Legal Fees Paid by RTC to Riker, Danzig, Scherer, Hyland & Perretti

(Audit Report No. 98-016, February 12, 1998)

Summary

The Office of Inspector General (OIG) has completed an audit of Riker, Danzig, Scherer, Hyland & Perretti, 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 January 1, 1990, through December 9, 1993.

The objectives of the audit were to determine whether Riker, Danzig, Scherer, Hyland & Perretti'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 $4,670,788. The audit sample covered $2,336,663, or 50 percent of the total. The IPA identified net questioned costs of $1,093,725.

Recommendations

That the AGC, Legal Operations Section, Legal Division, should disallow: (1) $462,797 for unauthorized attorneys,
(2) $67,911 for unallowable time charges,
(3) $15,519 for unauthorized rates and tasks,
(4) $174,206 for unsupported time charges,
(5) $39,661 for excessive time charges,
(6) $6,963 for travel time not discounted by 50 percent,
(7) $10,718 for services billed which were not adequately detailed,
(8) $8,278 for unallowable expenses,
(9) $298,401 for unsupported reimbursable expenses, and
(10) $9,271 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

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 $66,035. Although management's corrective actions on recommendations 2 through 7, 9, and 10 differed from the recommended corrective actions, we consider management's response as providing the requisites for a management decision.

Specifically, in recommendation 2, the OIG recommended that FDIC disallow $67,911 for unallowable time charges including time charges for administrative tasks, overhead, reviewing Financial Institutions, Reform, Recovery and Enforcement Act of 1989 issues, and researching the firm's own conflicts of interests. Management allowed $63,834 and disallowed $4,077. Specifically, management reviewed the IPA's working papers and determined that $63,834 of the questioned charges involved substantive legal work. However, management disallowed $3,797 for administrative and overhead tasks including copying, filing, and distributing a memorandum. Management also disallowed the $280 charged by the firm for researching its own conflicts. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $4,077.

In recommendation 3, the OIG recommended that FDIC disallow $15,519 for unauthorized rates and tasks. Management allowed $8,181 and disallowed $7,338. Management disallowed $7,338 questioned for excess rates but allowed the remaining questioned charges because the rates for two timekeepers were not in excess of the legal services agreement (LSA). Management also reviewed the $7,991 questioned for paralegal charges and determined the tasks performed by the paralegals were not clerical or administrative in nature, but rather represented substantive activity. Specifically, the paralegals reviewed and organized loan documents in connection with a legal audit of a particular institution. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $7,338.

In recommendation 4, the OIG recommended that FDIC disallow $174,206 for unsupported time charges. Management allowed $167,603 and disallowed $6,603. Specifically, management disallowed the $4,877 questioned where the hours billed exceeded those detailed on the corresponding time sheet. In addition, management disallowed $1,726 of the $164,019 questioned for missing time sheets. Management acknowledged that the firm did not maintain time sheets as required by RTC. However, management did not believe that the firm's failure to maintain required documentation was a -no cost- alternative to outside counsel. Accordingly, after considering other factors, management considered $1,726 as an appropriate disallowance. Finally, management allowed the $5,310 questioned where the invoice descriptions differed from the time sheet descriptions because the differences between descriptions were editorial in nature.

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 time charges. Therefore, for recommendation 4, the OIG will continue to question $168,896 ($4,877+$164,019).

In recommendation 5, the OIG recommended that FDIC disallow $39,661 for excessive time charges. Management allowed $12,218 and disallowed $27,443. Management allowed the $12,218 questioned for overstaffing based on the firm's assertion that the cases involved were complex and the fact that the staffing levels were expressly known to and approved by RTC oversight attorneys. Management disallowed the remaining charges because the firm did not provide a response to the questioned items. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $27,443.

In recommendation 6, the OIG recommended that FDIC disallow $6,963 for travel time not discounted by 50 percent. Management allowed all the questioned charges because the firm explained that it reduced the amount of time billed by 50 percent and billed those hours at the full rate. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 7, the OIG recommended that FDIC disallow $10,718 for vague descriptions. Management allowed the questioned charges. The Legal Division reviewed the descriptions related to the questioned charges and determined that the descriptions were acceptable. Specifically, the Legal Division stated that the RLIS Deskbook requires a precise description of the services performed and the RTC Guide for Outside Counsel mandated a traditional legal bill. The Legal Division considered the questioned entries to be sufficiently precise under these Legal Division guidelines. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 9, the OIG recommended that FDIC disallow $298,401 for unsupported reimbursable expenses. The OIG reduced questioned cost from $298,401 to $280,590 because $16,130 in photocopying credits had been applied to invoices and $1,681 of the questioned telecopying charges were not adequately identified in the IPA's working papers. Of the adjusted questioned costs, management allowed $276,773 and disallowed $3,817. Specifically, management disallowed $3,411 for unsupported expenses including charges for ground transportation, meals, telephone, and miscellaneous items because the firm's response did not address those questioned items. Management also disallowed $406 for telecopying charges that the firm did not support.

Management allowed $16,568 for in-house photocopying because the Legal Division stated that the report lacked information about the questioned charges. However, the draft report included exhibits that specifically listed the invoices with questioned photocopying charges. Moreover, the OIG made the IPA's working papers available to the Legal Division for review and provided the Legal Division with an analysis of the questioned photocopying charges for its consideration. Finally, RTC guidelines provided that photocopying charges be billed at actual documented costs or at a standard cost based on a documented cost study. The firm did not provide a cost study for photocopying charges. Accordingly, the OIG will continue to question $16,568.

The Legal Division also allowed $4,936 for legal research because the report did not question the reasonableness or excessiveness of the legal research performed. The IPA appropriately questioned the charges for Westlaw and Lexis research because the firm did not provide any support for the charges. Accordingly, the OIG will continue to question $4,936.

Additionally, the Legal Division allowed $53,363 for airfare, train tickets, messenger service, legal research, and external photocopying services because it considered copies of vendor invoices and credit card statements to be adequate support for these charges. The firm was required to retain original supporting documentation relating to reimbursable expenses and failed to do so. Accordingly, the OIG will continue to question $53,363.

The Legal Division allowed $626 for telephone charges. The Legal Division accepted the firm's assertion that the computerized reports generated by the firm's telephone tracking system approximated actual cost. RTC guidelines provided that telephone charges be billed at actual cost. The burden to provide support for actual long distance charges rests with the firm. The firm did not provide evidence that its system generated charges approximated actual cost. Accordingly, the OIG will continue to question $626.

Finally, the Legal Division allowed $201,280 for subcontractors based on the explanation provided by the firm. Specifically, the firm stated that the subcontractor was retained by the RTC, not the firm. However, at the direction of the RTC, the firm agreed to forward the subcontractor's fee bills to RTC for processing and payment and to reflect the subcontractor's fees and expenses as an expense item on the firm's bills. The firm explained that this was done to maintain certain evidentiary privileges that would have otherwise been lost had the subcontractor been viewed as directly retained by the RTC rather than counsel. The firm asserted that all original subcontractor invoices and related supporting documentation were routinely forwarded to RTC. Therefore, all original supporting documentation related to subcontractor invoices was retained by RTC. RTC attorneys reviewed the subcontractor's fees and expenses and the firm paid the subcontractor based on RTC's review. The OIG accepts management's explanation and, accordingly, reduced questioned costs by $201,280. Therefore, for recommendation 9, the OIG will question $79,310 ($3,411+$406+$16,568+$4,936+$53,363+626).

In recommendation 10, the OIG recommended that FDIC disallow $9,271 for expenses not invoiced at cost. The OIG agreed to reduce questioned costs from $9,271 to $1,704 because $7,567 of the questioned charges were not adequately identified in the IPA's working papers. The Legal Division disallowed the $1,704 for facsimiles absent proof of the firm's long distance telephone charges for the facsimile transmissions. Accordingly, for recommendation 10, the OIG questioned $1,704.

Based on the IPA's audit work, $1,093,725 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 1, 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 $462,797 in questioned charges should be ratified, and disallow any of the charges not approved. The Legal Division ratified $456,022 and disallowed $6,775. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $6,775. After considering $66,035 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $303,821 (including $249,910 of unsupported costs) in our Semiannual Report to the Congress.

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