Watchdog Finds "Unacceptable Risk" in Treasury's Oversight of Bailout Law Firms

Neil Barofsky has stepped down from his post as the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), following a two-and-a-half-year tenure in which he frequently butted heads with the Treasury officials responsible for overseeing the government’s bailout programs. But even without Barofsky at the helm, the SIGTARP presses on in its efforts to make Treasury’s bailout programs more transparent and fair to the American taxpayer.

This morning, the SIGTARP released a new audit report that was requested by Senator Tom Coburn (R-OK) on Treasury’s process for procuring professional services under the TARP. POGO has been following this issue closely throughout the course of the bailout to ensure that the government is taking adequate steps to protect taxpayers from conflicts of interest and wasteful spending tied to the work performed by outside firms (for more background, check out Scott’s testimony last fall before the Congressional Oversight Panel).

As part of its audit, the SIGTARP took a look at Treasury’s contracts with five law firms that had received more than $27 million in legal fees as of last December. The report released today describes Treasury’s contract with one of these firms, Venable LLP, and its process for reviewing and approving Venable’s fee bills.

Overall, the SIGTARP found that Treasury’s lax oversight of its contracts with Venable and other firms had created an “unacceptable risk” that taxpayers are overpaying for legal services related to the bailout. Here are a few highlights:

Insufficient requirements for submitting and reviewing Venable’s bills

Three of the five task orders awarded to Venable were labor-hour task orders. According to the Federal Acquisition Regulation (FAR), this type of contract can only be used if: (1) the contractor’s accounting system is adequate for determining costs applicable to the contract; and (2) government surveillance during contract performance provides reasonable assurance that efficient methods and effective cost controls are used.

However, the contract with Venable—overseen by Treasury’s Office of Financial Services (OFS)—did not contain sufficiently detailed requirements or instructions on how the firm should prepare its fee bills. In addition, all three of the OFS Contracting Officer’s Technical Representatives (COTRs) interviewed by SIGTARP stated that there were no written standards for reviewing invoices.

Venable’s costs called into question

When the SIGTARP audited a sample of Venable’s fee bills, it called into question $676,840 in costs that were submitted by Venable and paid by OFS. While some of these costs may have been perfectly reasonable, there wasn’t enough detailed information available for SIGTARP (or OFS) to make such a determination.

Many of Venable’s charges were “block billed,” meaning that a single charge included several different tasks without specifying the time required to complete each task. For example:

03/23/09 PARTICIPATE IN CALL WITH ALL PARTICIPANTS TO REVIEW CITI PROGRAM STRUCTURE AND RELATED ISSUES; PARTICIPATE IN CALLS WITH GM AND CHRYSLER COUNSEL TO REVIEW SPECIFIC COMMENTS TO LOAN DOCUMENTS; WORK RE ANALYSIS AND REVIEW OF REQUESTED CHANGES; RELATED TELEPHONE CONFERENCES AND E-MAILS. (10.8 HOURS)

In other cases, there were vague or inadequate descriptions of Venable’s work, such as “REVIEW AND REVISE TRANSACTION DOCUMENTS; CONFERENCE CALLS; INTERNAL CONFERENCES. (6.2 hours).”

SIGTARP also questioned many of Venable’s administrative charges, such as preparing fee bills, reviewing OFS contract and task orders, and addressing conflict-of-interest issues. SIGTARP determined that OFS should have denied many of these types of charges.

Recommendations for improving contracting processes

The SIGTARP recommended that OFS adopt standards similar to those used by the FDIC and other agencies regarding legal fee bills prepared by law firms. The audit report also recommended that OFS provide specific invoice review procedures for the COTRs, and review previously paid bills to determine if there were any unreasonable or unallowable charges.

Although Treasury disagreed with the SIGTARP’s statement about the “unacceptable risk” posed to taxpayers, OFS has already taken steps to implement the recommendations by providing more specific instructions to the legal contractors who submit invoices and the COTRs who review them, meeting with FDIC officials to discuss best practices, and scheduling a meeting with Venable to discuss the SIGTARP’s findings.

Treasury’s contracts with the bailout law firms have long been a source of controversy. BailoutSleuth repeatedly criticized Treasury for not providing enough transparency in its contracts. The Washington Independent pointed out that one of the bailout law firms, Simpson Thacher & Bartlett, had a long history of working for TARP recipients, raising serious questions about conflicts of interest. And at the Congressional Oversight Panel’s recent hearing on Treasury’s bailout contracting, Treasury refused to allow one of the bailout law firms to publicly testify, citing concerns about attorney-client privilege.

Michael Smallberg is a POGO Investigator.

UPDATE: A Treasury spokesperson emailed to remind us of other watchdogs' findings related to Treasury's contracting procedures. The Congressional Oversight Panel has stated that Treasury's procedures for post-award contract and agreement management "follow well-established norms for monitoring contract performance." The Government Accountability Office (GAO) has also said: "One year after implementation, OFS had put in place an appropriate infrastructure to manage and monitor its network of financial agents and contractors, as well as a system to oversee conflicts of interest that may arise with financial agents or contractors seeking or performing work under TARP. OFS has continued to make management and oversight enhancements."