Ontra's Use and Oversight of Law Firms Under RTC's Mortgage Trust 1994 N-3/S

(Audit Report No. 98-075, August 6, 1998)

The Office of Inspector General (OIG) has completed a limited-scope audit of trust expenditures for outside legal counsel under the Resolution Trust Corporation's (RTC) Mortgage Trust 1994N-3/S. The audit objective was to determine whether improvements could be made in how Ontra retained, managed, and paid outside legal counsel performing services for the trust activity.

We identified 11 law firms that over a 14-month period received $2,622,677 in legal fees and expenses from the deferred maintenance account of the RTC Mortgage Trust 1994N-3/S partnership. We reviewed $1,590,750, or 61 percent, of the billing invoices for these 11 law firms for the period September 1, 1995 to November 1, 1996. Our audit results indicated that Ontra, the contractor retained by the trust's general partner to manage and dispose of trust property, may have paid more than was necessary for legal services, did not adequately monitor legal fee bills, and hired law firms that had terminated Legal Service Agreements (LSAs) with the FDIC.

FDIC has the right and responsibility to protect its investment by requiring efficient and economic use of the trust funds. In the interest of obtaining the best possible price for services and enhancing or strengthening internal controls over legal costs, the OIG recommended that the Director, DRR, take the following actions:

In addition, we believe that FDIC should also consider these recommendations for other existing and future trust agreements.

On July 27, 1998, the Assistant Director, Agreement Management Group, Division of Resolutions and Receiverships, provided a written response to a draft of this report. The Assistant Director agreed with our recommendations and a letter was sent to Ontra encouraging it to negotiate for more favorable rates using LSA lists and recommending that it obtain formal conflict of interest statements prior to engaging a law firm for trust matters. The response contained the requisite elements of a management decision for the two recommendations.