Legal Fees Paid by RTC to Fendig, McLemore, Taylor & Whitworth, P.C.

(Audit Report No. 98-021, March 3, 1998)

The Office of Inspector General (OIG) has completed an audit of Fendig, McLemore, Taylor & Whitworth, P.C., a law firm hired to provide legal services to the Resolution Trust Corporation (RTC). The audit was conducted by the joint venture Financial Management Associates through a contract with the OIG, and covered billings paid by the RTC during the period January 1, 1992, through December 31, 1994.

The Office of Inspector General (OIG) has completed an audit of Fendig, McLemore, Taylor & Whitworth, P.C., a law firm hired to provide legal services to the Resolution Trust Corporation (RTC). The audit was conducted by the joint venture Financial Management Associates through a contract with the OIG, and covered billings paid by the RTC during the period January 1, 1992, through December 31, 1994.

The joint venture identified net questioned costs of $1,551,368. However, based on discussions with the joint venture and additional documentation reviewed by the OIG, we concluded that $1,276,796 of the $1,294,985 originally included in recommendation 1 was adequately supported and should not be questioned. The remaining $18,189 represented unsupported discrepancies between fees on invoices and corresponding supporting documentation. Therefore, after adjusting for recommendation 1, total reported questioned costs were reduced to $274,572.

That the AGC, Legal Operations Section, Legal Division, should disallow:

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 $17,600. For five findings, management and the OIG determined that RTC had previously disallowed questioned costs and, therefore, questioned costs needed to be reduced in these instances. This situation resulted because of the RTC OIG's agreed- upon audit procedure at that time. Specifically, the OIG's contractor audited the firm's invoices as submitted to RTC that did not reflect RTC oversight attorney disallowances. Future OIG audits will be based on FDIC reviewed and paid invoices and, therefore, will reflect disallowances taken by the FDIC oversight attorney.

Although management's corrective actions on recommendations 1, 3 through 6, and 8 through 12 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 $18,189 for missing time sheet charges. Management allowed all the questioned charges. The firm provided an itemized account of the eight specific entries that accounted for $3,031 of the questioned charges. However, the firm acknowledged that the pre-bill documentation did not accurately reflect the time charges for services rendered by the firm. Further, the firm provided an affidavit from the RTC oversight attorney and a statement by the oversight attorney's section chief stating that they were extremely vigilant in reviewing the firm's fee bills and required disallowances in many instances. For these reasons, management allowed the questioned charges. With regard to the remaining $15,158 in questioned charges, management did not believe the missing time sheet charges as reported were a "no cost" alternative to outside counsel. Accordingly, after considering several factors that were all favorable to the firm, management allowed the $15,158.

In the absence of time sheets, the OIG could not independently verify the questioned time charges. Therefore, for recommendation 1, the OIG will continue to question $18,189.

In recommendation 3, the OIG recommended that FDIC disallow $41,953 for time billed in excess of 12 hours in one calendar day. Management allowed all the questioned charges. Management did not believe the efficiency of outside counsel work could be assessed simply on the basis of hours spent on the job. Rather, the assessment of efficiency must take into account the demands of the work itself. Management concluded that the hours questioned did not seem excessive in the context of the work performed by the firm. The RTC oversight attorney also stated that she was aware that firm personnel had worked more than 12 hours per day and believed it was necessary to meet the requirements of the cases. Finally, published guidelines adopted by the Legal Division did not establish a 12-hour work standard. The OIG accepts management's explanation and, accordingly, reduced questioned charges to $0.

In recommendation 4, the OIG recommended that FDIC disallow $23,354 for research that was not pre-approved, unless the firm demonstrates that it delivered written work product to the RTC Research and Brief Bank as required under the legal services agreement. Management allowed all the questioned charges because the firm and oversight attorney confirmed that the RTC Research and Brief Bank was reviewed for resource materials, and that the RTC oversight attorney approved the firm to conduct the questioned research. The oversight attorney further confirmed that the legal briefs created as a result of the research were placed into the research bank and were subsequently used by other law firms. The OIG accepts management's explanation and reduced questioned costs to $0.

In recommendation 5, the OIG recommended that FDIC disallow $5,292 for time billed for attendance at a seminar and training session. Management allowed all the questioned charges. Management agreed that costs for attending a seminar and training session were appropriately questioned. However, the firm provided documentation supporting that $4,300 was already disallowed by the RTC oversight attorney. The questioned costs also included charges for other appropriately billable services. Therefore, the questioned amount should be adjusted to reflect the fees for these other services. The OIG accepts management's explanation and reduced questioned costs to $0.

In recommendation 6, the OIG recommended that FDIC disallow $16,330 for in- house copying charges. Management allowed $8,312 and disallowed $8,018. Management stated that it has consistently taken the position that the absence of a cost study to support photocopying costs did not warrant recovery of all photocopying payments. Rather, a cost study was required only for charges above $.08 per page. Nonetheless, management did not accept the law firm's supporting documentation for its copy counts, which the joint venture tested for $8,018 in charges. Accordingly, management disallowed the $8,018 tested in detail by the joint venture.

RTC guidelines provided that photocopy 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 joint venture. The Legal Division subsequently revised its guidelines to allow firms to charge up to $.08 per page for photocopying. In view of subsequent changes to guidelines, the amount disallowed by the Legal Division does not appear to be unreasonable. However, the joint venture appropriately questioned the photocopying costs for lack of support. Therefore, for recommendation 6, the OIG will question $16,330.

In recommendation 8, the OIG recommended that FDIC disallow $175 for telephone charges not billed at actual cost. Management allowed $137 and disallowed $38. The firm stated that RTC had already disallowed the questioned costs and provided RTC payment documentation to support its position. Both the OIG and Legal Division reviewed the supporting documentation and concluded that $137 had already been disallowed by RTC. Accordingly, management agreed to disallow $38. The OIG accepts management's explanation and reduced questioned costs to $38.

In recommendation 9, the OIG recommended that FDIC disallow $8,210 for unsupported travel costs. Management allowed $397 and disallowed $7,813. The firm acknowledged that expenses in excess of allowable travel costs occurred, but the firm asserts that the RTC oversight attorney disallowed such excesses. The firm provided additional documentation to support its position. Both the OIG and Legal Division reviewed the supporting documentation and concluded that $397 had already been disallowed. Accordingly, management agreed to disallow $7,813. The OIG accepts management's explanation and reduced questioned costs to $7,813.

In recommendation 10, the OIG recommended that FDIC disallow $324 for ordinary postage charges unless the firm can demonstrate the extraordinary nature of the postage charges. Management allowed $132 and disallowed $192. The firm stated that RTC had already disallowed the questioned costs and provided RTC payment documentation to support its position. Both the OIG and Legal Division reviewed the supporting documentation and concluded that $132 had already been disallowed by RTC. Accordingly, management agreed to disallow $192. The OIG accepts management's explanation and reduced questioned costs to $192.

In recommendation 11, the OIG recommended that FDIC disallow $1,899 for unauthorized or unnecessary research charges unless the firm can, first, demonstrate proper RTC authorization and, second, demonstrate the charges were necessary and appropriate. Management allowed all the questioned charges because the law firm provided documentation supporting that the questioned costs had already been disallowed. The OIG reviewed the supporting documentation and agrees with management's conclusion. Accordingly, the OIG reduced questioned costs to $0.

In recommendation 12, the OIG recommended that FDIC disallow $254 for overhead charges unless the firm can demonstrate prior RTC approval and document the unusual nature of the charges. Management allowed all the questioned charges because both the firm and oversight attorney confirmed that the charges involved organizing and copying documents on an extraordinary basis. Therefore, the charges were not overhead. The OIG accepts management's explanation and reduced questioned costs to $0.

Based on the joint venture's audit work, $274,572 was questioned in the draft report. In addition to the recommendations previously discussed, in recommendation 2, 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 $157,053 in questioned charges should be ratified, and disallow any of the charges not approved. The Legal Division ratified or approved all $157,053. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $0. After considering $17,600 in disallowances taken by management and management's comments on the joint venture's findings, we will report questioned costs of $44,101 (all of which is unsupported) in our Semiannual Report to the Congress..