Legal Fees Paid by RTC to Schnader, Harrison, Segal & Lewis

(Audit Report No. 98-024, March 10, 1998)

Summary

The Office of Inspector General (OIG) has completed an audit of Schnader, Harrison, Segal & Lewis, 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 Ollie Green & Company through a contract with the OIG, and covered billings paid by RTC during the period January 1, 1990, through December 9, 1993.

The objectives of the audit were to determine whether Schnader, Harrison, Segal & Lewis' 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 $10,553,108. The audit sample covered $5,314,569, or 50 percent of the total. The IPA identified net questioned costs of $831,849.

Recommendations

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

(1) disallow $4,076 for missing time sheet charges,
(2) evaluate $171,665 in fees and expenses billed during the period in which
the firm did not have an effective legal services agreement (LSA) and ratify
amounts deemed reasonable and disallow any of the charges not
approved,
(3) analyze the qualifications of employees working on RTC matters but not
listed on the LSA, determine how much of the $440,131 in questioned
costs should be retroactively ratified, and disallow any of these charges
not approved,
(4) disallow $532 for rates not reduced by 50 percent while traveling,
(5) disallow $11,208 for unauthorized rate charges,
(6) disallow $1,260 for unsupported time charges,
(7) disallow $4,903 for duplicate billing charges,
(8) refund $36,612 in duplicate payments received,
(9) disallow $36,970 for intra-office conferences charges,
(10) disallow $1,821 for duplication of effort charges,
(11) disallow $527 for intra-office memoranda charges,
(12) disallow $21,270 for review, revise, and edit charges,
(13) disallow $10,115 for vague entry charges,
(14) disallow $11,595 for inappropriate legal research charges,
(15) disallow $8,444 for unsubstantiated expenses,
(16) disallow $1,699 for facsimile charges that exceeded actual costs,
(17) disallow $10,068 for database service charges that exceeded actual costs,
(18) disallow $58,953 for document reproduction charges that exceeded actual
costs.

Management Response

The AGC's response to a draft of this report provided the requisites for a management decision on each of the recommendations. Management disallowed a total of $107,617. Although management's corrective actions on recommendations 1, 9 through 14, and 18 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 $4,076 for missing time sheet charges. Management allowed all the questioned charges. While management stated in their response that the $4,076 is de minimis, in the absence of time sheets, the OIG could not independently verify the questioned time charges. Therefore, for recommendation 1, the OIG will continue to question $4,076.

In recommendation 9, the OIG recommended that FDIC disallow $36,970 for intra-office conferences charges. Management allowed all the questioned charges. The firm asserted that the conferences were appropriate to the size and complexity of the litigation. The Legal Division reviewed the questioned charges in the context of the complexity of the litigation and also concluded that the conferences were not excessive. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 10, the OIG recommended that FDIC disallow $1,821 for duplication of effort charges. Management allowed all the questioned charges. The firm denied that any duplication of effort occurred and noted that most of the questioned charges were billed for a meeting held at the behest of RTC officials, who specifically chose the firm personnel that attended. The Legal Division reviewed the questioned invoices. Although the Legal Division could not identify from the invoices who determined the meeting attendees, there was nothing on the invoices to contradict the firm's assertion. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 11, the OIG recommended that FDIC disallow $527 for intra- office memoranda charges. Management allowed all the questioned charges. The Legal Division reviewed the questioned invoice entries and found no indications of excessive intra-office memoranda charges. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 12, the OIG recommended that FDIC disallow $21,270 for review, revise, and edit charges. Management allowed all the questioned charges. The firm responded that the nature of the work involved a complex accounting malpractice action and a circuit court appeal that required extensive editing and revisions. The Legal Division reviewed the questioned charges and determined that the IPA questioned only $510 from more than $5,200,000 in invoices for the accounting malpractice litigation, which the Legal Division concluded was not excessive. With regard to the circuit court appeal, the Legal Division agreed with the law firm that the nature of the work, which included a change of appellants after a bank failure and required a new set of defenses, adequately explains the review, revise, and edit charges. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 13, the OIG recommended that FDIC disallow $10,115 for vague entry charges. Management allowed all the questioned charges. The firm asserted that the descriptions were not vague for someone familiar with the details of the cases. The Legal Division agreed with the firm. The Legal Division reviewed over 75 percent of the questioned vague entries and did not conclude the entries were vague when reviewed with the knowledge of the nature of the litigation or in the overall context of the invoices. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 14, the OIG recommended that FDIC disallow $11,595 for inappropriate legal research charges. Management allowed all the questioned charges. The firm denied that it inappropriately charged RTC for legal research. The Legal Division reviewed $10,156 of the questioned charges and again concluded that the complex nature of the accounting malpractice and appellate litigation matters adequately explains the amount of legal research charges. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 18, the OIG recommended that FDIC disallow $58,953 for document reproduction charges in excess of the firm's actual costs. Management allowed $26,335 and disallowed $32,618. Management stated that it has been the practice of both the FDIC and former RTC Legal Divisions to permit firms to bill at the maximum "cap" rate applicable for the time period involved. The FDIC specifically incorporated this policy into its December 1991 Guide for Outside Counsel, and it was not the intent of the RTC to impose a differing standard on its outside counsel with the February 1992 RTC Guide for Outside Counsel. Therefore, based on an analysis of the firm's three LSAs during the period in question, the Legal Division calculated that only $32,618 of the $58,953 exceeded the applicable "cap" rates. Accordingly, the Legal Division disallowed the $32,618 and allowed the remaining $26,335.

However, RTC guidelines provided that photocopy charges be billed at actual documented costs or at a standard cost based on a documented cost study. The law firm conducted a cost study that was adjusted by the IPA to remove overhead costs included in the firm's hourly rates. The IPA calculated that the firm's photocopy rate ranged from $.046 to $.048 per page, while the firm billed from $.05 to $.12 per page. The Legal Division subsequently revised its guidelines to allow firms to charge up to $.08 per page for photocopying. In view of the subsequent change to guidelines, the amount disallowed by the Legal Division does not appear to be unreasonable. Nonetheless, the IPA appropriately questioned the photocopying costs given the guidelines in effect at that time. Therefore, for recommendation 6, the OIG will question $58,953.

Based on the IPA's audit work, $831,849 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 2, the OIG recommended that FDIC evaluate $171,665 in fees and expenses billed during the period in which the firm did not have an effective LSA and ratify amounts deemed reasonable and disallow any of the charges not approved. Management ratified all $171,665. Also, in recommendation 3, 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 $440,131 in questioned charges should be ratified, and disallow any of the charges not approved. The Legal Division ratified $439,858 and disallowed $273. The OIG accepts the actions taken by management on recommendations 2 and 3 and, accordingly, reduced questioned costs to $273. After considering $107,617 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $138,028 (including $13,780 in unsupported costs) in our Semiannual Report to the Congress.

Last Updated 03/27/01 contact the OIG