In one of the federal government's biggest legal services contracts ever, the Treasury Department has hired 13 law firms to help run the Troubled Assets Relief Program at a cost to taxpayers of up to $100 million.
But the TARP watchdog, the Congressional Oversight Panel, has faulted the agency for excessive secrecy when it comes to its outside counsel, as well as the potential for conflicts of interest in managing the $700 billion program.
The lion's share of TARP legal work has gone to Cadwalader, Wickersham & Taft, which has already raked in more than $13 million since the program began in October 2008, according to the firm -- and that's not counting the new contract. Treasury declined a request by the oversight panel for a Cadwalader representative to testify at a Sept. 22 public hearing about transparency in TARP contracting, citing attorney-client privilege.
Treasury has about 2,000 in-house lawyers -- equivalent to the fourth-largest law firm in the nation -- but the department is turning to outside counsel for help with complex equity investments, debt transactions, bankruptcy, real estate, structured products and regulatory issues related to TARP.
The omnibus legal services contract, which was awarded in August, allows the agency to spend up to $99.8 million on private law firms during the next five years. Treasury's authority to make new TARP expenditures expires on Oct. 3.
In addition to Cadwalader, the other firms selected by Treasury are Alston & Bird; Fox, Hefter, Swibel, Levin & Carroll; Haynes and Boone; Hughes Hubbard & Reed; Orrick, Herrington & Sutcliffe; Paul, Weiss, Rifkind, Wharton & Garrison; Perkins Coie; Seyfarth Shaw; Shulman, Rogers, Gandal, Pordy & Ecker; and Venable. Two firms were also chosen under the contract's small business set-aside requirement — Love and Long of Newark, N.J., and Sullivan Cove Reign Enterprises JV of Washington. Each contract has a guaranteed minimum value of $50,000.
At the Sept. 22 hearing, the four-member Congressional Oversight Panel did not challenge Treasury's need for outside legal expertise but questioned how the department is managing conflicts of interest, since many of the firms also represent TARP recipients. As panel member Damon Silvers put it, what happens if "other interests of the contractor dominate the contract?…TARP recipients are going to be these firms' clients forever and TARP is going to go away."
But Treasury responded that it was "highly unusual" for its lawyers to testify in public "except in extraordinary circumstances," and -- after consultation with Cadwalader -- declined the invitation.
"We understand and respect the panel's interest in obtaining information from this law firm," said Gary Grippo, deputy assistant secretary for fiscal operations and policy, reading a statement from Treasury General Counsel George Madison at the hearing. "However, lawyers play a very special role which requires them to provide confidential advice to their clients."
In an interview, panel spokesman Thomas Seay countered, "We invited Cadwalader to testify specifically about conflict-of-interest mitigation. We weren't trying to get at issues of attorney-client confidentiality."
Nor did the refusal sit well with panel member Silvers, who also serves as director of policy and special counsel to the AFL-CIO. "We disagree with Treasury's decision to object to their counsel testifying," he said at the hearing. "We note the obstacles such an approach places to public oversight of legal contracting in the context of the TARP.
"The panel has requested a comprehensive list of Cadwalader clients that have received TARP funds," he said. "We have yet to receive that list. But we note that Cadwalader's Web site and other public sources list a significant number of current and former TARP recipients as clients of the firm, including Bank of America, Citigroup and AIG."
To Scott Amey, general counsel of the Project on Government Oversight, Cadwalader's no-show "seemed kind of evasive. Overall, there are ways to get around revealing confidential or privileged information," he said. "This is not your normal attorney-client relationship. They could have very easily come to testify."
As a compromise, Treasury arranged for the panel to interview Cadwalader lawyers in private on Sept. 27. The 90-minute meeting took place at the Treasury Department and was attended by about 15 people -- Cadwalader partner Louis Solomon, special counsel Douglas Mintz and conflict specialist John Kruse; oversight panel members and staff; and Treasury officials.
"Of course, we would have preferred to have had the conversation in a more public venue, but the meeting was productive," Seay said.
Solomon, who is chairman of the firm's commercial and international litigation groups and co-chairman of the litigation department, said in an interview that, although Cadwalader has represented TARP recipients on unrelated matters, the firm "would never represent someone directly in connection with TARP funds." To do so, he said, would be "antithetical to our engagement agreement. We have an amazing screening process to make sure we are conflict-free on matters."
He said the firm has responded to every information request from the panel save one: Cadwalader (with Treasury's assent) declined to reveal the amount of revenue the firm has earned from every client who has received TARP funds. Treasury procurement services director Ronald Backes said during the public hearing that the agency "did have deliberations" about Cadwalader's relationship with other clients, but in the end, "we recognized them as available."
In his written testimony, he outlined Treasury's procedure for handling conflicts. Every bidder "is required to provide a conflict-of-interest mitigation plan and identify actual, potential or apparent organizational and personal conflicts of interest as part of its proposal," he said. "The mitigation plan is reviewed by Treasury and, if necessary and appropriate, the bidder is required to provide additional information and/or a revised conflicts-of-interest mitigation plan."
He said the department also prefers to have contracts with multiple law firms, "so we would have a competitive environment going forward, not locked into a single source for a particular thing, and also the ability to mitigate conflict."
Under the new contract, the 13 firms will compete for specific task orders from Treasury.
NO BILLING RATES
Haynes and Boone bankruptcy and business restructuring practice Chairman Stephen Pezanosky said his firm is "excited and hopeful we'll get our fair share of work" under the contract. And he noted that, in addition to his firm's usual procedures for vetting conflicts, Treasury required "an added layer of disclosure in connection with submitting the bid."
But given the nature of the work, he said, it would be next to impossible for Treasury only to hire firms that have no relationship with any TARP recipients. "Every law firm that's ever represented a bank would have a problem," he said.
As part of the contract, Treasury in a 2009 industry presentation assured firms that hourly billing rates "are considered proprietary and will not be provided. Treasury does not intend to compile or issue an average hourly rate."
Treasury officials pointed to exemptions in the Freedom of Information Act, but did not directly answer why billing rates are revealed in bankruptcy proceedings and when courts award attorney fees, though not here.
It's possible that law firms want their rates hidden not because the government is overpaying them but because they don't want other clients to know how much they've discounted them.
Documents obtained from the Treasury Department in October 2009 under a Freedom of Information Act request by The National Law Journal show that Cadwalader partners normally charge between $625 to $1,050 per hour. But for a contract issued in December 2008 for 500 hours of work advising Treasury on "highly complex bankruptcy issues," the price was $525 an hour.
Cadwalader associates who typically charge $310 to $575 an hour cost the government $287.50 per hour and special counsel cut their rates to $440, down from $590 to $880 per hour.
The only reason Cadwalader's rates were revealed, according to the government, was because the firm "expressly consented" to it. (John Rapisardi, who is co-chairman of Cadwalader's financial restructuring group, said that he did not believe Cadwalader intended to do so.) Rates for other firms working on the project were not disclosed.
Amey of the Project on Government Oversight said billing rates are not usually made public in any kind of commercial contract, though he urged Treasury that more information "could and should be added for transparency.…They seem to be erring on the side of nondisclosure rather than openness."