Legal Fees Paid by RTC to Holland & Hart

(Audit Report No. 98-020, February 20, 1998)

The Office of Inspector General (OIG) has completed an audit of Holland & Hart, 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 3, 1993.

The objectives of the audit were to determine whether Holland & Hart'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 $6,651,198. The audit sample covered $3,703,313, or 56 percent of the total. The IPA identified net questioned costs of $2,692,066.

That the AGC, Legal Operations Section, Legal Division, should take the following actions:

In addition, the OIG recommended that the AGC (recommendation 14) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate.

In response to a draft of this report, the AGC provided the requisites for a management decision on each of the recommendations. Management disallowed a total of $64,434. Although management's corrective actions on recommendations 1 through 4, and 6 through 13 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 $1,552,498 for attorney fees not adequately supported. Management allowed all of the questioned charges. The law firm kept track of its billable time through computerized electronic entries rather than handwritten notations on time sheets. More specifically, timekeepers entered their time daily into the firm's electronic system from which a pre- billing summary report was produced. The pre-billing summary became the original document from which the billing process commenced. According to the firm, timekeepers reviewed their pre-billing summary report and made adjustments as necessary. However, the auditors could not verify whether timekeepers had actually reviewed their time before RTC was billed.

Management recognized that the firm's system did not permit independent verification of the accuracy of time entries once information was entered into the system; however, the Legal Division concluded that the firm's system was functionally equivalent to a system from which an invoice was prepared from a manual time sheet. Although the Legal Division agreed that it would be desirable to verify the time entries, neither the firm's LSA nor the Guide for Outside Counsel required the use of a manual system or prohibited electronic timekeeping. Thus, in the absence of published Legal Division guidelines on electronic timekeeping and without any specific information indicating that the firm's system was less reliable than a manual system, the Legal Division would not presume it was. The Legal Division also stated that, absent evidence of inaccuracies in the data entry, Courts would accept the pre-billing summary reports as competent evidence.

Holland & Hart's procedures within the firm's electronic billing system prevented the IPA from determining whether timekeepers reviewed their time before it was billed to the Corporation. Specifically, the firm did not retain edit reports that were generated from the firm's computerized timekeeping system and sent to the responsible timekeepers for review before RTC was billed. In the absence of this type of independent confirmation of the time charged, the OIG cannot verify the accuracy of the time billed. Accordingly, for recommendation 1, the OIG questioned $1,552,498, which represents the amount of professional fees not supported by original time sheets net of $236,122 questioned in other findings.

In recommendation 2, the OIG recommended that FDIC disallow $79,650 for unallowable time charges, including charges for multiple attorneys performing a given task, interoffice conferences, attorneys performing clerical tasks, preparation of a case plan budget, excessive rates, and research. The OIG agreed to reduce questioned costs from $79,650 to $78,968 because the Legal Division had previously disallowed $682 for excessive rates. Of the adjusted questioned costs, management allowed $70,695 and disallowed $8,273. Specifically, management allowed $53,717 questioned for multiple attorneys performing a given task, interoffice conferences, and attorneys performing clerical tasks because the Legal Division concluded that these charges were allowable given the nature and complexity of the cases handled by the firm.

Management also allowed $1,262 for preparation of a case plan budget because RTC policy at the time generally permitted firms to charge for preparation of case plan budgets in professional liability cases. In addition, management allowed $5,879 because it found that some of the questioned excessive rates were in compliance with the applicable legal services agreement. Management disallowed the remaining $3,275 questioned for excessive rates.

Finally, management allowed $9,837 for research related to the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 (FIRREA). Management accepted the firm's assertion that it was requested to research the potential effects of the newly enacted statute. However, the Legal Division disallowed $4,998 as unnecessary research because the issue was also being researched by an outside consultant. The OIG accepts management's explanation for these charges. Therefore, for recommendation 2, the OIG questioned $8,273 ($3,275+$4,998).

In recommendation 3, the OIG recommended that FDIC disallow $20,262 for unsupported time charges. The OIG reduced questioned costs from $20,262 to $20,187 because $75 questioned by the IPA did not appear on the invoice identified in the IPA's working papers. Of the adjusted questioned costs, management disallowed $13,979 because the pre-bills did not support charges on the invoices. Management allowed the remaining $6,208. Specifically, management allowed $3,328 because the firm provided evidence to show that hours charged on the invoices agreed with the respective pre-bills. Management also allowed the $2,880 because the differences between the pre-bill and invoice descriptions were editorial in nature. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $13,979.

In recommendation 4, the OIG recommended that FDIC disallow $3,461 for travel time not discounted by 50 percent. Management allowed $2,421 and disallowed $1,040. The firm was not aware of the requirement to discount travel before February 1992. After February 1992, the firm asserted that all travel related discounts were taken before the invoice was submitted to RTC. Accordingly, the Legal Division disallowed $1,040 for the questioned travel time that occurred before February 1992. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $1,040.

In recommendation 6, the OIG recommended that FDIC disallow $8,131 for excessive time charges. Management allowed all of the questioned charges. Specifically, management reviewed the charges and the RTC oversight attorney's review of the invoices and concluded that the charges were not excessive. The OIG accepts management's explanation and, accordingly, reduced questioned charges to $0.

In recommendation 7, the OIG recommended that FDIC evaluate the block billed entries that contained excessive time charges 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 charges were not excessive. The OIG accepts the explanation provided by management.

In recommendation 8, the OIG recommended that FDIC disallow $40,552 for excess fees over the budget. Management allowed all of the questioned costs. Specifically, management determined that for one matter the firm's billings did not exceed the budget. For the second matter, management confirmed that the firm was not paid for billings that exceeded the budget. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 9, the OIG recommended that FDIC disallow $6,350 for duplicative billings. Management allowed $764 and disallowed $5,586. The firm conceded $5,586 were duplicative billings. For the remaining $764, the Legal Division reviewed the questioned entries and verified the firm's contention that entries were not duplicate entries but legitimate, repetitive tasks of the timekeeper. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $5,586.

In recommendation 10, the OIG recommended that FDIC disallow $8,564 for services billed which were not adequately detailed. Management allowed all of the questioned charges. The Legal Division reviewed the questioned charges and determined that the descriptions were sufficiently precise under Legal Division guidelines. Specifically, the Legal Division stated that the RLIS Deskbook required "a precise description of the work performed" and the RTC Guide for Outside Counsel required a "traditional legal bill." The Legal Division considered the entries acceptable under either standard. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 11, the OIG recommended that FDIC disallow $41,673 for unsupported reimbursable expenses. Management allowed $31,715 of the $41,673 questioned because the firm provided the Legal Division with acceptable support for the questioned items. Management disallowed the remaining $9,958 questioned charges not supported. The OIG reviewed the documentation and accepts management's explanation. Accordingly, the OIG reduced questioned costs to $9,958.

In recommendation 12, the OIG recommended that FDIC disallow $773,730 for outside consultant fees and expenses. Management allowed $773,592 and disallowed $138 that the firm billed in error. Management allowed $773,592 because the firm provided the Legal Division with acceptable support for the questioned items. In addition, the former RTC oversight attorney stated that the firm complied with the process for hiring consultants. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $138.

In recommendation 13, the OIG recommended that FDIC disallow $82,947 for expenses not billed at cost and unallowable expenses. Management disallowed $4,575 for questioned facsimile expenses not supported by a cost study, unallowable internal courier expense, secretarial charges, and other miscellaneous charges. Management allowed the remaining questioned charges. Specifically, management allowed the $76,897 questioned for photocopying because the Legal Division only required law firms to conduct cost studies for photocopying expenses if the firm charged more than the Legal Division's established maximum allowable rates. The Legal Division determined that all of the questioned charges were within the maximum allowable rates and, as such did not disallow any of the charges.

RTC guidelines provided that photocopying charges be billed at actual documented costs or at a standard cost based on a documented cost study; therefore, photocopying costs not supported by a cost study were questioned by the IPA. The Legal Division subsequently revised its guidelines to allow firms to charge up to $.08 per page for photocopying. Therefore, in view of subsequent revisions to guidelines, the Legal Division's position does not appear unreasonable. However, the IPA appropriately questioned the photocopying costs and the OIG will continue to question $76,897 for photocopying.

Management also allowed $1,475 for meals, transportation, and Federal Express charges because the firm provided adequate support for the charges. The OIG reviewed the documentation and accepts management's explanation and, accordingly will reduce those questioned charges by $1,475. Therefore, for recommendation 13, the OIG questioned $81,472 ($4,575+$76,897).

Based on the IPA's audit work, $2,692,066 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 5, 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 $74,248 in questioned charges should be ratified, and disallow any of the charges not approved. The Legal Division ratified $53,363 and disallowed $20,885.

The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $20,885. After considering $64,434 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $1,693,829 (including $1,576,435 of unsupported costs) in our Semiannual Report to the Congress.