Legal Fees Paid by RTC to Brownstein, Zeidman & Lore

(Audit Report No. 98-038, April 17, 1998)

The Office of Inspector General (OIG) has completed an audit of Brownstein, Zeidman & Lore, 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, 1993 through December 31, 1994.

The objectives of the audit were to determine whether Brownstein, Zeidman & Lore'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 $4,985,145. The audit sample covered $2,492,734, or 50 percent of the total. The IPA identified net questioned costs of $1,755,420.

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

In recommendations 3, 5, 8, 11, 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 3, 5, 8, 11, 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 $27,392, which includes $595 not questioned by the OIG. Although management's corrective actions on recommendations 2, 4, 6, 7, 9, 10, 12, 14, 15, and 16 differed from the recommended corrective actions, we consider management's response as providing the requisites for a management decision.

Specifically, in recommendation 2, the OIG recommended that FDIC disallow $75,497 for unallowable time charges, including time charges for administrative tasks and reviewing and revising documents. Management allowed all the questioned charges based on consultation with the former RTC oversight attorneys and review of the questioned invoice entries. Specifically, the oversight attorneys confirmed the firm's assertion that attorneys and paralegals performed what would otherwise be considered clerical work because of time pressures and the nature of the legal work. The oversight attorneys also confirmed that the charges for reviewing and revising documents should not be considered overpolishing. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 4, the OIG recommended that FDIC disallow $63,495 for multiple attorney and paralegal time charges. Management allowed all the questioned charges. The former RTC oversight attorneys confirmed that the nature of the work performed by the firm required that several attorneys or paralegals attend meetings or closings. More specifically, the oversight attorneys stated that the firm represented RTC in a number of extremely complex asset securitization transactions that could not have been conducted adequately or effectively by a single attorney. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 6, the OIG recommended that FDIC disallow $562,085 for unsupported time charges. Management allowed $561,091 and disallowed $994. Specifically, management disallowed $994 of the $2,240 questioned charges where the hours billed exceeded those detailed on the corresponding time sheet. However, in two instances, the Legal Division determined that the hours on the invoice matched the hours on the time sheet and allowed those charges. The OIG accepts management's explanation for these charges and will reduce questioned charges to $994.

In addition, management allowed the $559,845 questioned for professional fees not supported by time sheets. The firm responded that it used a computerized billing system consisting of computerized billing memoranda that were entered into the firm's computer system by each timekeeper's secretary on a daily basis. According to the firm, some timekeepers prepared handwritten or typed time sheets that were given to the secretaries to prepare the computerized billing memoranda. Other attorneys dictated or called in daily time information to their secretaries. The firm considered the handwritten and typed time sheets to be the equivalent of rough drafts of the billing records and not the original billing records.

In the absence of original time records, the IPA could not independently satisfy itself that the $559,845 in computerized time charges were appropriately supported. As a result of a joint project involving the Legal Division and OIG, the Legal Division transmitted electronic billing guidelines to outside counsel on December 31, 1997. Nonetheless, the IPA appropriately questioned the computerized time charges for lack of original support. Therefore, for recommendation 6, the OIG will continue to question $560,839 ($994 + $559,845).

In recommendation 7, the OIG recommended that FDIC disallow $3,557 for unauthorized research. Management allowed all the questioned charges. Former RTC oversight attorneys confirmed that the legal research questioned was authorized by a responsible RTC attorney. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 9, the OIG recommended that FDIC disallow $138,614 for excessive time charges. Management allowed all the questioned charges. In considering this recommendation, the Legal Division reviewed the invoice entries and IPA working papers. In addition, the Legal Division consulted with former RTC oversight attorneys and reviewed RTC reports to determine the extent the invoices were reviewed by oversight attorneys. The OIG accepts management's position and reduced questioned costs to $0.

In recommendation 10, the OIG recommended that FDIC disallow $1,451 for travel time not discounted by 50 percent. Management disallowed $2,046, which includes $595 not questioned by the OIG. Specifically, management reviewed the nine entries with questionable travel charges, including entries that were not included in the net questioned costs. The Legal Division determined that the firm properly discounted the travel time or demonstrated that the attorney performed work for RTC while in travel status in six of the nine entries. The Legal Division disallowed $2,046 on the three remaining entries. The OIG accepts management's explanation and, accordingly, will question $1,451.

In recommendation 12, the OIG recommended that FDIC disallow $394,682 for services billed which were not adequately detailed. Management allowed all the questioned charges. The Legal Division reviewed a representative sample of the questioned charges and determined that the descriptions were sufficiently precise under Legal Division guidelines. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 14, the OIG recommended that FDIC disallow $30,609 for unallowable expenses. Management allowed $25,436 and disallowed $5,173. Management allowed $20,261 for secretarial overtime because former RTC oversight attorneys confirmed that an RTC Assistant General Counsel gave verbal authorization for the firm to charge for secretarial overtime. The Legal Division also allowed $5,175 questioned for local transportation. Specifically, the Legal Division reviewed the questioned charges and determined that the majority of the questioned charges were for local transportation costs on occasions when the firm's employees worked overtime on RTC matters. The Legal Division disallowed $5,173 questioned for meals, tips, desktop publications, and non-business related telephone calls. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $5,173.

In recommendation 15, the OIG recommended that FDIC disallow $26,981 for unsupported reimbursable expenses. Management allowed $13,870 of the $26,981 questioned because the firm provided the Legal Division with additional supporting documentation for the questioned items. Management disallowed the remaining $13,111. The OIG reviewed the additional documentation provided by the law firm and accepts management's explanation. Accordingly, the OIG reduced questioned costs to $13,111.

In recommendation 16, the OIG recommended that the Legal Division disallow $29,494 for expenses not invoiced at actual cost or supported by a cost study. Management allowed $23,426 and disallowed $6,068. Specifically, management allowed $19,719 of the $25,264 questioned for photocopying because the Legal Division only required law firms to conduct cost studies for photocopying expenses if the firm charged more than the Legal Division's established maximum allowable rates. The Legal Division determined that all but $5,545 of the questioned charges were within the maximum allowable rates. Management also allowed $3,707 of the questioned facsimile charges because it considered a facsimile charge of $.15 to $.25 per page to be reasonable. Furthermore, without evidence to the contrary, the Legal Division concluded that the facsimile charges by the firm closely approximated actual costs. Finally, management disallowed $523 for questioned telephone expenses not supported by a cost study.

RTC guidelines provided that photocopying and facsimile charges be billed at actual documented costs or at a standard cost based on a documented cost study; therefore, photocopying and facsimile 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 and to reimburse firms for the cost of facsimile long distance telephone charges. Therefore, in view of subsequent revisions to guidelines, the Legal Division's position does not appear unreasonable. However, the IPA appropriately questioned the photocopying costs and facsimile charges. Therefore, for recommendation 16, the OIG questioned $29,494 ($25,264 + $3,707 + $523).

Based on the IPA's audit work, $1,755,420 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 1, 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 $428,955 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 $27,392 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $610,068 (including $603,444 of unsupported costs) in our Semiannual Report to the Congress.