Legal Fees Paid by RTC to Nagel, Rice & Dreifuss

(Audit Report No. 98-034, March 23, 1998)

The Office of Inspector General (OIG) has completed an audit of Nagel, Rice & Dreifuss, 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 July 1, 1992, through June 30, 1995.

The objectives of the audit were to determine whether Nagel, Rice & Dreifuss? 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 $1,473,830. The audit sample covered $745,316, or 51 percent of the total. The IPA identified net questioned costs of $336,804.

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

In addition, the OIG recommended that the AGC (recommendation 8) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate.

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 $39,233. Although management?s corrective actions on recommendations 1, 4, and 7 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 $110,948 for unsupported time charges. Management allowed $99,853 and disallowed $11,095. Management acknowledged that the firm did not maintain time sheets as required by RTC. However, management did not believe that the firm?s failure to maintain required documentation was a ?no cost? alternative to outside counsel. Accordingly, after considering other factors, management considered $11,095 as an appropriate disallowance. 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 $110,948.

In recommendation 4, the OIG recommended that FDIC disallow $99,742 for excessive, inappropriate or unauthorized time charges, including unauthorized and undocumented research, excessive time charges, time billed to the incorrect matter, over staffing, and learning curve costs. Management allowed $95,455 and disallowed $4,287. Specifically, management allowed the $15,847 questioned research charges. The firm specifically identified the RTC attorneys who authorized the research and also provided the final work products generated from the research. The Legal Division stated that authorization for legal research did not have to be written, but could not verify that the research had been verbally authorized because the oversight attorneys listed by the firm no longer worked for FDIC. Nonetheless, the Legal Division concluded that it had no basis to doubt the veracity of the firm?s assertions that the research was authorized by the specifically named attorneys. Lacking specific evidence or independent confirmation that the research was approved, the OIG cannot verify that the research was authorized. Therefore, the OIG will continue to question $15,847 for research.

Management also allowed $34,490 of the $37,697 questioned excessive time charges. Specifically, management allowed the $27,288 questioned excessive charges for a professional liability case reviewed by the IPA?s legal specialist. For this case, the Legal Division reviewed the invoices and determined that the invoices had been scrutinized for excessive time charges by the former RTC oversight attorney. Management concluded that it would rely on the review of the former RTC oversight attorney and would not disallow any additional charges. Management also allowed $5,262 for a motion to enforce a subpoena because it determined that the motion was complex in nature and the charges were not excessive. Additionally, management allowed $1,940 questioned for multiple attorneys attending meetings because the meetings were held at RTC?s direction. However, management disallowed the $3,207 questioned for the appeal of a magistrate judge?s order. The OIG accepts management?s explanation for the questioned excessive charges and, accordingly, will reduce questioned costs from $37,697 to $3,207.

Additionally, management allowed the $34,290 questioned for time billed to the incorrect matter. The Legal Division acknowledged the firm made an accounting error but allowed the charges because the matters were all related to the same case and there was no evidence that any financial harm had been caused by the error, such as budget overruns. Management allowed $10,828 of the $11,566 questioned over staffing charges because it reviewed the questioned charges and concluded that all but $738 of the tasks were appropriately staffed. Finally, management disallowed the $342 questioned for learning curve charges. The OIG accepts management?s explanation for these charges. Therefore, for recommendation 4, the OIG will question $20,134 ($15,847 + $3,207 + $738 + $342).

In recommendation 7, the OIG recommended that FDIC disallow $52,790 for unsupported or improperly supported reimbursable expenses. Management allowed $38,457 and disallowed $14,333. The Legal Division reviewed additional documentation submitted by the law firm and accepted the support for $36,514 of the expenses questioned. In addition, the Legal Division allowed $1,943 of the $2,018 questioned unsupported in-house photocopying charges. Management allowed $1,943 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. The Legal Division determined that the firm billed $75 above its established maximum allowable rate. Hence, the Legal Division disallowed $75. The Legal Division also disallowed $14,258 in expenses for which the firm did not provide acceptable supporting documentation.

The OIG reviewed the additional documentation provided by the firm and will reduce questioned costs by $36,514. However, 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 Legal Division does not appear to be unreasonable. However, the IPA appropriately questioned the photocopying costs for lack of support. Accordingly, the OIG will continue to question $16,276 ($14,258 + $2,018).

Based on the IPA?s audit work, $336,804 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 3, the OIG recommended that FDIC analyze the qualifications of employees working on RTC matters but not listed on an approved LSA, determine how much of the $63,806 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 $39,233 in disallowances taken by management and management?s comments on the IPA?s findings, we will report questioned costs of $156,876 (including $126,266 of unsupported costs) in our Semiannual Report to the Congress.