charges did not accompany the invoice. The OIG reviewed the information submitted and reduced questioned costs for items previously disallowed, but will continue to question the $7,473 not specifically disallowed or supported.

Management allowed the $1,192 questioned long distance telephone charges because the firm stated that its telephone tracking system generated charges that approximated actual long distance costs. In addition, the Legal Division allowed the $60,672 questioned photocopying charges and $15,156 questioned facsimile charges because the Legal Division only required law firms to conduct cost studies for photocopying and facsimile expenses if the firm charged more than the Legal Division's established maximum allowable rate.

RTC guidelines provided that telephone, photocopy, and facsimile charges be billed at actual documented costs or at a standard cost based on a documented cost study. Therefore, costs not supported were questioned by the IPA. Specifically, the firm did not provide any evidence to support the fact that its telephone system generated charges that approximated cost nor did the firm provide a cost study to support its photocopying or facsimile charges. The Legal Division subsequently revised its guidelines to allow firms to charge up to $.08 per page for photocopying. Therefore, the Legal Division's position on photocopying does not appear unreasonable. However, the IPA appropriately questioned the costs. Therefore, for recommendation 12, the OIG will question $84,493.

Based on the IPA's audit work, $1,186,755 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 4, 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 $17,378 in questioned charges should be ratified, and disallow any of the charges not approved. The OIG reduced questioned charges by $14,027 because some charges were inappropriately questioned or previously disallowed and, therefore, did not need to be ratified. Of the $3,351 adjusted questioned amount, the Legal Division ratified all of the charges. The OIG accepts the action taken by management and, accordingly, reduced questioned charges to $0. After considering $10,161 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $125,737 (including $117,593 of unsupported costs) in our Semiannual Report to the Congress.

Last Updated 03/27/01 contact the OIG