Legal Fees Paid by RTC to Bayh, Connaughton & Malone

(Audit Report No. 98-029, March 17, 1998)

Summary

The Office of Inspector General (OIG) has completed an audit of Bayh, Connaughton & Malone, 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 Bayh, Connaughton & Malone?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 $7,716,032. The audit sample covered $3,330,772, or 43 percent of the total. The IPA identified net questioned costs of $251,492.

Recommendations

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


(1) $76,696 for unauthorized personnel,
(2) $877 for excess time charges billed to case matters,
(3) $1,781 for duplicate billing entries,
(4) $60,586 for intra-office conference charges,
(5) $32,885 for duplication of effort charges,
(6) $1,439 for intra-office memoranda charges,
(7) $4,938 for review, revise, and edit charges,
(8) $31,804 for legal research charges,
(9) $10,993 for vaguely described charges,
(10) $2,988 for unallowable database charges,
(11) $6,095 for administrative charges,
(12) $12,568 for unsubstantiated expenses, and
(13) $7,842 for photocopying charges in excess of 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 $26,049. Although management?s corrective actions on recommendations 4 through 13 differed from the recommended corrective actions, we consider management?s response as providing the requisites for a management decision.

Specifically, in recommendation 4, the OIG recommended that FDIC disallow $60,586 for intra-office conference charges. Management allowed all the questioned charges. The firm stated that the IPA questioned certain time entries as intra-office conferences that actually involved individuals who did not work for the firm. In other instances, the time entries questioned included other tasks in addition to the conferences. The law firm provided many examples that were reviewed by the Legal Division and OIG. The firm also asserted that the conferences were necessary to consider legal, strategic, and litigation decisions. The Legal Division further determined that, based on a review of pertinent files from the RTC Legal Information System, a substantial amount of disallowances of fees and expenses were reflected on the invoices, thereby indicating that RTC had performed a thorough review of the invoices before they were paid. The OIG accepts management?s position and, accordingly, reduced questioned costs to $0.

In recommendation 5, the OIG recommended that FDIC disallow $32,885 for duplication of effort charges. Management allowed all the questioned charges. The firm stated that the matters covered by the questioned charges were complex and managed by RTC attorneys who wanted to complete investigations quickly. Consequently, the firm proposed a strategy approved by the respective RTC supervising attorneys that involved using teams of attorneys and paralegals. Further, many of the questioned meetings were attended by or specifically requested by the RTC supervising attorneys who did not object to the participation of any team member. With regard to questioned travel and document analysis, the firm stated that the magnitude of the cases required multiple staff to participate in an activity. The Legal Division reiterated that RTC had already made a substantial amount of disallowances for the invoices in question. In light of the firm?s explanations and the thorough review of invoices made by RTC, the Legal Division allowed all the questioned charges. The OIG accepts management?s explanation and, accordingly, reduced questioned charges to $0.

In recommendation 6, the OIG recommended that FDIC disallow $1,439 for intra-office memoranda charges. Management allowed all the questioned charges. The Legal Division response stated that the firm?s internal memoranda memorialized significant facts and the minimal amount of attorney time in this category indicates limited use of intra-office memoranda by the firm. The OIG accepts management?s explanation and reduced questioned costs to $0.

In recommendation 7, the OIG recommended that FDIC disallow $4,938 for review, revise, and edit charges. Management allowed all the questioned charges. The Legal Division response stated that the limited questioned amount indicates an efficient and cost-effective approach to the litigation and that it is unrealistic to expect that no revision or editing would be necessary. The Legal Division response further stated that it is normal practice for attorneys to revise or edit written work products, pleadings, or court filings. The OIG accepts management?s explanation and reduced questioned costs to $0.

In recommendation 8, the OIG recommended that FDIC disallow $31,804 for legal research charges. Management allowed $21,804 and disallowed $10,000. The Legal Division reviewed the questioned entries and determined that most of the research was reasonable. However, based on discussions with the former RTC supervising attorney, the Legal Division concluded that certain research charges totaling $18,000 were excessive and, accordingly, disallowed 50 percent of the charges or $9,000. In addition, the Legal Division identified another $1,000 in research charges that appeared excessive. The OIG accepts management?s explanation and reduced questioned costs to $10,000.

In recommendation 9, the OIG recommended that FDIC disallow $10,993 for vaguely described charges. Management allowed all the questioned charges. Based on a review of the questioned entries, the Legal Division concluded that the descriptions were sufficiently precise and acceptable under the applicable Legal Division guidelines. In support of its position, the Legal Division applied the criteria to many of the questioned entries. The OIG accepts management?s explanation and reduced questioned costs to $0.

In recommendation 10, the OIG recommended that FDIC disallow $2,988 for unallowable database charges. Management allowed all the questioned charges. The Legal Division stated that the firm?s time billed by the paralegals and an attorney to create a database of documents enabled it to manage the litigation. The firm provided supplemental information stating that the matters in question were large, complex cases often involving thousands of documents. The OIG accepts management?s explanation and reduced questioned costs to $0.

In recommendation 11, the OIG recommended that FDIC disallow $6,095 for administrative charges. Management allowed all the questioned charges. In a supplemental response, the firm stated that the case plans and budgets developed for the matters in question were not simply routine reports but, rather, established a scope and timetable for legal research, discovery, and pre-trial motions. The Legal Division reviewed the questioned entries and agreed with the law firm. The OIG accepts management?s explanation and reduced questioned costs to $0.

In recommendation 12, the OIG recommended that FDIC disallow $12,568 for unsubstantiated expenses. Management allowed $745 and disallowed $11,823. Specifically, management disallowed $2,198 for facsimile charges, $677 for furniture rental charges, $8,078 for car rental charges (incorrectly identified as furniture rental on page 20 of the IPA?s report), and $870 for miscellaneous charges. The Legal Division allowed $745 in car rental charges for which the firm submitted supporting documentation. The OIG accepts management?s explanation and reduced questioned costs to $11,823.

In recommendation 13, the OIG recommended that FDIC disallow $7,842 for photocopying charges in excess of actual costs. Management allowed $6,274 and disallowed $1,568. The Legal Division stated that it was standard RTC practice to allow firms to bill photocopying charges at $.08 per page after the RTC Guide for Outside Counsel was published in February 1992 and that this practice was consistent with the FDIC Guide for Outside Counsel published in December 1991. Applying the RTC standard, the Legal Division calculated that $1,568 of the $7,842 was in excess of the maximum permissible rate and, accordingly, disallowed this amount.

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 showed the firm?s average cost was $.06 per page, but the firm billed $.10 per page. The firm argued that the true per page photocopying cost was at least $.14 when other costs such as office space and materials were considered.

The Legal Division did not accept the law firm?s argument and subsequently revised its guidelines to specifically 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 13, the OIG will continue to question $7,842.

Based on the IPA?s audit work, $251,492 was questioned in the draft report. 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 the firm?s legal services agreement, determine how much of the $76,696 in questioned charges should be ratified, and disallow any of the charges not approved. The Legal Division ratified all the charges. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $0. After considering $26,049 in disallowances taken by management and management?s comments on the IPA?s findings, we will report questioned costs of $32,323 (including $12,700 of unsupported costs) in our Semiannual Report to the Congress.

Last Updated 03/27/01 contact the OIG