Legal Fees Paid by RTC to Jeffer, Mangels, Butler & Marmaro

(Audit Report No. 98-073, July 8, 1998)

The Office of Inspector General (OIG) has completed an audit of Jeffer, Mangels, Butler & Marmaro, 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 and Werlin, P.C. through a contract with the OIG, and covered billings paid by the RTC from January 1, 1990, through June 30, 1993. The objectives of the audit were to determine whether Jeffer, Mangels, Butler & Marmaro's legal bills were adequately supported and in compliance with the cost limitations set 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 $3,125,677. The audit sample covered $1,037,735, or 33 percent, of the total. The IPA identified questioned costs of $97,527.

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

In addition, the OIG recommended that the AGC (recommendation 8) review all invoices affected by the September 1992 billing arrangement between RTC and the firm to determine whether excessive fees were paid to the firm as a result of this arrangement. Furthermore, the OIG recommended that the AGC (recommendation 9) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate.

The General Counsel's response to a draft of this report provided the requisites for a management decision on each of the recommendations. In its response, the Legal Division suggested that the law firm's billing practices may have involved bill padding, manipulation, and possible gross negligence. OIG Counsel reviewed certain aspects of the audit and discussed their conclusions with Legal Division staff.

Management disallowed a total of $34,658. Management's corrective actions on recommendations 1, 2, 3, 5, 6, and 8 differed from the recommended corrective actions. Nonetheless, we consider management's response as providing the requisites for a management decision.

In recommendation 1, the OIG recommended that FDIC disallow $35,089 for unsupported and incorrect time charges. The OIG agreed to reduce questioned costs from $35,089 to $34,080 because the IPA had inadvertently questioned $1,009 related to an FDIC invoice. Management allowed $5,468 for unsupported time charges and disallowed the remaining $28,612. 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 $34,080.

In recommendation 2, the OIG recommended that FDIC disallow $23,449 for unallowable/ inappropriate charges. The OIG reduced questioned costs from $23,449 to $22,628 because the Legal Division previously disallowed $821. Management's response allowed $19,644 and disallowed $2,984. However, the OIG will continue to question $715 charged for preparing files for closure and archival of case files, and $10,355 charged for dual attendance at meetings. Therefore, for recommendation 2, the OIG will question $14,054.

In recommendation 3, the OIG recommended that FDIC disallow $1,063 for excessive attorney time. Management allowed $538 and disallowed $525. The OIG accepts management?s explanation and, accordingly, reduced questioned costs to $525.

In recommendation 5, the OIG recommended that FDIC disallow $21,993 for telephone, facsimile, photocopying, and database charges not billed at actual costs. Management allowed $20,862 and disallowed $1,131. The OIG will continue to question all the photocopy and facsimile charges not supported by a documented cost study. Accordingly, the OIG will question $21,993.

In recommendation 6, the OIG recommended that FDIC disallow $1,631 for undocumented reimbursable expenses. Management allowed $746 and disallowed $885. The law firm provided additional documentation to support questioned computer research, courier, and other charges. The OIG reviewed and accepts the documentation provided and, accordingly, reduced questioned costs to $885.

In recommendation 8, the OIG recommended that FDIC review all invoices affected by the September 1992 billing arrangement between RTC and the law firm to determine whether excessive fees were paid to the firm as a result of this agreement. A review of eight invoices disclosed that RTC paid the firm more than $14,000 in fees that would not have been paid had the arrangement not been made. Management concluded that it had appropriately entered into the September 1992 LSA and no evidence was developed to support recision of the LSA. The OIG accepts the explanation provided by management.

Based on the IPA's audit work, $97,527 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 4, the OIG recommended that FDIC analyze the qualifications of employees working on RTC matters but not listed on the firm's LSA, determine how much of the $13,815 in questioned charges should be ratified, and disallow any of the charges not approved. The OIG reduced questioned charges by $2,100 because the rates for one attorney were in the applicable LSA and, therefore, did not need to be ratified. Of the $11,715 remaining questioned amount, the Legal Division ratified $11,681 and disallowed $34 for time charged by one timekeeper. The OIG accepts the action taken by management and, accordingly, reduced questioned charges to $34. After considering $34,658 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $72,058 (including $57,445 of unsupported costs) in our Semiannual Report to the Congress.