Legal Fees Paid by the FDIC to Brill, Sinex & Stephenson

(Audit Report No. 98-053, June 18, 1998)

The Office of Inspector General (OIG) has completed an audit of fees paid to Brill, Sinex & Stephenson (BS&S), a law firm hired by the FDIC to provide legal services. The audit was conducted by the independent public accounting firm (IPA) of Financial Management Associates (FMA), through a contract with the OIG, and covered billings paid for the period from January 1, 1990 to December 31, 1993.

The objective of the audit was to determine whether BS&S's legal bills were adequately supported and in compliance with the cost limitations set forth by the FDIC and that the charges for legal services were reasonable. The total fees paid to the firm during the audit period were $1,389,033. The IPA identified net questioned costs of $797,156 from an audit sample of $1,291,455.

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

The General Counsel (GC), Legal Division, provided a response dated December 1, 1997. Management disallowed questioned costs totaling $593,442. Although management's corrective actions for recommendations 4, 6, 8, 9, 10, and 13 differed from the recommended corrective actions, we consider management's response as providing the requisites for a management decision on each of the recommendations.

Brill is the debtor in a Chapter 7, Bankruptcy action. The Legal Division forwarded a copy of the draft audit report requesting comments on March 19, 1997, to the Trustee in Brill's bankruptcy case. The Legal Division's December 1, 1997, response stated that the Trustee did not respond to its request for comments. Moreover, we verified that the Legal Division had not received comments from the Trustee as of June 17, 1998. Lacking evidence or an explanation from the Trustee, the Legal Division accepted the conclusions presented in the report and agreed to disallow $285,572 for unsupported payments, $63,873 for missing attorney fee and expense billings, $135,707 for missing time sheets, and $18,461 for hours billed in excess of time reports made in recommendations 1, 2, 3, and 7, respectively.

In recommendation 4, the OIG recommended disallowance of $9,487 in billings for professionals not listed on the LSA. The GC's response allowed the questioned $9,487 amount based on a review of additional LSAs which identified the attorneys in question. The OIG accepts management's explanation and will reduce questioned costs for this finding to zero.

In recommendation 6, the OIG recommended disallowance of $30,120 for overpayments and duplicate payments retained by the firm, and in recommendation 8, recommended disallowance of $3,148 for the firm's failure to notify the FDIC of the overpayment. The GC's response states that it considers the two recommendations to be intertwined. While the Legal Division agrees that a disallowance for multiple payments is appropriate, the full amount of the disallowance is yet to be determined. The GC further states that the recommendations are overtaken by events, in part, for the Bankruptcy Court has approved the settlement disposition of those trust monies placed in the court's registry by BS&S, and FDIC has recovered from those funds, $17,860.50. The OIG remains cognizant of the fact that the Legal Division is continuing to seek an accounting of all multiple payments placed in any known or unknown accounts so that interest on any remaining amounts may be determined and collected along with any additional overpayments. However, the OIG considers this a collection matter and continues to question $30,120 and $3,148, respectively, with regard to both recommendations.

In recommendation 9, the OIG recommended disallowance of $48,112 for the firm providing legal services after its dissolution. The GC's response argues that neither the RTC nor the FDIC terminated the firm's LSA. In addition, the firm's dissolution did not foreclose wrap-up work and/or transition work, or payment at LSA rates. The Legal Division concludes that no basis for disallowance exists as a matter of law. The OIG accepts management's explanation with respect to this finding and will reduce questioned costs to zero.

In recommendation 10, the OIG recommended disallowance of $175,692 for unsupported expert witness and consultant expenses, and management disallowed $77,800. The GC's response allows $97,892 of the questioned costs because it found documentation that BS&S owed monies to one of the subcontractors. However, the OIG will continue to question the entire $175,692 because neither the Legal Division nor the law firm has produced adequate documentation to support the questioned amounts as required by the Guide for Outside Counsel.

In recommendation 13, the OIG recommended that the Legal Division review questioned time entries totaling $14,955 that could not be evaluated as to its reasonableness due to bundling of services, and determine the amount which should be disallowed. The GC's response states that the OIG adopted a policy to abstain from questioning block billed or bundled amounts invoiced prior to 1991. Accordingly, the Legal Division will not review the BS&S bundled entries nor make a determination based on such an analysis to disallow the amounts in question. The OIG accepts management's explanation, and will reduce questioned costs for bundling to zero.

In addition, the draft report contained five non-monetary recommendations related to potential conflicts of interest. In this area, the Assistant General Counsel, Legal Operations Section, Legal Division, responded that the available facts do not adequately answer the potential conflicts of interest of the firm and the specific actions of one BS&S partner. In addition, further facts are unavailable and will not be forthcoming because the firm is in bankruptcy and defunct. However, upon review of the recommendations, the Outside Counsel Conflicts Committee has directed that the Legal Division place a restriction on the firm in its outside counsel monitoring and payment system to indicate that the ethics issues must be resolved before an LSA is issued to the firm or a follow-on-firm. In addition, the Committee has concluded that one BS&S partner has committed a presumptive violation of 12 U.S.C. Part 1606. Since this partner is not associated with the successor law firm, appropriate notations in the conflicts system and the Security Office files have been made to flag the offense for further inquiry in the event this individual applies for work at the FDIC.

Based on the IPA's audit work, $797,156 in net questioned costs were reported to management in the draft audit report. The OIG accepts the actions taken by management and will reduce questioned costs by $72,554. After considering $593,442 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $724,602 (including $660,844 in unsupported costs) in our Semiannual Report to the Congress.