Legal Fees Paid by RTC to Kantrow, Spaht, Weaver & Blitzer

(Audit Report No. 98-015, February 12, 1998)

Summary

The Office of Inspector General (OIG) has completed an audit of Kantrow, Spaht, Weaver & Blitzer, 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 the RTC from July 1, 1991, through June 30, 1994.

The objectives of the audit were to determine whether Kantrow, Spaht, Weaver & Blitzer'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 $2,042,607. The audit sample covered $1,188,886, or 58 percent of the total. The IPA identified net questioned costs of $454,680.

However, included in the questioned amount were blocked-billed charges of $65,091. Block billing is the term used to describe the practice of aggregating an attorney's time charges for different tasks or activities, rendering reasonableness reviews of time charges difficult or impossible. Subsequent to the preparation of the draft report, the OIG decided not to question block-billed charges (recommendation 1) for services rendered prior to the time that RTC provided the firm with specific billing guidance. Rather, because we were unable to apply auditing procedures to satisfy ourselves as to the reasonableness of the block-billed charges, we did not consider the scope of work sufficient to enable us to express an opinion on these fees. Therefore, we reduced questioned costs by $65,091 of block-billed charges identified in recommendation 1. Accordingly, total adjusted questioned costs were revised to $389,589, and we did not require the Assistant General Counsel (AGC) to respond to recommendation 1.

Recommendations

That the AGC, Legal Operations Section, Legal Division, should disallow:

(1) (recommendation eliminated by OIG),
(2) $237,998 for vague descriptions,
(3) $10,213 for unallowable professional fees,
(4) $19,142 for unauthorized attorneys,
(5) $15,341 for excessive time charged to case matters,
(6) $22,397 for inappropriate staffing,
(7) $50,327 for excessive time spent preparing authority to sue memoranda,
(8) $31,404 for unsupported time charges,
(9) $2,158 for unsupported reimbursable expenses, and
(10) $609 for expenses not invoiced at cost.

In addition, the OIG recommended that the AGC (recommendation 11) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate.

Management Response

In response to a draft of this report, management disallowed a total of $13,295. Although management's corrective actions on recommendations 2, 3, and 5 through 9 differed from the recommended corrective actions, we consider management's responses as providing the requisites for a management decision on each of the recommendations.

Specifically, in recommendation 2, the OIG recommended that FDIC disallow $237,998 for vague descriptions. The Legal Division allowed all the questioned costs based on its review of the questioned items. Management found that the charges questioned were sufficiently clear given the on-going chronological format of the invoices. More specifically, the Legal Division concluded that the oversight attorney reviewing the charges in the context of the invoice could have readily identified the tasks performed. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 3, the OIG recommended that FDIC disallow $10,213 for unallowable professional fees. The OIG reduced questioned costs from $10,213 to $10,088 because the IPA's working papers did not correctly identify the invoice number for the $125 questioned learning curve charges. Of the adjusted questioned costs, management allowed $2,475 and disallowed $7,613. Specifically, management allowed $958 for preparation of status reports because it was the Legal Division's practice to allow firms to bill for preparing budgets and status reports for professional liability section (PLS) cases. Management also allowed $1,517 of in-house courier charges because the legal services agreement (LSA) authorized $20 per hour for in-house couriers. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $7,613.

In recommendation 5, the OIG recommended that FDIC disallow $15,341 for excessive time charged to case matters. Management allowed all the questioned charges. Specifically, management determined that $7,088 questioned for the review of loan write-ups and loan files was justified given the need for extensive review of documents in statute-driven PLS cases. Management also accepted the law firm's explanation that the $3,048 questioned for dual attendance at meetings was required because the matter involved three separate actions consolidated for discovery but not for trial. Additionally, the firm asserted that dual attendance was calculated and approved in the case budget process.

Finally, management allowed $5,205 for preparation of a memorandum in support of a motion for protective order. The protective order was required when the firm released boxes pursuant to a discovery request without performing a detailed review of the contents. The firm stated that the boxes were not found until a few days before the deadline for production and the RTC oversight attorney instructed the firm not to perform a detailed review of the contents. The Legal Division confirmed the firm's assertions and concluded that it would be inappropriate to disallow any charges under the circumstances. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 6, the OIG recommended that FDIC disallow $22,397 for inappropriate staffing. Management allowed $21,848 and disallowed $549. Specifically, management allowed $18,400 charged by attorneys for reviewing and revising entries on a database system because the services involved certain decision making skills regarding the cases and benefitted RTC in substance and efficiency. The Legal Division also allowed $3,320 for charges by an attorney to review and summarize board committee minutes because the case required immediate and concentrated attorney attention to meet statue of limitations deadlines. Moreover, the Legal Division found that the facts excerpted from the board minutes were an essential element to RTC's claim. Finally, the Legal Division allowed $128 charged by paralegals for deposition related filings because it required greater skill and expertise than filing performed in the usual course of business. Management disallowed the remaining $549 questioned charges. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $549.

In recommendation 7, the OIG recommended that FDIC disallow $50,327 for excessive time spent preparing authority to sue memoranda. Management allowed all the questioned charges. The firm asserted that RTC was responsible for the numerous revisions to authority to sue memoranda. Former RTC oversight managers unanimously confirmed that the authority to sue memorandum format underwent multiple revisions at that time. Therefore, management concluded that the circumstances in this case did not indicate the firm was Aoverpolishing@ documents. Rather, RTC required the multiple changes and re-drafts with clear force and direction. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 8, the OIG recommended that FDIC disallow $31,404 for unsupported time charges. The OIG reduced questioned costs from $31,404 to $30,778 because the differences between the hours shown on the time sheets and those on the invoices were overstated by $626. Of the adjusted questioned costs, management allowed $29,476 and disallowed $1,302. Specifically, the Legal Division allowed $19,592 questioned where the invoice descriptions differed from the time sheet descriptions because it determined that the differences between descriptions were editorial in nature.

Management also allowed all of the $9,884 questioned for missing time sheets. Management acknowledged that the firm did not maintain the time sheets as required by RTC. However, management did not believe that the firm's failure to maintain required documentation was a Ano cost@ alternative to outside counsel. Accordingly, after considering other factors, management did not consider any disallowance appropriate for missing time sheets. The Legal Division disallowed the remaining $1,302 because the time charged on the original time sheet did not agree with the time charged on the invoice.

The OIG accepts management's explanation regarding the differences between the invoice and time sheet descriptions and will reduce those questioned charges. However, in the absence of time sheets, the OIG could not independently verify the questioned charges. Therefore, for recommendation 8, the OIG will question $11,186 ($1,302+ $9,884).

In recommendation 9, the OIG recommended that FDIC disallow $2,158 for unsupported reimbursable expenses. The OIG reduced questioned costs from $2,158 to $2,076 because the IPA inadvertently included $82 of non-RTC expenses in the questioned amount. Management allowed all of the adjusted questioned costs because the firm provided original canceled checks and other proof of payment which it concluded to be sufficient documentary evidence supporting all the questioned expenses. RTC guidelines required that firms retain copies of all bills and underlying documentation for reimbursable expenses. Canceled checks and other proof of payment do not allow the OIG to determine whether the charge was a legitimate expense on behalf of RTC. Therefore, for recommendation 9, the OIG will question $2,076.

Based on the IPA's audit work, $389,589 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 $19,142 in questioned charges should be ratified, and disallow any of the charges not approved. The Legal Division ratified $15,920 and disallowed $3,222 for the variances between the rates billed by the firm and the LSA approved rates. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $3,222. After considering $13,295 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $25,255 (including $13,871 of unsupported costs) in our Semiannual Report to the Congress.

Last Updated 03/27/01 contact the OIG