Legal Fees Paid by RTC to Bronson, Bronson & McKinnon

(Audit Report No. 98-025, March 10, 1998)

The Office of Inspector General (OIG) has completed an audit of Bronson, Bronson & McKinnon, 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 RTC from January 1, 1990, through December 9, 1993.

The objectives of the audit were to determine whether Bronson, Bronson & McKinnon'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 $2,375,151. The audit sample covered $1,192,018, or 50 percent of the total. The IPA identified net questioned costs of $356,838.

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

(1) $40,949 for unallowable time charges,
(3) $701 for unauthorized legal fees billed,
(4) $125,413 for unauthorized attorneys,
(5) $19,434 for excessive time charges,
(7) $35,550 for vague descriptions,
(9) $9,303 for travel time not discounted by 50 percent,
(11) $32,938 for unsupported time charges,
(12) $10,119 for unauthorized/unallowable research,
(14) $8,340 for unallowable expenses,
(15) $64,188 for unsupported reimbursable expenses, and
(16) $9,903 for expenses not invoiced at cost.

In addition, the OIG recommended that the AGC (recommendation 17) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate.

In recommendations 2, 6, 8, 10, and 13 the OIG recommended that the AGC review block- billed charges to determine the costs to be disallowed. Block billing is a term used to describe the practice of aggregating an attorney's time charges for different tasks or activities, rendering reasonableness reviews of time charges difficult or impossible. Subsequent to the preparation of a draft of this report, the OIG decided not to make recommendations to disallow questioned costs concerning block billing for services rendered prior to the time that RTC provided the firm with specific billing guidance. Therefore, we accept the Legal Division's response not to undertake a review of the block-billed charges for recommendations 2, 6, 8, 10, and 13.

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 $32,881. Although management's corrective actions on recommendations 1, 5, 7, 9, 11, 12, 14, and 15 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 $40,949 for unallowable time charges, including time charges for administrative tasks, preparing status reports, learning curve charges, mathematical errors, and duplicative billings. Management allowed $38,077 and disallowed $2,916, including $44 for a mathematical error not questioned by the OIG. Specifically, management allowed the $29,294 questioned for administrative tasks. The firm asserted that the questioned tasks required the exercise of judgment by qualified professionals. The Legal Division reviewed a sample of 11 of the 142 entries identified to contain administrative tasks and concluded that the entries supported the firm's position. The Legal Division found that the questioned entries involved professional liability cases and given the nature of those cases it could not reasonably conclude that tasks undertaken could have been effectively done by less qualified persons. Therefore, the Legal Division decided not to disallow any items in this category. The OIG accepts the Legal Division's assessment because all of the questioned entries relate to professional liability cases.

Management also allowed $4,934 of the $7,162 questioned for preparing status reports because the reports for professional liability cases were complex in nature, not routine, and specifically requested by RTC. Management allowed $3,849 of the $4,302 questioned learning curve costs. Management reviewed the entries and determined that the questioned costs should not be characterized as learning curve costs. For instance, the review of corporate bank minutes was a fundamental and necessary part of investigating a professional liability claim. In addition, management found that other questioned learning curve charges did not deal with a review of local rules but a substantive issue of state law in the context of investigating professional liability claims. Finally, management disallowed $191 questioned for duplicate time charges and time charges that exceeded supporting documentation. The OIG accepts management's position and, for recommendation 1, reduced questioned costs to $2,872.

In recommendation 5, the OIG recommended that FDIC disallow $19,434 for excessive time charges, including intra-office conferencing and excessive staffing. Management allowed all the questioned charges. The Legal Division reviewed a sample of 5 of the 41 questioned intra-office conference entries and did not agree with the IPA's assessment that the conferencing was unnecessary or excessive. Specifically, management determined the issues involved in the professional liability case were complex and entailed voluminous documents. In that context, management concluded that no disallowances would be taken for this category. The OIG accepts the Legal Division's assessment because over 90 percent of the other questioned entries relate to the same case reviewed by management and the remaining entries relate to other professional liability cases.

Management also reviewed 3 of the 31 questioned excessive staffing entries. Management again determined that because of the voluminous documents and complex nature of professional liability cases, the presence of more than one attorney at meetings or to review documents was often necessary. Moreover, in most instances, the firm asserted it had advance approval from the RTC supervising attorney for dual attendance at meetings. The OIG also accepts management's explanation for the questioned excessive staffing because 22 of the 31 entries relate to the same case sampled by management and all of the remaining entries relate to other professional liability cases. Therefore, for recommendation 5, the OIG reduced questioned costs to $0.

In recommendation 7, the OIG recommended that FDIC disallow $35,550 for vague descriptions. Management allowed all the questioned charges. Management reviewed a sample of five entries and concluded the descriptions were not vague in the context of the invoice. Moreover, the Legal Division agreed with the firm's assertion that the descriptions were adequate within the custom and practice of the legal profession. The Legal Division further concluded that disallowances of any amounts questioned were not justified.

The OIG accepts management's assessment of the five entries specifically reviewed and will reduce questioned costs by $660. However, the OIG will continue to question $34,890 because the Legal Division only sampled 5 of 262 questioned entries from only 2 of the 49 fee bills identified to contain vague entries. Further, the firm did not provide additional documentation. Detailed descriptions have traditionally served as a basis for assessing the need, level, and quality of services rendered by a firm. To meet FDIC's billing requirements, a charge must be sufficiently detailed to ensure that the criteria for allowable fees and expenses are met. Therefore, for recommendation 7, the OIG will continue to question $34,890.

In recommendation 9, the OIG recommended that FDIC disallow $9,303 for travel time not discounted by 50 percent. Management allowed $3,153 and disallowed $6,150. The Legal Division reviewed all the questioned entries and found that for $3,153 the firm charged 50 percent of travel time. The Legal Division disallowed the remaining $6,150 questioned. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $6,150.

In recommendation 11, the OIG recommended that FDIC disallow $32,938 for unsupported time charges. Management allowed $29,509 and disallowed $3,429. Specifically, management allowed the $25,022 questioned where the invoice descriptions differed from the time sheet descriptions because management determined that the entries were substantially the same. The OIG accepts management's explanation regarding the differences between the invoices and time sheet descriptions and will reduce those questioned charges.

Management also allowed $4,016 for missing time sheets. The firm located and provided time sheets for $1,717 of the questioned charges. For the remaining $2,299 questioned, the Legal Division acknowledged that the firm did not maintain the time sheets as required by RTC. However, management considered the missing time sheets to be de minimis to the audit sample and did not consider any disallowance appropriate. In addition, the Legal Division allowed the $471 questioned where the original time was written-up with out any explanation because the IPA's working papers did not adequately document the exception. Finally, the Legal Division disallowed $3,429 for differences between the amount billed and the amount on the time sheet.

The OIG reviewed the time sheets provided and will reduce questioned costs by $1,717. However, in absence of time sheets, the OIG could not independently verify $2,299 in questioned charges. Also, the OIG determined that the IPA's working papers adequately documented the $471 questioned for time written-up without explanation. Specifically, the IPA's working papers included copies of the time sheets which showed that the firm increased the time charges and did not document the rationale for the adjustments questioned. Therefore, for recommendation 11, the OIG will question $6,199 ($2,299+$471+$3,429).

In recommendation 12, the OIG recommended that FDIC disallow $10,119 for unauthorized and unallowable research. The Legal Division allowed all the questioned charges. The firm responded that in each instance the research performed was both necessary and essential to the case and was authorized by the supervising RTC attorney. The firm also stated that in many cases the research was performed to meet short deadlines in a crisis atmosphere that did not enable the firm and the supervising attorney to document the authorization. The firm submitted a detailed listing of the matters and the RTC attorney authorizing the research questioned. The Legal Division's response stated that written approval was not required and accepted the firm's assertion that prior authorization was obtained and allowed the questioned charges. However, the Legal Division's response did not provide documentation to support the oral authorization. Lacking specific evidence or independent confirmation that research was approved, the OIG cannot verify that the research was authorized. Therefore, for recommendation 12, the OIG will continue to question $10,119.

In recommendation 14, the OIG recommended that FDIC disallow $8,340 for unallowable expenses. Management allowed $5,103 and disallowed $3,237. Management allowed $1,668 of the $2,951 questioned unallowable travel charges because the firm provided evidence to demonstrate that the air fare questioned was not first class air fare and, therefore, was allowable. The Legal Division also allowed $3,435 of the $4,740 questioned administrative charges because the Legal Division specifically authorized the firm to rent additional office space in connection with document review and production for two cases. Management disallowed the remaining $649 in questioned charges. The OIG accepts management's explanation and, accordingly, reduced questioned charges to $3,237.

In recommendation 15, the OIG recommended that FDIC disallow $64,188 for unsupported reimbursable expenses. Management allowed $57,643 and disallowed $6,545. Specifically, the Legal Division allowed $2,666 because the firm located and provided support for those charges. The Legal Division also allowed $54,977 of the $55,518 not supported by original documentation because it considered copies of vendor invoices and credit card statements to be sufficient support for the questioned reimbursable expenses. The Legal Division disallowed the remaining $6,545. The OIG will continue to question the $54,977 because the firm was required to retain original supporting documentation for reimbursable expenses and failed to do so. Accordingly, for recommendation 15, the OIG will question $61,522 ($6,545+$54,977).

Based on the IPA's audit work, $356,838 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 4, 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 $125,413 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 $32,881 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $135,593 (including $102,611 of unsupported costs) in our Semiannual Report to the Congress.