Legal Fees Paid by FDIC and RTC to Hughes, Hubbard & Reed

(Audit Report No. 98-067, June 24, 1998)

The Office of Inspector General (OIG) has completed an audit of fees paid to Hughes, Hubbard & Reed, a law firm hired by the FDIC and RTC to provide legal services. The audit was conducted by the independent public accounting (IPA) firm of Bert Smith & Co. and covered billings paid during the period from January 1, 1992 through September 30, 1996.

The objective of the audit was to determine whether Hughes, Hubbard & Reed's legal bills were adequately supported and in compliance with the cost limitations set forth by the FDIC and the RTC and that charges for legal services were reasonable. The total fees paid to the firm during the audit period were $26,104,011. The IPA identified net questioned costs of $200,440 from an audit sample of $5,596,605.

That the Assistant General Counsel, Legal Operations Section, Legal Division disallow:

Management disallowed questioned costs totaling $31,449. Although management's corrective actions for recommendations 1, 2, 5-7, 9, 10, 12, and 15 differed from the recommended corrective actions, we consider management's response as providing the requisites for a management decision on each of the recommendations.

In recommendation 1, the OIG recommended disallowance of $112,259 for overhead/administrative charges. The General Counsel's (GC) response disallowed $310 and allowed $111,949 based on a review of the questioned entries and the firm's response. The Legal Division believes that the questioned costs represented typical legal work undertaken to prepare for litigation. In addition, the Legal Division reviewed the Invoice Reconciliation Report and decided that the FDIC managing attorneys had already taken disallowances for similar OIG questioned entries when the firm initially submitted the invoices. The OIG accepts management's explanation and will reduce questioned costs to $310.

In recommendations 2, 5, 7 and 10, the OIG recommended disallowances totaling $23,371. The GC's response disallowed $1,470 and allowed $21,901 based on a review of the questioned entries and additional information provided by the firm. The OIG accepts management's explanation and will reduce questioned costs to $1,470 for recommendation 10 and $0 for recommendations 2, 5, and 7.

In recommendation 6, the OIG recommended disallowance of $3,007 for unsupported time charges. The GC's response allowed $3,007 based on a review of the questioned entries and the firm's response. The OIG will continue to question $3,007 because it could not independently verify the questioned time charges.

In recommendation 9, the OIG recommended disallowance of $6,660 for unsupported miscellaneous expenses. The GC's response disallowed $1,043, allowed $1,976 based on additional information provided by the firm, and did not opine on payments of $3,641 occurring more than 4 years prior to the audit. The OIG acknowledges the 4-year record retention period and reduces questioned costs to $1,170 ($1,043 + $127 for unsupported taxi fares).

In recommendation 12, the OIG recommended disallowance of $1,681 for excessive photocopying charges. The GC's response disallowed $1,606 and allowed $75 based on the firm's response. The OIG will continue to question $1,681 for photocopying charges that exceeded the $.08 a page standard for reproduction costs.

In recommendation 15, the OIG recommended disallowances of $38,208 for fees and expenses identified in one sampled invoice that was included in a settlement amount between the firm and the Legal Division but neither the firm or the Legal Division could provide records noting the disallowances. The GC's response disallowed $10,482 and allowed $27,726 based on review of the questioned entries and the firm's response. The Legal Division believes that the questioned costs of $27,726 for overhead/administrative charges represented typical legal work undertaken to prepare for litigation. The OIG accepts management's explanations and will reduce questioned costs to $10,482.

Based on the IPA's audit work, $200,440 was questioned in the draft report transmitted to management. After considering additional information provided by the firm and management's comments on the IPA's findings, we will report questioned costs of $34,658 (including $5,375 for unsupported fees and expenses) in our Semiannual Report to the Congress.