Legal Fees Paid by RTC to Pillsbury, Madison & Sutro

(Audit Report No. 98-006, January 9, 1998)

The Office of Inspector General (OIG) has completed an audit of Pillsbury, Madison & Sutro, 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 paid billings for services provided to RTC during the period January 1, 1990 through December 9, 1993.

The objectives of the audit were to determine whether Pillsbury, Madison & Sutro'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 $3,387,460. The audit sample covered $1,694,381 or 50 percent of the total. The IPA identified net questioned costs of $421,257.

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

In recommendations 2, 6, 8, and 10 the OIG recommended that the AGC review block-billed charges to determine the costs to be disallowed. Block billing is the 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, and 8. For recommendation 10, the Legal Division disallowed $3,409 because the firm agreed to that amount of questioned costs. The OIG accepts management's decision and will question $3,409.

In addition to those 14 recommendations, the OIG recommended (recommendation 15) that the AGC assess the appropriateness of the unaudited billings and disallow the costs it deemed inappropriate. The Legal Division agreed to conduct an assessment of the unaudited billings.

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 $72,883. Although management's corrective actions for recommendations 1, 3, 5, 7, 9, 11, 12, 13, and 14 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 $29,198 for unallowable time charges. Management allowed $27,745 and disallowed $1,453. Specifically, management disallowed $390 of $28,135 questioned for miscellaneous administrative charges. Management allowed the remaining $27,745 because it concluded that RTC's Legal Division had approved the cost of massive document data entry by paralegal personnel for litigation efforts. In addition, management disallowed $1,063 for multiple attendance at a meeting. The OIG accepts management's explanation and reduced questioned costs to $1,453 ($390 + $1,063).

In recommendation 3, the OIG recommended that FDIC disallow $111,607 for unauthorized billing rates/attorneys. Management allowed $101,004 and disallowed $10,603. Specifically, management disallowed $8,753 of $109,682 questioned for unauthorized billing rates. Management allowed the remaining $100,929 because the firm provided an LSA to support the firm's assertion that FDIC/RTC agreed to flat rates for all personnel. As a result, the OIG recomputed the question costs to be $8,753. In addition, management disallowed $1,850 for one attorney not listed in the LSA. The OIG accepts management's explanation and reduced questioned costs to $10,603 ($8,753 + $1,850).

In recommendation 5, the OIG recommended that FDIC disallow $58,662 for excessive time charges to case matters. Management allowed all the questioned charges. The IPA questioned attorney time charges of $4,704 for the preparation of a brief that was similar to a brief prepared by the same attorneys a year earlier. Management allowed $4,704 based on a review of RTC Legal Information System records that showed the case budget was increased so that one invoice could be paid. Management identified a case budget approval it believes was executed to enable payment of these charges. However, management could not identify specifically why the budget was increased. The oversight attorney was not available to confirm the approval of these charges. Therefore, the OIG continues to question these costs as excessive time charges to case matters.

The remaining $53,958 related to multiple representation, attorneys performing clerical or paralegal tasks, and excessive intra-office meetings. The Legal Division determined that the firm's charges were not unreasonable. The OIG accepts management's explanation for those charges. Therefore, for recommendation 5, the OIG will question $4,704.

In recommendation 7, the OIG recommended that FDIC disallow $46,693 for services not adequately detailed and billed. Management allowed all the questioned charges, because Legal Division finds that the firm's codes along with the descriptions of service provide a clear and reasonable entry. The OIG accepts management's explanation and reduced questioned costs to zero.

In recommendation 9, the OIG recommended that FDIC disallow $415 for travel time not discounted by 50 percent. Management allowed $15 and disallowed $400. The Legal Division accepted the firm's response that an entry for $30 reflected total driving time. The OIG accepts management's explanation and reduced questioned costs to $400.

In recommendation 11, the OIG recommended that FDIC disallow $70,823 for unsupported time charges. The OIG adjusted questioned costs from $70,823 to $66,556. Of the adjusted questioned costs, management allowed $65,748 and disallowed $808. Specifically, management allowed $64,154 for time charges supported by computerized records because it had not provided guidance to Outside Counsel regarding requirements for electronic billing systems. The OIG continues to question $64,154, because the IPA auditors were unable to verify the accuracy of the time billed for those entries that were not supported by original documentation.

Management also allowed $1,595 for subcontractor time charges that could not be traced to time sheets because the Guide did not require subcontractors to submit time sheets for the bills submitted to outside counsel. The OIG reviewed the IPA working papers and could not locate such an agreement between the subcontractor and the firm. Therefore, the OIG accepts management's explanation for the subcontractor time charges. For recommendation 11, the OIG reduced questioned costs to $64,962 ($808 + $64,154).

In recommendation 12, the OIG recommended that FDIC disallow $2,485 for unallowable expenses. The Legal Division disallowed $1,213 for personal expenses charged as travel expenses, $54 for parking expenses, and $261 for overhead expenses. In addition, the Legal Division disallowed $839 for meals and lodging exceeding allowable rates. The OIG accepts management's explanation and reduced questioned costs to $2,367 ($1,213 + $54 + $261 + $839).

In recommendation 13, the OIG recommended that FDIC disallow $96,648 for unsupported reimbursable expenses. Management allowed $44,664 and disallowed $51,984. Specifically, management allowed $10,332 for research charges because it accepted the firm's explanation of its automated billing system. The IPA working papers show that the firm's automated billing system calculated the computer research time based on an estimated hourly rate rather than the actual Lexis or Westlaw cost. The IPA was not able to trace the actual cost to detailed information because the documentation was missing. Therefore, the OIG will continue to question $10,332.

Management disallowed $12,749 of $39,471 for travel expenses. Management allowed $26,772 because it accepted the firm's explanation that supporting documentation was provided to the IPA. The IPA working papers show that $24,647 was supported by a billing statement and not an original vendor invoice or receipt. Similarly, for the remaining $2,125, the firm provided a Diners Club statement that tied the airline charges to the fee bill. Therefore, the OIG will continue to question $39,471.

Management allowed $6,367 for photocopy expenses because it accepted the firm's explanation of its copy accounting system. The IPA working papers show that this system calculated photocopying costs by taking the total number of photocopies per client and multiplying it by $.19. For the RTC, the firm represented that the billing attorney manually adjusted the rate to $.08 on the prebill. However, the IPA questioned $6,367 because there was no documentation to support the number of copies used by the billing attorney. Therefore, the OIG will continue to question $6,367.

Finally, management allowed $1,243 for facsimile charges because it accepted $.25 per page as a reasonable rate. The IPA working papers show that $1,243 of $2,322 was questioned as unsupported facsimile charges. In addition, the OIG identified a footing error of $7 and reduced questioned costs to $1,236. Therefore, the OIG will question $1,236 for unsupported facsimile charges.

Management disallowed $304 for subcontractor expenses, $832 for delivery service, $158 for copy service, $35,858 for travel and transportation, $516 for fees and document services, and $1,567 for telephone charges. The OIG accepts management's decision to disallow all of these costs which total $39,235. Accordingly, for recommendation 13, the OIG questioned $96,641 ($10,332 + $39,471 + $6,367 + $1,236 + $39,235).

In recommendation 14, the OIG recommended that FDIC disallow $2,914 for expenses not supported by cost studies. Management disallowed $47 and allowed $2,397. Management allowed $2,397 because it only required law firms to conduct cost studies for photocopying expenses if the firm billed more than the Legal Division's established maximum allowable rate. RTC guidelines provided that photocopying charges be billed at actual documented costs or at a standard cost based on a documented cost study and, 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 amount disallowed by the Division does not appear to be reasonable. However, the IPA appropriately questioned the photocopying costs for lack of support.

In addition, management allowed $470 for facsimile charges because the report did not provide details on the firm's cost study. The IPA working papers show that $470 of $588 for faxing were questioned as unsupported expenses. Further, the OIG reduced question costs by $47 because this cost was included in the unsupported reimbursable expense condition. Therefore, the OIG reduced questioned costs to $2,867 ($2,397 +$470).

Based on the IPA's audit work, $421,257 was questioned in the draft report transmitted to management. After considering additional information provided by the firm, $72,883 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $189,218 (including $165,070 of unsupported costs) in our Semiannual Report to the Congress.