[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 LEGAL SERVICES CORPORATION: A REVIEW OF LEASING CHOICES AND LANDLORD 
                               RELATIONS

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 28, 2005

                               __________

                           Serial No. 109-145

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov

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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                      CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina         MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona                WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio                   CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin                JERROLD NADLER, New York
J. RANDY FORBES, Virginia
LOUIE GOHMERT, Texas

                  Raymond V. Smietanka, Chief Counsel
                        Susan A. Jensen, Counsel
                  James Daley, Full Committee Counsel
                        Brenda Hankins, Counsel
                   Stephanie Moore, Minority Counsel



















                            C O N T E N T S

                              ----------                              

                             JUNE 28, 2005

                           OPENING STATEMENT

                                                                   Page
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Chairman, Subcommittee on Commercial and 
  Administrative Law.............................................     1
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Ranking Member, Subcommittee 
  on Commercial and Administrative Law...........................     2
The Honorable William D. Delahunt, a Representative in Congress 
  from the State of Massachusetts, and Member, Subcommittee on 
  the Judiciary..................................................     5
The Honorable Louie Gohmert, a Representative in Congress from 
  the State of Texas, and Member, Subcommittee on the Judiciary..     6

                               WITNESSES

Mr. Thomas Smegal, Chairman of the Board, Friends of the Legal 
  Services Corporation
  Oral Testimony.................................................     8
  Prepared Statement.............................................    12
Mr. Frank B. Strickland, Chairman of the Board of Directors, 
  Legal Services Corporation
  Oral Testimony.................................................    14
  Prepared Statement.............................................    15
Mr. R. Kirt West, Inspector General, Legal Services Corporation
  Oral Testimony.................................................    18
  Prepared Statement.............................................    20

                                APPENDIX
               Material Submitted for the Hearing Record

Letter from Thomas F. Smegal, Jr., Chairman, Friends of Legal 
  Services Corporation, dated December 9, 2004, to Laurie 
  Tarantowicz, Office of the Inspector General, Legal Services 
  Corporation....................................................    49
Letter from Laurie Tarantowicz, Assistant IG and Legal Counsel, 
  Legal Services Corporation, Office of Inspector General, dated 
  December 13, 2004, to Thomas F. Smegal, Jr., Chairman, Friends 
  of the Legal Services Corporation..............................    60
Letter from Thomas Smegal, Chairman,, Friends of Legal Services 
  Corporation, dated February 3, 2005, to Kirt West, Office of 
  the Inspector General, Legal Services Corporation..............    61
Letter from Kirt West, Inspector General, Legal Services 
  Corporation, Office of Inspector General, dated February 23, 
  2005, to Thomas F. Smegal, Jr., Chairman, Friends of the Legal 
  Services Corporation...........................................    63
Letter from Thomas F. Smegal, Jr., Chair, Friends of Legal 
  Services Corporation, dated March 2, 2005, to Kirt West, 
  Inspector General, Office of the Inspector General, Legal 
  Services Corporation...........................................    64
Letter from Laurie Tarantowicz, Assistant IG and Legal Counsel, 
  Legal Services Corporation, Office of Inspector General, dated 
  March 7, 2005, to Thomas F. Smegal, Jr., Chairman, Friends of 
  the Legal Services Corporation.................................    68
Response to Post-Hearing Questions from Thomas Smegal, Chairman 
  of the Board, Friends of the Legal Services Corporation........    70
Response to Post-Hearing Questions from Frank B. Strickland, 
  Chairman of the Board of Directors, Legal Services Corporation.    93
Response to Post-Hearing Questions from R. Kirt West, Inspector 
  General, Legal Services Corporation............................   104
Letter from Thomas Smegal, Chairman of the Board, Friends of the 
  Legal Services Corporation, dated October 13, 2005, to the 
  Honorable Melvin L. Watt, Subcommittee on Commercial and 
  Administrative Law, Committee on the Judiciary.................   121















 
 LEGAL SERVICES CORPORATION: A REVIEW OF LEASING CHOICES AND LANDLORD 
                               RELATIONS

                              ----------                              


                         TUESDAY, JUNE 28, 2005

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 12:41 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Chris 
Cannon (Chair of the Subcommittee) presiding.
    Mr. Cannon. Good morning, ladies and gentlemen. This 
hearing of the Subcommittee on Commercial and Administrative 
Law will now come to order.
    I will keep my opening remarks brief, as I believe that the 
testimony and the opportunity to ask questions of our witnesses 
will prove to be more valuable, and I want to leave as much 
time as possible for the Members of the Subcommittee to utilize 
this opportunity.
    We consider today the ``Legal Services Corporation: Leasing 
Choices and Landlord Relations.'' This hearing comes as a 
result of the findings in the report of the Office of the 
Inspector General for LSC, a report which raised several issues 
of serious concern and which was unanimously rejected by the 
LSC board of directors.
    It is important to stress the reason why we are here. 
Congress wanted an independent review of the Executive Branch 
and independent agencies to determine if there is waste, fraud, 
or abuse occurring in Government generally.
    Is this microphone working?
    In order to aid Congress and the agencies for whom they 
work in this endeavor, the Inspector General was created. The 
success that the IGs have had across the spectrum is 
unquestioned. Upon receiving this report, I'm glad to see the 
IG at LSC is trying hard to continue in this tradition.
    The posture which the board and LSC management has adopted 
in this matter is troublesome. Some of the LSC management 
questioned the utility of this hearing, despite the conclusions 
of the IG's report. In view of their reluctance, I'm glad that 
Mr. Strickland, the board chairman, is here today to answer 
questions raised by that report.
    At issue today is how federally appropriated dollars are 
being utilized; whether there is efficient use of those 
dollars; and whether they are being used appropriately. These 
issues become all the more important when we're discussing the 
budget of an organization that is in existence to assure the 
provision of civil representation to those who could otherwise 
not afford it, and whose every inefficiency equates to the loss 
of representation to a potential client in need. These are 
serious questions which I can assure you this Committee and I 
will always have time for.
    I would like to thank each of our witnesses for taking the 
time to inform the Subcommittee of the facts involving this 
arrangement between LSC and Friends of LSC.
    At this time, I'd like to recognize my good friend and 
distinguished Ranking Member, Mr. Watt. I understand there are 
some issues he would like to address at this time. With the 
permission of Mr. Watt and the Subcommittee, I would also like 
to comment on the issues which he presents. I believe them to 
be of great concern to our body and our ability to conduct 
hearings which are conductive and can accomplish that which 
Congress needs to do as this Government's legislative arm. 
Thank you, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. And I want to start by 
thanking the Chairman for convening this oversight hearing of 
the Legal Services Corporation which, in my estimation, is an 
extremely vital part of our legal system.
    Last year, the Legal Services Corporation celebrated its 
30th anniversary. It was created by Congress in 1974 to ensure 
that Americans have access to our justice system regardless of 
their economic means. The Legal Services Corporation has for 
three decades lived up to the high purpose for which it was 
created, providing legal assistance in civil matters to tens of 
millions of low-income Americans who would have otherwise gone 
without counsel.
    Today, we are here to exercise our oversight 
responsibilities with respect to the Legal Services 
Corporation. The briefing materials issued by the Chairman in 
preparation for this hearing identify the purpose of the 
hearing to be, ``to examine the fiscal soundness of a lease 
entered into by Legal Services Corporation, the potentially 
false representations made by Friends of the Legal Services 
Corporation, the relationship key agents played in the 
interactions occurring between the Legal Services Corporation 
and Friends of the Legal Services Corporation, and the overall 
relationship between the Legal Services Corporation and Friends 
of the Legal Services Corporation.'' That's the purpose for 
which this hearing is here.
    Now, today we have three witnesses before us, and we have 
an empty chair in front of which I've taken the liberty of 
putting the name of the fourth witness who we've been trying to 
get to be here. The empty chair was to be occupied by John 
McKay, who is currently the U.S. Attorney for the Western 
District of Washington State. For the second consecutive year, 
the U.S. Department of Justice has thumbed its nose at a 
legitimate request from Congress, and refused to allow Mr. 
McKay to testify about the matters about which he has personal, 
historical, and professional knowledge.
    Before I continue, Mr. Chairman, I do want to acknowledge 
the support and assistance you have provided in attempting to 
secure Mr. McKay's presence. I believe you agree that the 
Department of Justice is undermining the ability of this 
Subcommittee to faithfully execute its oversight function.
    The position of the Justice Department lacks credibility. 
Last year we were told, ``DOJ officials testify on DOJ matters, 
not on matters relating to other entities.'' Similarly, this 
year we were told that, ``Department of Justice witnesses 
testify about Department of Justice issues.''
    Notwithstanding this curious position, on Mr. McKay's DOJ 
website, his bio proudly proclaims, ``Between 1997 and 2001, 
Mr. McKay served as the president of the Legal Services 
Corporation in Washington, D.C. Mr. McKay's tenure at the Legal 
Services Corporation was characterized by a bipartisan approach 
to working with Congress, driven by a deeply-held commitment to 
the principle of equal justice.'' Apparently, that approach has 
not been adopted by Mr. McKay's superiors, who have again 
treated this Subcommittee with disdain.
    Mr. Chairman, I have specifically requested from the 
Department an official copy or reference to the policy that 
prohibits DOJ employees from responding to invitations from 
Congress to testify about issues relevant to their prior 
Government service--all to no avail. Can it be that the DOJ 
requires all of its employees to check their past lives at the 
door, even when the past life was with other entities of, or 
connected to, the Federal Government?
    I have not asked for Mr. McKay's cooperation because I 
think he would make an entertaining witness. The focus of this 
hearing is on the leasing arrangement between the Legal 
Services Corporation and the Friends of the Legal Services 
Corporation, Inc. Mr. McKay is integral to that leasing 
arrangement, which is both complicated in detail and lacks some 
key documentation.
    Mr. McKay's role in the formation of Friends is undisputed. 
Let me quote from some of the submitted testimony. Mr. Smegal, 
Chair of Friends, states this concept of Friends--and I'm 
quoting, ``The concept of a Friends-owned building, leased to 
LSC for its administrative headquarters at a flat, fixed rate, 
was the motivation for the efforts of those including John 
McKay and Congressman John Erlenborn during their terms as 
president of LSC.''
    Mr. Strickland, the Chair of the LSC Board, states, ``This 
transaction was conceived by John McKay, who President Bush 
appointed as, and is now U.S. Attorney for the Western District 
of Washington.'' Even the Inspector General acknowledges Mr. 
McKay's role by reference to the dates of his presidency of 
LSC.
    As one of, if not the principal architect of the lease 
arrangement that we now review, Mr. McKay's presence is vital 
to a complete understanding of LSC's intent in entering into 
this arrangement with the Friends of LSC.
    While it is true that Congressman Erlenborn made many of 
the subsequent decisions necessary to implement the concept, he 
is, unfortunately, ill, and therefore unavailable to testify.
    The present president, Ms. Barnett, has only been over--
been at Legal Services for a little over a year.
    Mr. McKay is the only prior LSC official with knowledge of 
the contemporaneous events and circumstances surrounding the 
lease arrangement that we are now asked to scrutinize so 
closely. Mr. McKay, at least last term, was willing to testify. 
This year, after 20 days of negotiating with the Department of 
Justice commencing on June 8, we were advised only yesterday, 
and I quote from a DOJ e-mail, ``Even if we agree that U.S. 
Attorney McKay should participate in this hearing--which we 
don't--he could not do it anyway, because we were told last 
week that he was away on vacation.''
    It strikes me that that response is arrogant and insulting. 
Either the DOJ is totally inept, or completely contemptuous of 
this Congress.
    This matter was left unresolved last term, Mr. Chairman. 
But given Mr. Erlenborn's condition, it will certainly arise 
again if this Subcommittee is serious about getting to the 
facts about this lease arrangement.
    I will listen to the witnesses who are here today; but 
without Mr. McKay present before us, actively engaged in the 
dynamics of a hearing about his brainchild, the Friends of the 
LSC, and about a period he proudly and clearly--without the 
Department of Justice's objection--boasts on his website about, 
I certainly can't consider this record complete.
    Mr. Chairman, I hope that you will actively join with me to 
pursue this to an appropriate conclusion. I believe that the 
time is now for us to consider issuing a subpoena to either Mr. 
McKay or the appropriate Department of Justice official or 
officials who continue to disregard and disrespect this 
Committee's jurisdiction. And I yield back the balance of my 
time, if I have any.
    Mr. Cannon. Thank you. Let me just add to your comments 
that being on vacation is not an appropriate reason to not be 
here, especially when one wonders whether the vacation was 
planned in advanced, or a matter of convenience.
    The request that we made of Mr. McKay was as you said, a 
legitimate request. And it is not possible for us to faithfully 
fulfill--again, quoting you, Mr. Watt--our oversight 
obligations, if we don't have the ability to bring witnesses 
before us.
    You mentioned that the Department of Justice is 
contemptuous. There may be people there who are contemptuous, 
who need to learn a lesson. And may I just suggest for the 
gentleman that I am willing to consider leaving this hearing 
open at the end of the hearing--recessing, rather than 
adjourning, so that we retain our options as they relate to Mr. 
McKay and the Department of Justice.
    Mr. Watt. If the gentleman would yield on that point?
    Mr. Cannon. Certainly.
    Mr. Watt. I've been told though, that the Chairman of our 
full Committee will not allow that to happen, so I suspect----
    Mr. Cannon. But actually, I'll run it by the Chairman of 
the full Committee just--I think we actually have authority 
here in our Committee to do what we want to do; but he was 
gracious enough to suggest that if we wanted to keep it open, 
he would be fine with that.
    Mr. Watt. Hallelujah.
    Mr. Cannon. The heavens open. I'm only going to introduce 
our board Members and submit their background for the record 
for purposes of conserving time here. I want to just say that 
we're very grateful to have the people who are here, who are 
outstanding individuals with terrific histories.
    We'll begin with Mr. Thomas Smegal, who is the Chairman of 
the Board of Friends of Legal Services Corporation; and then go 
to Mr. Frank Strickland, who is the Chairman of the Board of 
Directors of the Legal Services Corporation; and then finally, 
we'll go to Mr. Kirt West, who is the Inspector General for 
Legal Services Corporation.
    And if you gentlemen will excuse me for not giving your 
whole bios here, I would appreciate that. And let us begin, Mr. 
Smegal----
    Mr. Delahunt. Mr. Chairman, I would like to make a 
statement.
    Mr. Cannon. Oh, the gentleman from Massachusetts. Or would 
anyone else like to make an opening statement at this point?
    [No response.]
    Mr. Delahunt. I'd just like to make an observation.
    Mr. Cannon. The gentleman is recognized for 5 minutes.
    Mr. Delahunt. I'm conflicted about this hearing. First, let 
me say that I think it's important that we conduct aggressive 
oversight. And I want to compliment the Chair of the 
Subcommittee, the Chair of the full Committee, for their work 
with Members on this side, in terms of doing that oversight in 
a way that is in camera, if you will.
    And I see Mr. Daley here. Let me also acknowledge his role 
in terms of conducting oversight into the FBI.
    And I think we need to be much more aggressive in public. 
Yet at the same time, here we are with the LSC again. A year or 
two ago, we were talking about a lease where there was a 
disagreement over--I don't know--$1,000 a month. I'm looking at 
the facts as put--as memorialized in a memorandum.
    And again, I'll just presume that these facts, in arguendo, 
are accurate. Over the life of the lease, they will overpay 1.2 
to 1.9 million. This is according to the Inspector General. And 
I should add that there appears to be a disagreement between 
the board of directors and the IG, and I'm sure that's what 
we'll hear about today.
    It's submitted that there could be saved 680,000, plus a 
440,000 early termination fee, by staying at original location. 
And yet, here we are in Congress, Mr. Chairman, where it was 
just this past week that there was a congressional hearing on 
the development fund for Iraq--the first occasion for an 
oversight hearing--where there are allegations of fraud, waste, 
and abuse of some 9 billion. I guess I'm talking about 
proportionality here. I think it's time that we take on some 
issues that have more significance than the one we are today.
    Having said that, I think we need a sense of proportion. 
And I would like to discuss with you and Mr. Watt and other 
Members, as well as the Chair of the full Committee, some 
areas. And I think we should communicate in letter, requesting 
oversight hearings into areas that I think have vastly more 
significance, with all due respect to Legal Services, because 
Legal Services is an easy target. And again, I think we should 
have a conversation, and then a letter.
    But--my final observation--to think that the Department of 
Justice--and I've met Mr. McKay, and I found him to be an 
individual of integrity, and I think he attempted to do well by 
Legal Services. I'm sure that this disagreement most likely 
will be a matter of opinion, but will establish that people 
were motivated by an effort to do better by Legal Services 
Corporation.
    But at the same time, to think that the Department of 
Justice won't provide Mr. McKay for testimony, that is 
contemptuous. And I would remind the Chair that I served with--
on an ad hoc basis with the Government Reform Committee, and we 
ran into the same resistance there. And Chairman Burton had to 
threaten the White House with a contempt citation before there 
was cooperation. And again, I would suggest that it wasn't a 
full measure of cooperation; not what should be expected to a 
congressional Committee.
    And I would add that Chairman Burton had bipartisan, full 
support of every single Member of that Committee to issue a 
subpoena. So I would just mention that to you, and suggest that 
that's something to consider.
    One further final thought. When we talk about the sunset 
provision in the hearings that the Crime Subcommittee has had--
and I know the Chairman of the Crime Subcommittee is here, Mr. 
Coble; and I see my friend from Texas, Mr. Gohmert--if this 
isn't an example of what myself and others have been saying 
about the need for a sunset provision to ensure that there is 
cooperation and collaboration by the Department of Justice, I 
can't think of a better case.
    With that, I'll yield back.
    Mr. Cannon. If the gentleman would yield just for a moment, 
let me just say that no one has been more careful of the 
prerogatives of Congress than I have, regardless of the 
Administration, Republican or Democrat. And so I agree with the 
gentleman.
    And putting in perspective this hearing--and I think Mr. 
McKay is relevant to that fact--if he were here, that would 
help us solve the problem at one time and move on to what I 
agree with the gentleman are much more important problems. That 
said, I believe that our role here is, when we have a problem 
as has presented itself before us today, that we need to look 
at it. And it will be interesting to hear our witnesses present 
their information and be questioned.
    There is no question but what there's a problem. The 
problem is not in the nature of the 1.2 million or the 1.9 
million dollars for rent. The question is in the nature of the 
relationship between the two organizations, a relationship that 
was created in the context of a rule by OMB that would have 
disallowed Legal Services Corporation from owning its own home 
because of its scoring rules.
    And so I think this is an appropriate time to look 
carefully and intimately into this problem, and then move on. 
But I agree with the gentleman, we have many things that we 
ought to look to. And we in particular ought to be enormously 
concerned about the prerogatives of this body, as opposed to 
those of what every Administration is going to presume, as 
opposed to what is appropriate. So I pledge to the gentleman 
that we'll work together both on our oversight process and as 
to this witness who is not with us today, in particular.
    Are there other Members who would like to make an opening 
statement? Mr. Gohmert? The gentleman is recognized for 5 
minutes.
    Mr. Gohmert. I thank you, Mr. Chairman. And I would like to 
applaud you for calling the hearing. And even though some might 
feel like 1.2 to 1.9 million dollars overpayment over a 10-year 
period is not all that significant, as the old adage goes, you 
know, ``A million here, and a million there, and before long 
you're talking about--''
    Mr. Delahunt. ``A billion.''
    Mr. Gohmert. Well, we're dealing with a million here, so 
before long you're talking real money.
    But it is important. And where we have an institution 
that's supposed to be providing legal advice and helping others 
with legal rights, my goodness, they certainly ought to be able 
to help themselves appropriately, ethically. And I think it's 
certainly worthy of review and oversight, and I applaud the 
Chairman, regardless of what Administration is in the White 
House. And I think it speaks volumes for the Chairman that we'd 
have a hearing of this nature with Republicans in the White 
House. It just shows, if there's some problem, we're not going 
to mask it. Let's get it out there where we can look at it.
    Now, I would like to also hear from Mr. McKay. I couldn't 
agree with my friend from Massachusetts more on that, and with 
Mr. Watt, as well. I think from what I was hearing there's a 
multiple problem, a multi-faceted problem in that he's on 
vacation, as well. But I get the impression that we're going to 
get a chance to hear from Mr. McKay, if enough of us want to 
hear from him, and that's what it sounds like.
    So I'm very interested in getting to the bottom of this, 
especially where we have officers of the bar who are supposed 
to be providing help to other people and yet, if you do what my 
old professor in law school said and apply the smell test, 
there's an odor here that is not good, and we need to get to 
the bottom of it. So I appreciate the chance.
    Mr. Watt. Would the gentleman yield just briefly?
    Mr. Gohmert. Surely.
    Mr. Watt. Just he hasn't been around quite as long as we 
have. But I've been working on getting Mr. McKay here for 2 
years, and I haven't seen him yet. So my patience is running a 
little thin.
    Mr. Gohmert. Well, there is----
    Mr. Cannon. If the gentleman would yield, I've been here 
for the last 2 years, and my patience is--``thin'' is a gentle 
way to say it.
    Mr. Gohmert. Well, I'm newer here, and I have that hope 
that springs eternal in the human breast, I guess. And I 
believe we're going to get him here at an appropriate time, so 
I would encourage the Chairman. And I expect to see that 
happen, or there will be consequences.
    But I appreciate the effort, and I applaud the Chairman's 
effort, and thank you for allowing me to be a part of it.
    Mr. Cannon. The gentleman yields back. Without further 
opening statements, let's turn to the panelists. Mr. Smegal, 
would you please take 5 minutes and explain. I assure you, 
we'll have time after.
    There's a light in front of you illuminating all panelists. 
It stays green for 4 minutes; turns yellow for a minute; and 
then turns red. You don't have to stop in the middle of a 
sentence, but if you could begin to wrap up at that point, we'd 
appreciate it. Thank you.

 TESTIMONY OF THOMAS SMEGAL, CHAIRMAN OF THE BOARD, FRIENDS OF 
                 THE LEGAL SERVICES CORPORATION

    Mr. Smegal. Thank you, Chairman Cannon, Ranking Member 
Watt, and the outpouring of others at this Committee. I 
appreciate the opportunity to address you. My name is Thomas 
Smegal, and I am Chairman of this Board of the Friends of the 
Legal Services Corporation, which is a District of Columbia 
non-profit Corporation recognized by the Internal Revenue 
Service as a public charity under section 501(c)(3) of the 
Internal Revenue Code.
    Congressman Watt, in my past life--you mentioned John 
McKay's past life--in my past life, I was first honored to be 
nominated by President Reagan in 1984 to serve on the Legal 
Services Corporation Board. In 1993, I was again honored by 
President Clinton to serve on this board, and I served over the 
course--each of those nominations, by the way, were confirmed 
unanimously by the United States Senate--and I served for 
approximately 18 years.
    Now, I've made an attempt to balance a Federal budget while 
I've been on the board--while I was on the board. There's an 
attendance fee that members of the board get. Chairman 
Strickland tells me it's now $318. I didn't take that $318 a 
day for the 20 years I was on that board. I worked on my own 
nickel. I represent friends pro bono. The only compensation I 
have ever gotten--and I haven't gotten it yet--is that I 
understand from Mr. Daley that I may be reimbursed for my plane 
fare and hotel room last night, in coming to attend this 
hearing.
    Friends was established in 2001, during my then most recent 
term on the Board of the Legal Services Corporation. Until a 
month ago, when we replaced a pro bono staff person from the 
Corporation, there was no one who was paid to be part of 
Friends of the Legal Services Corporation. Friends has always 
been staffed by non-paid volunteers. Its sole mission has been 
to act in the best interests of the Legal Services Corporation. 
Upon dissolution of Friends, any asset that has accumulated, 
including the building that is the subject of this hearing, 
will revert--must revert--to the Legal Services Corporation.
    The way this process started was when John McKay was 
president--Congressman Watt pointed out that he was president 
of this--the staff president of the Legal Services Corporation, 
as Helaine Barnett is now, from 1997 to, I recall, about June 
of 2001, when he was then being nominated by President Bush to 
be the U.S. Attorney for the Western District of Washington. 
But prior to his departure, in 1999 he and others went to the 
Office of Management and Budget with the idea that had been 
created by some of us who were sitting on the board, had been 
subjected to two leases, payment of two leases, when we became 
board members in 1992--one at 750 Northeast First Street, and 
the other on Virginia Avenue. Our prior board had determined to 
move, expecting property in D.C. in 1991 to be rentable on a 
sublease, and we paid--we paid double rent for 2 years.
    Anyway, the concept here was: Is there some way we can cap 
the rent of the Legal Services Corporation in the District of 
Columbia? We have to be in the District of Columbia. We have to 
have space here. And the concept was: If we owned our own 
building, if the Corporation owned its own building, then maybe 
we'd have some control over what the rent would be.
    In addition, it occurred to us--and at that time, I spent a 
lot of time before various Committees of the House and the 
Senate, defending the Corporation and defending its budget. And 
we got a lot of--there was a lot of concern upon the Hill here 
for the Legal Services Corporation. The other concept was: If 
we had a permanent home, we weren't just wandering around town 
renting, that maybe that would be helpful with you Members of 
Congress to demonstrate that we were a vital component of the 
United States delivery system of legal services.
    So John McKay and others went to OMB and said, ``Here's 
what we want to do. We want to buy a building.'' And OMB said, 
``Well, you can do that, but if you do that, we're going to 
score it. We're going to take whatever that building costs off 
the top of your appropriation in whatever year you do it.'' And 
John McKay and others said, ``Geez, that doesn't sound like 
something that we want to do, then. Is there any alternative?'' 
And OMB said, ``Yes, there is an alternative. You can set up a 
501(c)(3) corporation which will own the building, and you can 
rent from that corporation.''
    And there happens to be--and I think Mr. Strickland will 
share with you several examples of that, that existed before. 
The Navy has a setup like that; Friends of the Zoo here has a 
similar situation; and there are a couple of others that Mr. 
Strickland will get to.
    In any event, that was the first conversation. There was no 
Friends of the Legal Services Corporation at that point. The 
next meeting--and I was part of that meeting, and went to the 
White House. And we talked to Counsel to the President, Charles 
Ruff, and we explained to him what we had hoped to do, if we 
could accomplish this. And the Clinton White House, through 
Charles Ruff, said, ``This is a great idea.''
    The process kept going. And incidentally, I'm not here to 
defend the Justice Department. I'm not here to defend John 
McKay. But let me at least give you a little insight into what 
was going on. If you want someone who was there all the time 
and can answer all the questions, I'm here.
    The original Gates offer of $4 million to buy a building 
occurred in the year 2001--19--no, 2001, when John McKay was, 
in fact, staff president. The problem with that original grant 
was that it would expire on December 31, 2001. The problem was 
at that point we had an opportunity. We hoped to buy a vacant 
lot up here, which fell through, and December 31 came and went.
    Now, John McKay had left the Corporation in June of 2001. 
He hadn't been there for 6 months. So when the contact is again 
made with Bill Gates, Sr., I make the contact. I call Bill 
Gates, Sr. I say, ``We couldn't make the deal by the end of 
December 31, 2001. Can you extend the term in which we could 
have this grant?'' And Bill Gates, Sr., said, ``Well, I'll 
check with my son. I'll call you back.'' A few months later, I 
got a call from Bill Gates, Sr., saying, ``I'm going to make 
your day, Tom. My son says we'll give you the money. You can 
have additional time in which to find a building for the Legal 
Services Corporation.''
    Now, we're now in 2002, and we've got a building in sight. 
And the significance of the building--which, by the way, has to 
be a Class ``B'' building, because you can't be a Class ``A'' 
building unless you have 100,000 square feet of space. The 
building has 65,000 square feet. As the Inspector General's 
appraiser points out, it's 46 percent empty. It's the old adage 
of, ``Is the glass half-full or half-empty?'' To us, that's the 
good news; because we're looking for space to put the Legal 
Services Corporation in, in June of 2003, when they can get out 
of the lease at 750 Northeast First Street.
    We come to Congress; we come to this Committee; we come to 
the Judiciary Committee on April 23, 2002. There's no lease. 
There is no deal. We've got a hold on the building. We're 
trying to get it. We come up here. And John Erlenborn, Vic 
Fortuno, Lynn Bulan, Mauricio Vivero, and the person who's 
trying to put this deal together for us, a financial person, 
Don Carpenter--the five of them come up here. They meet with 
Patty DeMarco and J. Keith Ausbrook, who I understand then to 
have been the chief counsels for oversight investigation for 
this Committee. That was April 23, 2002, at 2 p.m.
    Now, this Committee signed off on the deal, and it was 
structured at that point. We understood what we were going to 
do. And then, we went to the only bank that would give us any 
money. We've got $4 million of Gates' money, maybe, and we have 
nothing else.
    Mr. Cannon. Mr. Smegal, I apologize for cutting you off, 
but we have--I can assure you that under questioning time 
you'll have the opportunity to finish----
    Mr. Smegal. Well----
    Mr. Watt. Can I just yield him my 5 minutes, so we can get 
a clear picture of how this occurred?
    Mr. Cannon. Yes. Absolutely.
    Mr. Smegal. Thank you.
    Mr. Cannon. The gentleman is recognized for an additional 5 
minutes.
    Mr. Smegal. Well, BankAmerica is very skeptical about this 
whole deal, and they say, ``Well, geez, we're going to have to 
give you $15.5 million. We want a million and a half of the 
Gates money set in a separate account as a reserve, in case you 
lose your tenant. We want a tenant in that building that will 
yield $1.7 million a year, so that we know you can service the 
debt, the 15-point-million-dollar debt that you're going to 
incur. And as long as you can guarantee us that, then we're 
willing to give you the opportunity to have this money and go 
and try and make your deal with the bank.''
    They had an appraiser. The appraiser is in here. You've got 
the appraiser's report that the BankAmerica--someone they 
trust; someone they went to; someone they go to a lot. And they 
said, ``What's this building worth?'' This individual said, 
``This building is worth $60.2 million, once they put some 
tenant improvements in there.'' And the concept was up to $2 
million in tenant improvements in this 54 percent of this 
vacant building that the Corporation is going to occupy in June 
of 2003.
    The bank says, ``We'll make the deal. You get $38 a square 
foot, flat, because that's what we need--'' They didn't say 
that. ``That's what we need to carry the debt. That's what 
you're going to need to carry the debt in addition to the 
million and a half we've asked you to set aside.''
    So we go to the Corporation. John McKay is a year away from 
what's going on here now. He left in June of 2001. This is now 
June of 2002. The bank gets their appraisal. The banks says, 
``Okay, we've got a deal.'' And I, as part of the Legal 
Services Corporation--I'm serving on the board--and the rest of 
us who are involved in this--there's nobody else here. It's 
just us. There's no conflict of interest. There's nobody. It's 
the Legal Services Corporation, trying to save the Government 
some money; trying to create a permanent home.
    So we create a lease. And the lease is for $38 a square 
foot, flat, forever. No pass-throughs; no increases; nothing. 
So what else did we do? There's parking spaces in the building. 
They're going for $175 to $200 a month in 2002. We say, ``A 
hundred bucks a month, forever.'' What else? No pass-throughs, 
no tax increases; $38.
    We have a meeting of the board on February 6, 2002. You 
have the minutes. Bill McAlpin, one of my fellow board 
members--appointed to the Legal Services Corporation twice--
says to me, ``Tom, you know, when we came in the office in 
1993, we were saddled with two leases, only one of which we 
could occupy. And you know, that was troublesome.'' And that 
was in response to the question he had asked me, ``How long is 
the lease going to be, Tom?'' And I said, ``Bill, how long do 
you want the lease to be?''
    The tax-free Government bonds that I persuaded the District 
of Columbia to provide to us, in lieu of the $15.5 million in 
loan from the Bank of America, is a 25-year bond issue. Twenty-
five years sounds like an appropriate term.
    The only reason for having the rent level at $38 a square 
foot, the million-seven, is to service the debt. We have other 
tenants in the building from which we obtain sufficient funding 
to accomplish the rest of the management of the building.
    And incidentally, there was some question raised somewhere 
along the way as to, ``Gee, the other tenants are paying much 
less. And how come the Corporation is having to pay this 
incredible amount?'' The other tenant on the fourth floor, 
Penzance, renewed their lease. We inherited a lot of leases in 
2002, in the part of the 46 percent of the building that was 
occupied.
    Penzance recently executed a lease at $31 a square foot. 
They pay $175 a month for eight parking places; and they have 
pass-throughs and bumps every year; and their lease is going to 
end in 2009. The Corporation's current lease is going to end in 
2013.
    Frank Strickland and his board asked for an additional 
lease extension--we're now past the owning two buildings, or 
renting two buildings--a number of months ago. And we started 
to prepare that. And the Inspector General decided that there 
was something wrong with a lease extension, so we have put that 
aside. But certainly, at some point we're going to pick that 
up.
    And incidentally, the other thing that seems to get 
overlooked in this process, the rest of our tenants are now 
paying for the space on what is called a BOMA measurement 
standard. The Corporation is paying on the D.C. standard 
process. And when you measure with the D.C. standard process, 
you now get 45,000 feet. If you measure with BOMA, you'd get 
48,000-something. The rest of our tenants are paying more rent, 
based upon the way you measure the building. BOMA is the way 
you measure buildings in this city presently. The Corporation 
has the old standard; much less space they're paying for.
    Your Honor, I appreciate--or Congressman, I appreciate this 
opportunity. And I expect to hear some questions.
    Mr. Cannon. I thought you were talking to Mr. Watt there 
for a moment. [Laughter.]
    Who is certainly honorable.
    Mr. Smegal. I'm sorry, I do have one other point that I 
want to make right now. Somebody referred--I think it may have 
been you, Congressman Gohmert--to this 1.3 to 1.8 million of 
overpayment over a 10-year period. And it was Adlai Stevenson 
said, ``A million here and a million there and sometimes--
sooner or later, you have a lot of money.''
    The cover letter that the appraiser for Mr. West provided 
to him in his January 25 report contains the following 
statement, ``While the lease was--'' And he's evaluating this 
in 2001-2002. ``While this lease was under negotiation as of 
our retrospective value date, it had not been signed. And at 
your request, our evaluation does not include the terms of this 
lease. Our valuation is based on the terms of the seven 
existing leases that Friends inherited, encumbering 46 percent 
of the building, with 54 percent vacant; with the balance of 
the space being vacant on a current basis.'' Thank you.
    [The prepared statement of Mr. Smegal follows:]
                  Prepared Statement of Thomas Smegal
    Chairman Cannon, Ranking Member Watt and Members of the 
Subcommittee:
    Thank you for inviting me to speak at this hearing. My name is 
Thomas Smegal and I am the Chairman of the Board of Friends of the 
Legal Services Corporation (``Friends''), a District of Columbia non-
profit corporation recognized by the Internal Revenue Service as a 
public charity under Section 501(c)(3) of the Internal Revenue Code.
    In 1984 I was nominated to the Board of the Legal Services 
Corporation (``Board'') by President Reagan. In 1993 I was again 
nominated to the Board by President Clinton. Both nominations received 
unanimous confirmation by the United States Senate and resulted in my 
serving on the Board for parts of 18 years until 2003.
    Friends was established in 2001 during my most recent term on the 
Board and at the direction of the Board. Until a month ago when Friends 
hired a part-time executive director, Friends has always been staffed 
by non-paid volunteers, including myself. Its sole mission has been to 
act in the best interests of the Legal Services Corporation (``LSC''). 
Upon dissolution of Friends, any assets it has accumulated, including 
the Building that is the subject of this hearing, must revert to the 
LSC.
    At the outset, let me suggest that, as the Inspector General 
(``IG'') himself has acknowledged, the discussions we are having today 
are premature. The IG has stated that his evaluation of the 3333 K 
Street Lease is not complete. In effect, what we are discussing is an 
interim report by the IG that says ``LSC is paying more for this car 
than the price of other cars available at the car dealer.'' What this 
statement omits is any discussion about whether the car being bought is 
a used Saturn with 100,000 miles on it or a brand new Buick.
    In its simplest terms, the IG is saying ``LSC is paying $38 per 
square foot in rent, and that seems too high to me.'' What that comment 
ignores--by the IG's own admission--is the rest of the terms of both 
the Lease itself and the relationship between Friends and LSC. Thus, I 
would rather that the Subcommittee had the benefit of the full 
analysis--which the IG has suggested he is undertaking--as that full 
analysis will show this transaction to have been extremely favorable to 
both LSC and the Federal Government. However, as we are here today, let 
me point out the main features of the Lease that the IG has yet to 
consider and which, I am confident, will obligate him to render a 
favorable final report when it is written.
    First, the Lease at a fixed $38 per square foot is a long-term 
lease. All other leases in the building are for 5 years or less, as 
opposed to the 10-year lease Friends has with LSC. It is customary in 
the District of Columbia (``DC'') for long-term leases to have 
different terms than short-term leases. This long-term fixed rate 
Lease, with the resulting security of tenancy, was one of the primary 
goals the Board was seeking in looking for new space to occupy when the 
existing LSC lease on Capitol Hill expired in 2003.
    Second, this long-term Lease does not include any rent increases. A 
typical long-term lease would include both ``bumps'' every 5 years and 
CPI increases in each year. As the IG's appraisers acknowledge, even if 
there were a slightly higher initial rental rate fixed for 10 years, 
versus a slightly lower initial rental rate that rose over the term of 
a lease, the actual result would be a net savings to LSC. Further, the 
IG has yet to consider the added value throughout the Lease term of 
providing 52 below-market parking privileges to LSC.
    Third, the Lease is a ``full service'' lease, which transfers the 
risk of rising real estate taxes, utilities and other operating 
expenses to the landlord. With oil prices spiraling, you can easily see 
that the structure of this Lease is highly favorable to LSC.
    Finally, and perhaps more importantly, the IG has not evaluated the 
unique relationship between Friends and LSC. As I noted in the 
beginning of this statement, Friends was created by LSC and its sole 
mission is to support LSC. Once the mortgage on the Building is paid, 
Friends has several options. Friends can either dissolve and turn the 
Building over to LSC, rent the Building to third parties and turn over 
the profits to LSC, or relet the Building to LSC at terms even more 
favorable to LSC than those provided by the present ten-year Lease.
    The concept of a Friends' owned building, leased to LSC for its 
administrative headquarters at a flat, fixed rate--to cap the LSC 
annual rent appropriation requested from Congress--was the motivation 
for the efforts of those including John McKay and Congressman John 
Erlenborn during their terms as President of LSC.
    As the attached chart shows, in 1992, the per square foot price of 
LSC's space was $28 per square foot (DC standard). By 2001, the year 
Friends was incorporated, that price had risen to $36 per square foot. 
One of the IG's appraisers projected that LSC's cost was going to rise 
to nearly $49 per square foot by 2012, and the Board actually saw it 
going higher than that. By contrast, LSC's current cost per square 
foot, fixed at $38 gross through 2013, is actually less than $37 net 
and declining annually when the increasing value of the parking subsidy 
is thrown in. Thus, as the attached chart clearly illustrates, bringing 
an end to soaring occupancy costs had already been one of the 
significant results of the Lease.
    As the Board informed the IG in its ``Response'' of April 20, 2005, 
the creation of Friends and acquisition of 3333 K Street were vetted 
with and approved by his predecessor, OMB and both the Senate and House 
Appropriations Committees. The structure of Friends as a 501(c)(3) 
corporation was designed by the Board, based on advice of counsel, to 
satisfy OMB and CBO budgeting rules, and provide LSC with a mechanism 
to fix, and then to reduce, and finally to eliminate the occupancy cost 
component of its budget. Through the acquisition of 3333 K Street by 
Friends, LSC will be able to devote more of its precious resources--the 
taxpayers' dollars--to its vital mission of delivering legal services 
to indigents.
    We are proud of the creativity that went into developing Friends as 
an opportunity to save taxpayers' dollars, made possible by the 
generous contribution of the Melinda and Bill Gates Foundation in 
supporting the LSC mission through the vehicle of Friends.
    Thank you for your time. I'll be happy to respond to any questions.

    Mr. Cannon. Thank you, Mr. Smegal.
    Mr. Strickland, you're recognized for 5 minutes.
    Pardon me. Let me point out, staff has just pointed out 
that we did not swear witnesses in as we typically do. That's 
fine. Let me just say that if you swear in, then you're subject 
to perjury. If you just talk to Congress and say something that 
would otherwise be perjury, it is telling--it's not being 
truthful with Congress; which has exactly the same penalties.
    So I just want to inform you that, in my view, a swearing 
in is redundant. And given the lawyers we're dealing with, I 
think you understand the implications of that. And I apologize 
for that diversion.
    Mr. Strickland, we're looking forward to hearing from you 
for 5 minutes.

  TESTIMONY OF FRANK B. STRICKLAND, CHAIRMAN OF THE BOARD OF 
             DIRECTORS, LEGAL SERVICES CORPORATION

    Mr. Strickland. Thank you. Chairman Cannon and Mr. Watt, 
and other Members of the Committee, thank you for inviting me 
to be here today. I'm Frank Strickland, and this is my third 
year as Chairman of the Board of Directors of the Legal 
Services Corporation.
    I will add, also, that when our board members were 
nominated and confirmed in 2003, it was by unanimous vote of 
the Senate.
    You already have my prepared remarks, which I understand 
will be entered into the record, so let me just make a few 
brief comments.
    The transaction we're talking about today is at 3333 K 
Street. It was conceived by our predecessor board, not the 
current board. We have simply inherited what was delivered to 
us. So the question would be: Was it a good deal?
    We think it was. And we've said so in our replies to the 
Inspector General's report. The evidence to us is clear that 
what the prior board did was a far better alternative than the 
continued reliance on the Washington, D.C., commercial real 
estate market. And the market today, as we understand it, is 
that non-profit organizations are leaving the District, because 
they can't afford to pay the rent. LSC doesn't have that 
option. We're required by law to be located in D.C.
    Now, another question might be whether everything that was 
done in connection with the lease transaction was done 
perfectly. I can't say that it was. But we do believe that our 
predecessors had a good idea, and that they implemented it 
successfully.
    Was the transaction transparent? We think it was. You've 
just heard Mr. Smegal explain all the bases he touched, and 
others in LSC touched, when the transaction was being 
contemplated.
    As far as we can tell, Congressman Erlenborn, who was then 
the president of LSC, and the LSC staff, briefed all 
appropriate parties, including this Committee and the Office of 
Inspector General.
    We've been told that because the Inspector General's report 
did not contain any recommendations, that our board actually 
did not have to respond. But when we got the report and 
reviewed it, we concluded that we had to reply to it. We 
disagreed with the methodology in the report, the conclusions 
reached in the report, and the characterization of the 
transaction.
    From the perspective of our board, dealing with a report 
that's critical of our organization, even though we didn't do 
the lease transaction, that's very distracting to our board and 
to our management from doing what we should be doing; and 
that's trying to run an efficient and effective nationwide 
program to provide legal assistance to the poor.
    That's our mission, and we shouldn't forget it. We know 
that in the past there have been disagreements between LSC and 
the Congress on exactly how our mission should be undertaken. 
Since I've been the Chairman, our instructions to the staff 
have been clear. We're going to run an efficient, high-quality 
legal services program exactly in the manner that Congress 
intends that we run it.
    Our predecessors, we believe, were correct in trying to get 
LSC out of the D.C. office market. They were looking for a way 
to cap occupancy costs. They were creative, and they put 
together a deal that was far better than the status quo at the 
time.
    And as Mr. Smegal said, in doing so, they persuaded the 
Gates Foundation to donate $4 million, specifically for the 
purpose of this building. They cleared it with both the Clinton 
and Bush administrations and briefed the House and the Senate 
Appropriations Committees, as well as this Committee.
    Mr. Chairman, that concludes my short opening statement.
    [The prepared statement of Mr. Strickland follows:]
               Prepared Statement of Frank B. Strickland
    Mr. Chairman, Mr. Watt, and Members of the Subcommittee, thank you 
for the opportunity today to testify with regard to the current leasing 
arrangement the Legal Services Corporation has for its headquarters at 
3333 K Street, Northwest.
    When I and seven of my fellow members of the LSC Board of Directors 
had the honor of being nominated by President Bush and unanimously 
confirmed by the Senate in 2003, our plan was to oversee the delivery 
of high quality and efficient legal services to the poor throughout 
America, and to faithfully enforce the intent of Congress as expressed 
by the various laws governing both LSC and our local legal services 
programs. I believe we are doing that.
    One of our first tasks was to fill the two positions at LSC that 
report directly to the Board. The President, former Congressman John 
Erlenborn, a distinguished member of this body for twenty years, 
clearly indicated his desire to retire and we had an acting Inspector 
General. The Board brought on Helaine Barnett as President in January 
2004 and Kirt West as Inspector General last September.
    In February, the Inspector General delivered a draft report 
prepared by his Office regarding the lease of 3333 K Street. Because 
that report made no recommendations and did not question the conduct of 
either the current Board or President, the Board had no legal or 
substantive obligation to respond, a fact the Inspector General pointed 
out to us.
    However, because the report stated that LSC was overpaying rent by 
as much as $1.9 million over 10 years compared to fair market value, 
and paying more than if it had remained in its previous offices, we 
decided to examine the report carefully. Moreover, because of vague 
allusions to conflict of interest and breaches of fiduciary duty, our 
President in consultation with me decided to appoint a new senior staff 
person, who had not been present during the transaction, to help the 
Board review the matter.
    The Board concluded its review in the third week of March. We voted 
unanimously that, based on the information provided to us by the OIG, 
we could not conclude that the lease transaction was ``inappropriate or 
fiscally unsound.'' In short, we rejected the draft OIG report. The 
final OIG report, basically unmodified from the draft, and the Board 
response were transmitted to Congress on April 22.
    Let me quickly highlight the key findings of the Board. First, we 
had serious problems with the methodology employed by the two 
appraisers hired by the OIG as well as the manner in which the OIG 
analyzed those appraisals. The appraisers, on the apparent instructions 
of the OIG, used a static, retrospective analysis based solely on the 
state of the commercial real estate market in July 2002. It seems 
obvious, in reviewing the judgment of the prior Board and Congressman 
Erlenborn, the evaluation should be based on expectations of the 
commercial market from June 2003 through May 2013 (the life of the 
lease) and should take into account events that have transpired since 
mid-2002. In this regard, one of the OIG's appraisers noted that the 
retrospective analysis they employed is normally used for estate 
valuations, tax assessments, and condemnations. That kind of analysis 
is irrelevant to evaluating the merits of LSC's current lease.
    Second, in comparing LSC's costs to those at its prior offices, the 
OIG ignored the fact that the prior Board and management had concluded 
that LSC needed additional space, and in fact acquired 5,000 additional 
square feet and 27 additional parking spaces as a result of the move. 
The OIG did not take into account what it would have cost LSC to get 
5,000 additional square feet in its previous office building on First 
Street, even if such space was available. The OIG also ignored the fact 
that LSC's lease was expiring in 2007 and that LSC had would have had 
to renegotiate with its then-existing landlord or find new space in 
what is clearly now a very hot D.C. commercial real estate market. In 
fact, as of this moment, LSC is paying less, when taking into account 
the additional space and parking spots, than it would have been paying 
had it not moved, a point one of the OIG's appraisers acknowledged.
    Third, with respect to the allegation that LSC is overpaying 
compared to fair market value, the Board concluded that the analysis 
employed by the OIG failed to take into account several key factors. I 
will not repeat all of them here; they are in our response. The key one 
is that LSC received tenant improvements of up to $2 million--well over 
what a typical market transaction would have provided for. Just like a 
car buyer gets a different price depending on whether he puts up cash 
or insists the dealer provide him with a no interest loan, when a 
tenant receives above market concessions from the landlord, they have 
to be paid for and that will reflect itself in the lease cost. The 
difference between tenant concessions assumed by one of the OIG's 
appraisers in estimating fair market rent and what LSC actually 
received is $1.6 million--$1.3 million in tenant improvements and at 
least $300,000 in parking concessions--over 80 percent of the alleged 
$1.9 million over-payment that the OIG calculated using that 
appraiser's assumptions. Even accepting some questionable assumptions 
on the part of the OIG and its appraisers, we are left with an alleged 
overpayment over ten years of $300,000 when the tenant concessions are 
accurately counted. That amounts to 1.7 percent of the total lease 
payments to be made under the contract.
    A week after the OIG report was submitted to Congress, I was 
provided a copy of the contemporary appraisal commissioned by the Bank 
of America in 2002 before it agreed to finance the transaction. That 
appraisal concluded, taking into account the value of the above market 
build-out, that the proposed LSC rent was within the range of fair 
market value. The Board was not made aware of the appraisal during its 
consideration of the OIG draft report, although the OIG had the 
appraisal, and the Board subsequently voted unanimously that we should 
have had it and that it confirmed our conclusion. Accordingly, we 
believe the OIG failed to make his case and we consider this matter 
closed.
    Finally, I would like to make a few observations. First, I will not 
try to assert that everything done by LSC from 2001 to 2003 was 
perfect. However, the OIG's suggestion that LSC overpaid by $1.9 
million over ten years or somehow failed to adequately serve as a 
reasonable, fiscally prudent steward of public funds is incorrect. I 
would note that the then-Inspector General was at the time represented 
at virtually every meeting at which the lease transaction was discussed 
and was fully aware of all the details of the transaction, even 
requesting and receiving a private briefing. It is my understanding 
that no objections were raised with the previous Board or management by 
the previous Inspector General or the OIG.
    Second, it is indisputable that this transaction will ultimately 
save LSC money. The only question is how much and beginning when. The 
OIG pegged the beginning of savings to be in the last couple of years 
of LSC's ten year lease with total savings only to be realized if there 
is an extension. Based on the evidence provided to the Board, it 
appears more likely that LSC is beginning to see savings now and will 
show significant savings during the current lease term. There is no 
question that, during a second ten year term and beyond, savings will 
be substantial compared to the alternative of continuing to rent 
commercial office space.
    Third, there has been no evaluation by the OIG of the substantial 
benefits to LSC from the transaction. These include efficiencies from 
LSC's possession of space built to its needs and specifications; 
stabilizing LSC's cost of space and removing its dependence on the D.C. 
commercial office market; and the long-term advantage of having a 
nonprofit landlord which was specifically created for, and whose 
charter provides as its purpose, to benefit LSC and support its mission 
of delivering legal services to the poor. No other landlord fits this 
description.
    This transaction was conceived by John McKay, who President Bush 
appointed as and is now U.S. Attorney for the Western District of 
Washington. The K Street building was found, the details negotiated, 
and the contracts executed under the direction of former Congressman 
Erlenborn, with every key decision approved by my predecessors on the 
Board. I cannot say everything was done perfectly; I was not here at 
the time. I am confident, however, that the prior LSC Board acted 
honorably and properly every step of the way and that, if any mistakes 
were made, they were miniscule compared to the overall long-term gains 
that are and will be realized by LSC. The current Board has reviewed 
the reports of the Inspector General suggesting that our predecessors, 
previous management and the former Inspector General all erred in 
approving this transaction and we unanimously rejected that finding.

    Mr. Smegal. Would you mind referring to the graph, please?
    Mr. Strickland. I would want to refer--you mean to the 
graph?
    Mr. Smegal. Yes, I'm sorry, Your Honor----
    Mr. Strickland. I'm sorry. Mr. Smegal reminded me, I want 
to refer to the graph that's over here on the chart. And I hope 
that we've provided--we're now providing copies of the graphs 
so that you can read it up close.
    Mr. Cannon. Without objection, the graph will be made part 
of the hearing record.
    [The information referred to follows:]
    




    
    Mr. Strickland. I'd be glad to discuss that, or Mr. Smegal 
can discuss that graph at the appropriate time, whether that's 
now or later, Mr. Chairman. But except for the presentation of 
the graph, that would conclude my brief opening. And I'll be 
glad to answer questions at the appropriate time.
    Mr. Cannon. Thank you, Mr. Strickland.
    Mr. West, you're recognized for 5 minutes.

         TESTIMONY OF R. KIRT WEST, INSPECTOR GENERAL, 
                   LEGAL SERVICES CORPORATION

    Mr. West. Good afternoon, Mr. Chairman, Mr. Watt, and 
Members of the Subcommittee. My name is Kirt West. I've been 
the Inspector General of the Legal Services Corporation since 
September 1, 2004.
    For nearly 20 years, I've served in various legal and 
executive capacities in the inspector general community. I 
appreciate this, my first opportunity to discuss the work of 
the LSC OIG with the Subcommittee. A more exhaustive review 
will be included in my written statement.
    Before discussing the leasing arrangement, I would like to 
begin briefly by discussing my role as IG. Like all IGs, my 
mission is to prevent and detect waste, fraud, and abuse, and 
to promote efficiency and effectiveness. IG quality standards 
require me to adhere to the highest ethical principles, and to 
conduct my work with integrity.
    Ultimately, my job is to write independent and objective 
information to the LSC board, the Congress, and the public, as 
to whether federally-appropriated tax dollars are being spent 
wisely and prudently in carrying out the LSC mission.
    This past October, in response to inquiries from the 
Subcommittee, I decided to look into LSC's 2003 move from 
Capitol Hill to Georgetown. Staff from OIG and LSC management 
had also told me in confidence that they believed that LSC was 
overpaying for its Georgetown location. At that time, I was 
also aware that LSC was negotiating a lease extension, so I 
wanted to provide prompt, independent, and objective 
information about rent to assist the board in its negotiations.
    Because we are not commercial real estate experts, I hired 
two experienced commercial real estate appraisal firms to 
determine whether LSC was paying fair-market rent when it 
signed a lease in July of 2002, as well as in November in 2004, 
in case there had been significant changes in the Georgetown 
market.
    The appraisers followed their professional standards and 
used their independent judgment. No one from my office directed 
the appraisers' work or suggested any particular outcome. Both 
appraisers independently concluded that LSC is paying higher 
than market rent for its Georgetown space. This was the case in 
July 2002, and is still the case.
    Based on these reports, the OIG calculated LSC would 
overpay the landlord between 1.23 million and 1.89 million over 
the life of the 10-year lease. This overpayment occurs in the 
first 7 years of the lease. For example, over the next 12 
months, LSC will overpay at least $300,000.
    In addition to these appraisals, Mr. Chairman, the OIG has 
overwhelming objective evidence that LSC is overpaying rent. 
For instance, all other tenants in the building are paying 
below market rent. Even the landlord's own rental agent states 
that LSC's first-floor space would only rent for 24 to 26 
dollars per square foot; far below what LSC is paying.
    The OIG also calculated that LSC could have saved at least 
$1.1 million by remaining at its Class ``A'' location on 
Capitol Hill, next to Union Station, instead of moving to its 
Class ``B'' building in Georgetown.
    Finally, LSC may be due a rent credit of more than 
$100,000. LSC was charged for 2,000 square feet of space that 
it did not occupy for 18 months.
    I'd like to mention a few of the many other observations 
that have come from this review. Although this building is 
commonly referred to as LSC's permanent home--or, as Mr. Smegal 
suggested, forever--LSC has a 10-year lease, and the OIG is not 
aware of any legally binding agreement allowing LSC to stay 
permanently or to take ownership from Friends.
    LSC management has not provided the OIG with any documents 
that support the need for LSC to have a 45,000-square-foot 
headquarters out of a 65,000-square-foot building--which I 
think is more like two-thirds than 54 percent.
    LSC did not have records tracking how much of its $2 
million tenant improvement allowance was spent.
    Although LSC officials created the Friends of Legal 
Services Corporation, LSC no longer controls Friends.
    Friends recently made an unrestricted contribution to the 
National Legal Aid and Defenders Association, that LSC itself 
could not make directly.
    Thank you, Mr. Chairman, for this opportunity to testify 
before the Subcommittee. I am proud of the work being done by 
the staff of the LSC OIG. We look forward to continuing to 
conduct independent and objective reviews, so that the LSC 
Board of Directors, the Congress, and ultimately the American 
taxpayers can be assured that federally-appropriated tax 
dollars are being spent wisely and prudently to provide legal 
services to those in need.
    [The prepared statement of Mr. West follows:]
                   Prepared Statement of R. Kirt West






    Mr. Cannon. You obviously practiced your time. That was 
within the 5 minutes. Thank you. Elegantly done.
    The Chair recognizes himself for 5 minutes. That's 
something I don't normally do. I usually go last on the 
questioning, but the situation really begs for my discussion 
early, I think.
    I was surprised, Mr. Strickland, on seeing this chart on 
the board when I walked in, because we talked about this chart 
last night in my office. And I thought I made some compelling 
points on that chart. Do you recall those points?
    Mr. Strickland. As I recall our discussion, the chart 
demonstrates the cost of continuing at 750 First Street, versus 
the flat rate at 3333 K Street. Mr. Smegal wanted to make use 
of the chart, to make some of his points, and that's the reason 
why we brought it today.
    Mr. Smegal. Congressman, yes, it's part of my presentation. 
But I ran out of even Congressman Watt's time, so I went on.
    Mr. Cannon. Thank you. We'll come back to it. But let me 
just tell you why I think the chart is a problem here. The pink 
dots represent a possible future scenario that you can't know 
until you get to the signature on a new lease. And while that--
even if it were true and not a fantasy, not a future 
projection, it totally misses the underlying point; which is 
looking backwards to the time when Friends of Legal Services 
was created.
    Friends of Legal Services was created to do something that 
Legal Services itself could not do directly; that is, get 
around the OMB A-11 regulation that dealt with capitalized 
loans. And so we have this. What is really deeply concerning me 
here about this discussion is that there is--and the 
presentation so far--is that you all are acting as lawyers and 
advocates; instead of acting as board members and considering 
the policy implications of what's going on.
    And as a result of that, the advocacy that you're 
presenting just begs for challenge. And in fact, if you will 
look at the issues, there are many points that can be 
challenged. And what's not happening here is you're not saying, 
``We've got a problem. We've got a building. We have got a 
conflict of interest. We have two groups.''
    And I've read Mr. West's report very carefully. And Mr. 
Strickland, I think you were a little bit upset yesterday in my 
office about the statement in Mr. West's report that referred 
to if there were the Federal Government standards and ethics 
applicable to this agency there may be even a crime. That was 
outrageous, given the stature of the board members--which I 
agree is a pretty remarkable set of people.
    The point is not that a crime was committed. The point is 
that there is an inherent context of conflict which you're not 
dealing with, and which leaves your opening statements subject 
to, I think, some serious questioning that puts your integrity 
on the line; instead of the problem with the decision.
    And the decision--I don't want to go back and say, ``Oh, 
you guys did it wrong, looking backwards.'' But you as a 
board--representing two boards, President of Legal Services, 
and LSC--ought to be looking back and saying, ``Hey, wait a 
minute. What did we do?''
    So for instance, you have said, Mr. Smegal, in your opening 
statement that the issue was vetted--not a legal term, but it 
is in fact a term of art. And that's important, because you 
said it's vetted with OMB and both the Senate and the House 
Appropriations Committees. And then you said here a moment ago 
that it was run by--the agreement was run by counsel to this 
Committee. Now, when you say ``vetted,'' what do you mean, Mr. 
Smegal?
    Mr. Smegal. Well, I'm sorry, Congressman, if I used a term 
that is too legal. But what I mean by that is that this 
Committee, April 23, 2002, 2 p.m. in the afternoon, its staff 
asked to be briefed on what it was the Corporation was 
intending to do. John Erlenborn, 20 years one of the members of 
your body----
    Mr. Cannon. Did you present to the staff the details of the 
lease?
    Mr. Smegal. That was the purpose of the meeting, ``Here's 
what we're going to do.'' Don Carpenter had it all laid out. 
That was there for that purpose. They were there for that 
purpose. The Committee members--Patty DeMarco and J. Keith 
Ausbrook--were there for the purpose of asking those questions.
    Mr. Cannon. And did they agree with your proposed----
    Mr. Smegal. They agreed that the Corporation, through the 
vehicle of Friends, could proceed with the purpose of a 
building, if we could find one. We had one in sight. As I've 
told you, we had this----
    Mr. Cannon. Let me read Mr. Ausbrook's recollection of that 
meeting.
    Mr. Smegal. Okay.
    Mr. Cannon. Thank heaven for modern technology--or curse 
it; whatever you will. ``On the latter point, we did meet with 
them on their building. We expressed some concerns about the 
expense and the appearance of luxury digs in Georgetown. No 
further action was taken. The previous Chairman of the 
Subcommittee was aware of the purchase at the time. Are you now 
looking at this, almost 3 years later?''
    Well, the answer is, yes, we're looking at it. And I 
suspect that if Mr. Ausbrook was sitting here as a witness, he 
would disagree with you that there was an agreement.
    Mr. Smegal. Oh, I don't know. I wasn't there----
    Mr. Cannon. Certainly, not as to details.
    Mr. Smegal. There are staff people who were here then. They 
were there for the meeting. I was not present. I didn't come to 
every meeting. I couldn't afford that, Your Honor. I live in 
San Francisco.
    Mr. Cannon. My----
    Mr. Smegal. But I do understand. My understanding of what 
happened at that meeting is this Committee was told April 2002, 
before any of this happened. We didn't make any deals. We 
didn't have the Gates money. Bill Gates says to me, ``When you 
have a building, call me up, and we'll see how we get you the 
money.''
    There was no building in April. We were there to the 
Committee to tell them what we had in mind; as we'd gone to 
OMB; as we'd gone to the Office of the Counsel to the 
President.
    Mr. Cannon. My time has expired. I think we'll probably do 
a second round on this issue.
    Mr. Smegal. I hope so, Your Honor.
    Mr. Cannon. And, well, normally, I would. If there were 
only three of us, we could probably share time. But we have so 
many Members that I think that we'll go, and I probably in an 
hour--Bill, would you like to take some time? The gentleman 
from Massachusetts is recognized for 5 minutes.
    Mr. Delahunt. You know what I'm concerned about, Mr. 
Chairman, is that I see these two gentlemen here. It's clear 
that they were well intentioned; felt that they had a good 
deal. I concur. I happen to think that you did the right thing.
    Now, I don't know the details. But the last thing that we 
want to find ourselves in the position of doing is discouraging 
the likes of Mr. Strickland and Mr. Smegal from serving on the 
board of directors of the Legal Services Corporation, which is 
a non-profit charity. I mean, they're not getting a lot, other 
than just a sense of public service and reward, from their 
effort.
    Mr. Cannon. Would the gentleman yield?
    Mr. Delahunt. Yes.
    Mr. Cannon. I agree with the gentleman. And that's why this 
is such a matter of concern. The issue here is not to attack 
people of great integrity. The issue is to have the perspective 
of the current board on a problem that I think is a significant 
problem, and resolve the problem.
    Mr. Smegal. Congressman----
    Mr. Cannon. Not flail people here. That's not my objective 
at all.
    Mr. Smegal. Congressman, the only reason there is an 
alleged problem is because the OIG has suggested there was one. 
I've seen no legal brief on a conflict of interest. I don't 
have a conflict of interest.
    Friends was created by the Legal Services Corporation. They 
were one entity. What OMB told us, we had to have a separate 
entity in order to avoid, as the Navy has done, as the 
Smithsonian Institute has done, as--what's the other one; 
there's a third one--has done, we had to set up a separate 
501(c)(3). We did what we were told.
    Mr. Cannon. Mr. Smegal, look, I understand what you're 
saying and----
    Mr. Strickland. It's the National Academy of Science.
    Mr. Smegal. National Academy of Science, Congressman.
    Mr. Cannon. I understand. The problem is that you now have 
an entity that has, as you pointed out, a lease figure that was 
set by the lender; not by two parties at an arm's length. And 
the owner of the building does not--is not--the same as the 
institution for which it was set up. That's an inherent 
conflict. And I just would--I'm on the gentleman's time, and I 
apologize for going on. I don't mean to lecture.
    Mr. Delahunt. That's all right.
    Mr. Cannon. But what I see is defensiveness about an issue, 
instead of resolution. And that is remarkable. This is not Mr. 
West who's bad; it's Mr. West who's doing his job and who 
should be not argued against, but considered and have the 
underlying problem resolved so we can get the little sliver out 
and go on with life.
    Mr. Smegal. Well, Your Honor----
    Mr. Cannon. I yield back to the gentleman.
    Mr. Smegal. Congressman, I disagree with you on your 
characterization of Mr. West. But nevertheless, if you go to a 
bank and try to buy property, they're going to ask you for a 
financial statement. Friends did not have a financial 
statement. So the lender said to us, the prospective lender 
said, ``We want a certain amount of income to service this debt 
you're asking us to take on, $15.5 million.''
    Mr. Cannon. If the gentleman would yield again?
    Mr. Delahunt. Sure.
    Mr. Cannon. Our arguments are not joining here. I 
understand your argument. Just take my word for it. I 
understand your argument. And I'm suggesting that the animosity 
that you've just expressed toward Mr. West is highly misplaced. 
And everybody is better served if the animosity disappears and 
you deal with the underlying problem.
    You were talking about billions of dollars maybe that we 
ought to be overseeing at other places. Let me just reiterate, 
this is a problem in a context that is not infinite. But the 
problem which I am deeply concerned about is the reaction of 
both boards to Mr. West and his presentation of an issue which, 
on its face--and I've read his report very carefully--is valid. 
And your incensed reaction to it doesn't make it less valid.
    And if you step back and look at it, nobody is being called 
criminal. The issue of a conflict between two entities is there 
and clear. But it's, again, not infinite. It has narrow scope. 
It has a clear definition. And what I'm not hearing is--I'm 
hearing more animosity toward Mr. West than I am about solving 
an underlying problem--which, by the way, can't be solved with 
a simple dissolution of Friends of Legal Services and with the 
building being turned over to LSC, because I think you'd still 
probably have the underlying problem with OMB.
    So instead of arguing back and forth, it would be a matter 
of great appreciation from my perspective if you said, ``Look, 
we have a problem. How do we solve it? We can't just dissolve. 
Let's talk to OMB and see what the path is.'' And if you did 
that, we'd say, ``Thanks.''
    Mr. Smegal. Congressman, I disagree. There is no problem. 
In fact, the statement of the Inspector General is internally 
inconsistent; contrary to what you've just said. He says on the 
one hand, the problem is that the Legal Services Corporation no 
longer controls Friends; and then on the other hand, he says 
the problem is that the Corporation is independent. You can't 
have it both ways. He's working both sides of the street in his 
statement. He's worked both sides of the street in everything 
he's filed.
    Mr. Cannon. That's consistent. He says that Legal Services 
doesn't control Friends.
    Mr. Smegal. That's right.
    Mr. Cannon. And he says that Friends is independent.
    Mr. Smegal. That's right.
    Mr. Cannon. Those are highly consistent.
    Mr. Smegal. But he criticizes both of those.
    Mr. Cannon. Well, because when you have two independent 
organizations that overlap, then there is obviously criticism 
from both points of view. But it's actually really the same 
point of view.
    Mr. Smegal. No, no, he's saying--Congressman, he's saying 
that----
    Mr. Delahunt. Mr. Chairman, I ask unanimous consent that I 
receive an additional 2 minutes. [Laughter.]
    That I'll yield to the Chairman.
    Mr. Cannon. Without objection.
    Mr. Gohmert. Mr. Chairman, I have no objection to 5 
minutes. You really didn't get started.
    Mr. Delahunt. I withdraw my unanimous consent, and concur 
with the gentleman from Texas and ask unanimous consent for an 
additional 5 minutes that I'll yield to the Chairman.
    Mr. Cannon. Thank you. And without objection, so ordered.
    Now, let me just say, Mr. Smegal, this is not a debate. And 
I actually don't want to pursue it any more, and I'd like to 
leave this part aside. Although let me just admonish the two of 
you that I have read this very carefully, and Mr. West's report 
does not go beyond the bounds of what an appropriate IG should 
be doing. And in the environment of advising the board--and the 
board that he advises is just LSC, and it gets to the friends 
of LSC, I think appropriately--I don't think in that report 
there is anything that is amiss.
    And the problem here is that the retrenching around that 
issue has created a problem where one probably doesn't need to 
be. There is a problem. The problem is, what do you do with OMB 
and this building long-term? I think we need to--you need to 
deal with that.
    But I don't want this just to be a back-and-forth debate 
where you assert something, and I'm just telling you something 
entirely different. I hope you'll recognize the difference.
    Mr. Smegal. Yes, Congressman. In fact, I'm particularly 
pleased that you've given me this opportunity to be a 
participant in this debate, because the OIG wouldn't do that. 
In his letter of February 23, 2005, in response to my request 
for his report, he says the following: I won't give it to you, 
``However, we will consider your letter a request for a copy of 
the final report under the Freedom of Information Act. And once 
the final report is issued, we will release it to Friends, as 
appropriate, in accordance with FOIA.''
    I haven't been part of this debate. I didn't have a chance 
to file anything with this Committee, Your Honor, other than my 
statement.
    Mr. Cannon. But you are not the agency that Mr. West 
represents. He couldn't give that to you directly. You're a 
lawyer. I don't understand why you've just made that statement. 
He couldn't do that.
    Mr. Smegal. That's incorrect, Congressman.
    Mr. Cannon. Well----
    Mr. Smegal. He could give it to me.
    Mr. Cannon. Why?
    Mr. Smegal. There is no basis for him taking this position 
with respect to this----
    Mr. Cannon. Well, because his client--he is the IG for LSC. 
The appropriate request would be from you to Mr. Strickland.
    Mr. Smegal. No, that's not correct. The appropriate request 
is from him. He labeled Friends as a contractor, a Government 
contractor. And under the provisions of the OIG Act, I get that 
report. I get the report from him. He never gave it to me. I'm 
here today for the first time in a position to respond to his 
various statements that he's filed with this body.
    Mr. Cannon. And gave to LSC. And I assume that you got it 
from LSC at some early point, which would be perfectly 
appropriate.
    Mr. Smegal. I did, yes.
    Mr. Cannon. Let me just ask----
    Mr. Smegal. Not at an early point; at a later point.
    Mr. Cannon. Mr. West, Mr. Smegal has just said that he had 
a legal right, because you characterized him as a contractor, 
to get your report. Does he have that right, in your view? And 
did you appropriately withhold it?
    Mr. West. I'm unaware of ever calling him a contractor. In 
the financial statement that was prepared for the Legal 
Services Corporation, Friends of Legal Services is listed as a 
component.
    When I have dealt with contractors in previous instances, 
if we did an audit of the contractor, they of course get the 
draft audit report. But this was a report to the board that was 
for them to negotiate the lease extension with Friends. I had--
and that's all that was, was information to the board.
    Mr. Cannon. Mr. Smegal, do you agree with that analysis?
    Mr. Smegal. I wasn't listening. I'm looking at a letter I 
wrote to the Inspector General. Incidentally, I'd like, if it's 
possible, to keep the record open. I have an exchange of 
correspondence that I had with the Inspector General starting 
on December----
    Mr. Cannon. I can assure you that----
    Mr. Smegal. --December 9; none of which is in his report. 
But starting on December 9.
    Mr. Cannon. Well, without objection, that will be made part 
of the record.
    Mr. Smegal. Thank you, Your Honor.
    [The information referred to is available in the Appendix.]
    Mr. Smegal. In that, one of these communications from him, 
he did--he or one of his assistants referred to Friends as a 
Government contractor.
    Mr. Cannon. I think he dealt with that issue in his 
response.
    Mr. Smegal. Well, I'm not sure. I don't have a legal brief 
on it, so I don't know.
    Mr. Delahunt. Mr. Chairman, reclaiming my time?
    Mr. Cannon. Oh, yes, it is your time. The gentleman--I 
yield.
    Mr. Delahunt. You know, I can see that this dispute has 
become, you know, a question of, I think, both--particularly 
Mr. Smegal feels that the role, as he understands it and has 
lived it, of the LSC and its clear, to me, good intentions have 
been impugned by the report. Now, I understand there are rules 
and guidelines, etcetera. But I would hope that, you know, an 
exchange that was appropriate and civil and courteous would 
always exist between any office of inspector general and those 
individuals that are participating or are being--whose actions 
and transactions are being reviewed.
    I mean, this is--well, let me ask you a question, Mr. West. 
Is there anything that you have discovered where any individual 
has accrued any particular financial benefit from this 
transaction?
    Mr. West. With respect to anybody on the LSC board?
    Mr. Delahunt. Right.
    Mr. West. Anybody on the Friends of LSC? No.
    Mr. Delahunt. Okay. I mean, which confirms, I think, what 
you and I have both been saying, Mr. Chairman; is that these 
are people of integrity.
    I think, as I'm hearing the exchanges going on, you alluded 
to the OMB and the rule that requires this pass-through public 
charity corporation being created; not just in the case of the 
LSC but, I understand, the Smithsonian, the Navy, and others. 
You know, I would like to understand the rationale for that 
particular rule. It appears to me to be somewhat archaic.
    You know, maybe there is good reason. But I daresay we 
wouldn't be having this hearing today if the LSC as a board 
could have acquired the property directly; rather than the need 
to create another vehicle. It just doesn't seem to make any 
sense to me; particularly when, for protection of the taxpayer, 
we have an Office of Inspector General as part of the LSC 
board.
    So maybe Mr. Chairman, you should request the 
representative of the Office of Management and Budget to come 
and sit down. We don't need a public hearing. If the public 
wants to sit and listen to the conversation, I don't have any 
problems with that. But to explain to us the rationale for the 
rule. And then, among ourselves we ought to consider whether 
the rule has--no longer serves its original purpose--we don't 
know what that original purpose is--and do whatever has to be 
done to put the rule into the dustbin of oblivion, if you will.
    So that we don't find ourselves enmeshed in this kind of--
you know, I'm sure they're great appraisers but, you know, that 
Bank of America appraiser, I bet he went to school for 
appraisers, and has his benefits, and has a master's degree in 
appraising buildings in Georgetown. I mean, that's the micro 
level that we're getting ourselves into, a dispute among 
professionals.
    I mean, it's like in my former life, it was always 
fascinating to me that when a criminal defendant pled insanity 
in a criminal trial--I yield to my----
    Mr. Gohmert. I take exception to saying ``insanity'' and 
pointing to me.
    Mr. Delahunt. No, I did it like this, Charlie. [Laughter.]
    It was up in the air. I didn't mean----
    Mr. Cannon. That was the Almighty.
    Mr. Delahunt. Okay? And somehow, psychiatrists--you could 
disagree as to whether there was legal responsibility on the 
behalf of the defendant. And we are, as a Subcommittee, 
monitoring, you know, which appraiser is right. I yield back.
    Mr. Cannon. The gentleman yields back. Let me point out, 
there are actually three appraisals. Two agreed, and the other 
appraisal was by the lender, which is in a different context. 
But I agree with most of what you said, Mr. Delahunt.
    Now the Chair recognizes the gentleman from Texas, Mr. 
Gohmert, for 5 minutes.
    Mr. Gohmert. Okay, thank you, Mr. Chairman. And I do want 
to say, I am grateful that people of high esteem are willing to 
serve in these thankless jobs. I'm grateful that we have 
someone who would be able to solicit or obtain a $4 million 
contribution to an entity like this, because that's not 
something easy to do. So I'm grateful for that.
    I think probably all of us up here agree that there are 
aspects of OMB scoring that we don't like. We don't think that 
they use good business judgment. And I will readily acknowledge 
right up front that all three of you are a lot more financially 
smart than I am, because you've never run for judge and you've 
certainly not--smart enough to avoid running for Congress. So 
I'll give you right up front, you're smarter than me.
    But just to go back on some of the testimony, Mr. Smegal, 
that you've given us. You gave us a good overview of the whole 
scenario, how this came about. Have you been with LSC board 
from the beginning? How long were you with it?
    Mr. Smegal. Congressman, you may have missed my opening 
remarks. I was nominated----
    Mr. Gohmert. Oh, I was here for all of your remarks.
    Mr. Smegal. Well, I've been on the Legal Services 
Corporation Board at the nomination of two Presidents and the 
unanimous confirmation of the United States Senate for 18 
years.
    Mr. Gohmert. I guess what I was trying to get to was----
    Mr. Smegal. I was there--excuse me.
    Mr. Gohmert. What I was getting to was, you were testifying 
about conversations, some of which you said, ``And I was there 
at that one.'' And I take that to mean that you may have been 
testifying about conversations where you weren't there. And so 
I'm just trying to----
    Mr. Smegal. Yes.
    Mr. Gohmert. So obviously, you're giving us an overview 
which includes some hearsay of what you've heard from other 
people; which if we want to get to the bottom of it, it's 
always best to hear it straight from the people that were there 
personally.
    But I am concerned, as the Chairman has indicated, as smart 
as you obviously are just--and I mean, I know I look stupid, 
but I did not miss some of the snubs like when you were talking 
about vetting and you comment, ``Well, sorry I used a term that 
was too legal,'' like, ``You wouldn't understand.''
    But you say you don't see a conflict. And I mean, it's 
very, very basic. If I'm a judge, and I'm dealing with a 
landlord and a tenant, and they may be friends, and one's got 
an attorney, I'm going to appoint an ad litem attorney to 
represent the other side; because there is a clear conflict 
between a landlord and a tenant.
    There is a clear conflict between someone who is a borrower 
on a note, and someone who is not a party to that note. There 
is a conflict between someone who's trying to get enough rent 
to service a note, as opposed to somebody that's trying to get 
the cheapest rent they possibly can, and therefore get the 
biggest bang for their buck. There is a conflict. And I'm 
shocked that, as brilliant as you are, that you cannot come in 
here and say that you actually see that.
    So let me ask you this. Is there a legitimate basis for 
agreeing to $38 a foot for the LSC?
    Mr. Smegal. Is there a legitimate basis?
    Mr. Gohmert. That's right.
    Mr. Smegal. Absolutely, Congressman. And in fact, the chart 
that I--that was supposed to be attached to my remarks, which 
is over there displayed, and you have, demonstrates that the 
reality of what the Corporation now has by way of its space is 
represented at 2003 by the line that continues.
    Now, $38 a square foot continues on that line and goes down 
because of the advantages of the $100-a-month parking spaces. 
So it's actually going down, as we go out to the right. Whereas 
the Corporation would have continued in--and the numbers there 
out through 2007 are real numbers. Congressman Cannon suggested 
maybe they weren't. They are the lease that the Corporation had 
through 2007. So you're up there at 42 or 43 dollars a square 
foot.
    The rest of that would be the anticipated--there was no 
additional renewal at 750 First Street, Northeast, Congressman. 
So those red numbers are what is anticipated might have 
happened after that time.
    Mr. Gohmert. And we take it as just that: something that 
might have happened. But we're looking at a $38-a-foot lease 
for this whole--you indicated in your testimony in your opening 
statement--which I did hear--that by law any property of the 
Friends would revert or go to the LSC. The OIG says he knows of 
no contract or anything that would cause that to revert to the 
LSC. Do you know what law that is that would cause it to 
automatically revert to the LSC, if Friends is dissolved?
    Mr. Smegal. Yes, the bylaws by which the LSC was created. 
It's a document that had to be filed with the District of 
Columbia when the 501(c) incorporation was obtained. It clearly 
spells out exactly what happens to Friends, should it be 
abolished. All--whatever assets Friends has is automatically 
transferred to the Legal Services Corporation.
    Mr. Gohmert. Okay, so bylaws----
    Mr. Smegal. Incidentally----
    Mr. Gohmert. --and I will conclude. My time is running out. 
But you mentioned bylaws. Bylaws, as you know, can be 
unilaterally changed by the Corporation that set up those 
bylaws; isn't that correct?
    Mr. Smegal. I apologize. I misspoke. ``Vetted'' was a bad 
term, and I apologize for that, too. But it's the articles of 
incorporation; not the bylaws.
    Mr. Gohmert. All right. The articles of incorporation.
    Mr. Smegal. Of Friends.
    Mr. Gohmert. Of Friends.
    Mr. Smegal. Yes, sir.
    Mr. Gohmert. And are you familiar with how--or the manner 
in which articles of incorporation could be changed?
    Mr. Smegal. I'm sure there's a provision in there that 
would permit changing under some circumstances, yes, sir.
    Mr. Gohmert. And that LSC would not necessarily be a part.
    Mr. Smegal. Well, I don't know. I can't speculate.
    Mr. Gohmert. Well----
    Mr. Smegal. Incidentally, I am advised that the red numbers 
that you and I were referring to a minute ago actually are the 
OIG's numbers, right off his materials that he's provided to 
you in one or more of his presentations.
    Incidentally, Congressman Delahunt, you said--or maybe it 
wasn't you, and I apologize if I'm----
    Mr. Gohmert. All right, obviously, my time is up, and so 
it's up to the Chairman at this point to determine who's going 
to talk after this.
    Mr. Cannon. Are you yielding back, Mr. Gohmert?
    Mr. Gohmert. My time has expired.
    Mr. Cannon. I thank the gentleman.
    Let me just thank the members of the panel. I appreciate 
your being here through a relatively tense period. And it's 
been actually a pleasant exchange, let me just say, from my 
point of view. It's like a bunch of lawyers going back and 
forth at each other. Mr. Smegal, you wanted to say something?
    Mr. Smegal. I do. I have one other comment, and I 
apologize. Mr. West, in response to a question, I think it was 
of Congressman Delahunt, indicated that he had accused no one 
of doing anything, and he mentioned specifically the Friends 
and the Board of the Legal Services Corporation. But I would 
direct your attention to--his pages are unnumbered, but if you 
go to what I've numbered page 14, he's got a bullet. And the 
bullet is the following: ``Friends made a $50,000 unrestricted 
contribution to an organization to which LSC is restricted from 
making the same kind of contribution.''
    Now, three things. He doesn't identify the organization 
there, but he did in his opening statement. It's the National 
Legal Aid and Defender Association.
    Mr. Cannon. I think he identifies it earlier in his report.
    Mr. Smegal. I don't think it's in here, Your Honor. But in 
any event, there's two things wrong with what he says, two 
significant errors. One, it was not an unrestricted 
contribution. He has my letter of February 9, 2005, which will 
be in the packet that I'm providing, which includes the nine-
page grant to the NLADA--very restricted in its use of the 
$50,000.
    The other point that I would make is that NLADA is not an 
organization described as he states. Legal Services 
Corporation--and they can speak for themselves--have given 
grants to the NLADA for years for various things. There's 
nothing wrong with the National Legal Aid and Defender 
Association and, in particular, this $50,000 grant.
    The innuendo here by this Inspector General is that Bill 
Gates would give us $4 million so somehow we could give $50,000 
to some organization that's going to violate congressional 
restrictions on LSC activities? That's nonsense.
    Mr. Watt. Mr. Chairman?
    Mr. Cannon. Certainly, Mr. Watt.
    Mr. Watt. Could I ask unanimous consent just to ask one 
question? And I know I gave my time away.
    Mr. Cannon. Before you do that, may I just say, Mr. West, I 
think you understood the two statements, or the two accusations 
made by Mr. Smegal. Are you comfortable responding to those in 
writing? Not now, because we're----
    Mr. West. Yes, I'll respond to them in writing.
    Mr. Cannon. Thank you. The Chair recognizes Mr. Watt for 5 
minutes.
    Mr. Watt. And I'm not sure exactly what implications this 
has, but Mr. West, do you have any idea what the value of this 
building is now?
    Mr. West. I have no idea. I have not seen an appraisal of 
the building. My report was restricted to what would have been 
the fair-market rent if the Legal Services Corporation entered 
into an at-arm's-length transaction in July 2002. That's what 
we wanted our appraisers to tell us: If they were going out in 
the marketplace, what would have been a fair-market rent?
    Mr. Watt. But the appraisers did the appraisal on an income 
approach?
    Mr. West. They did an income, and they also did a sales 
approach. Income--I don't have it in front of me. I could get 
the specific information for you. But the appraisals, I 
believe, are going to be in the record.
    Mr. Watt. Okay. Mr. Strickland or Mr. Smegal, either of you 
have any idea of what the value of this building is now?
    Mr. Smegal. Yes, and I haven't got this in writing, 
Congressman, but the tenant on the fourth floor along with us, 
who's working its way up and about to pass through $38 a square 
foot, I am advised by our realtor, is prepared to offer us $20 
million for the building.
    Mr. Watt. So the bottom line is this building was acquired 
for--what?--$15 million, $16 million?
    Mr. Smegal. No, Congressman, actually what happened was 
this building was sold for $16 million, and the deal fell 
through; which is the reason we got an opportunity to buy it. 
We bid 14.2. There were two other bidders at 14.2. The prior 
owner understood who we were and what we were going to do with 
the building, and said, ``You get it.''
    So we bought it for 14.2. We put $2 million, roughly, of 
tenant improvements in--a million-eight, eight-fifty--into it. 
And the bank then appraised it; understanding that to happen at 
17.1. And my understanding from the realtor that's leased space 
for us in the building is that the other tenant on four is 
prepared to offer us $20 million.
    Mr. Watt. And of that $16.2 million that you all have in 
it, Bill Gates gave you 4 million of it?
    Mr. Smegal. Yes, Congressman, that's correct.
    Mr. Watt. So the net amount that Legal Services has in this 
building is approximately $12.2 million, and you have an asset 
that's worth $20 million in today's market.
    Mr. Smegal. Yes, Your Honor. Actually, we've been paying 
off the bonds over the last couple of years, so--and our 
financial statements show that our liabilities are even less 
than that.
    Mr. Delahunt. Would the gentleman yield?
    Mr. Watt. Yes, I'm happy to yield.
    Mr. Delahunt. Mr. Chairman, there's a certain irony here 
because--and I'm not being critical of the work done by the 
Inspector General--but because of the lack of flexibility 
that's inherent in Government bureaucracy, big Government, we 
find ourselves not allowing a certain entrepreneurial 
initiative which I think is inherent in the free market.
    When you see something that's a good deal, if you can get 4 
million out of Bill Gates and negotiate favorable terms and 
look down the future 20 years when the bonds are paid off, we 
have a quasi-public corporation not paying, you know, any rent; 
probably generating some revenue from this asset which would 
reduce the cost to the taxpayers, or maybe provide services for 
more individuals who need them. Because my recollection is 
Legal Services is incapable, because of lack of resources, to 
provide individuals--in terms of the number--the pie that ought 
to be receiving services, only 20 percent are in fact receiving 
the services that are necessary for them, thereabouts. I'm sure 
my figures are not exact. But again, with all due respect to 
Mr. West, you're building equity up.
    Mr. Watt. Let me reclaim my time, though. Because I want to 
be clear that just because the value of the building may exceed 
the investment, the end doesn't always justify the means. And I 
think what the Chair's concern is that a means was used that 
might have been an end around.
    But the bottom line is that the Friends of Legal Services 
and, if they ever dissolve, Legal Services, would be the 
beneficiary of a much, much more valuable asset. So we need to 
figure out a way to resolve this in a way that it will cut off 
our nose despite our face or whatever the----
    Mr. Delahunt. Well, Mr. Watt, I just--I'm sure that, you 
know, the panel, and maybe those that are here, are somewhat 
confused. This is the Democratic side of the panel---- 
[Laughter.]
    --those, you know, who ascribe to the ``big Government'' 
theory----
    Mr. Cannon. If the gentleman would yield----
    Mr. Delahunt. And they're the Republicans over there, the 
``free marketeers.''
    Mr. Cannon. If the gentleman would yield----
    Mr. Watt. No, I'm not going to yield. I'm not going to 
yield to either one of you---- [Laughter.]
    Mr. Cannon. The gentleman's time has expired. He yields 
back.
    Mr. Watt. I'm not going to yield to either one of you. I'm 
just going to try to walk right down the middle here---- 
[Laughter.]
    --and remind you all that this is the result of an 
entrepreneurial ownership spirit. But it's a good thing, and we 
shouldn't be discouraging it for non-profits and valuable 
organizations like Legal Services any more than we discourage 
it--now, that doesn't mean that the end justifies the means.
    So we've got to figure out a way to step back from this. 
Now that we've got it all out on the table now, let's just 
figure out a way to resolve this in a way that doesn't 
disadvantage the clients of Legal Services.
    Mr. Strickland. If I may address that, Mr. Watt's point, 
Mr. Chairman, certainl, it is the case with the current board 
having inherited this transaction, that it is our intent, if 
there's a problem that needs to be resolved, we will work 
diligently to resolve it. And I think the reason that we 
disagreed with the Inspector General is that as I said in my 
opening, we had questions about his methodology and his 
conclusions. And we don't necessarily think his office is 
infallible, so we disagreed with it. But having said that, I'll 
emphasize again that if there is a problem, we will do our best 
to resolve it.
    Mr. Cannon. Thank you. The gentleman yields back.
    A couple of points. First of all, let me ask--well, let me 
get to that, I guess, in order. First of all, as to the 
relevant rule at OMB, this is a rule that's been around for a 
very long time under both Administrations. In the fiction of 
Government, it's very difficult to deal with. And so the point 
I don't think is to change OMB, but to adapt to the 
circumstances.
    And I suspect that both Friends and Legal Services 
Corporation--and what I take it that you've just suggested, Mr. 
Strickland, is that you're going to be working on this rule 
with Friends and with OMB to see how the underlying problem can 
be resolved.
    Because currently, all the equity that you referred to, Mr. 
Delahunt, is in Friends. In other words, it doesn't accrue yet 
to LSC. And so I suspect that we will see some discussion 
there.
    I ask unanimous consent that the record be kept open and 
that questions may be directed to the witnesses. Without 
objection, so ordered.
    One of those first questions, Mr. Smegal, is going to be in 
relationship to the grant that Friends has given, which you 
referred to as restricted. And staff tells me they've been 
through it; they don't see any restrictions. We'd like to 
understand what you view those restrictions as being. We'll get 
that to you by way of a written request.
    I'd also like to ask unanimous consent that we recess this 
hearing at this point, subject to the call of the Chair. 
Without objection, so ordered, and we'll finish.
    [Whereupon, at 2:15 p.m., the Subcommittee was recessed, 
subject to the call of the Chair.]
                              ----------                              

    [The following is excerpted from the transcript of the 
legislative hearing on H.R. 6101, the ``Legal Services 
Corporation Improvement Act,'' held on Tuesday, September 26, 
2006 by the Subcommittee on Commercial and Administrative Law, 
Committee on the Judiciary:]

          Mr. Cannon. If we could just take one more moment, 
        Mr. Watt, I'd like to make the following motion: The 
        unfinished business before the Subcommittee is the 
        adjournment of the Subcommittee's June 28, 2005 
        hearing, which was recessed subject to the call of the 
        Chair. Without objection, the aforementioned hearing is 
        so adjourned. Without objection, so ordered. We left it 
        open.
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Letter from Thomas F. Smegal, Jr., Chairman, Friends of Legal Services 
 Corporation, dated December 9, 2004, to Laurie Tarantowicz, Office of 
           the Inspector General, Legal Services Corporation



 Letter from Laurie Tarantowicz, Assistant IG and Legal Counsel, Legal 
 Services Corporation, Office of Inspector General, dated December 13, 
2004, to Thomas F. Smegal, Jr., Chairman, Friends of the Legal Services 
                              Corporation



    Letter from Thomas Smegal, Chairman, Friends of Legal Services 
   Corporation, dated February 3, 2005, to Kirt West, Office of the 
             Inspector General, Legal Services Corporation



 Letter from Kirt West, Inspector General, Legal Services Corporation, 
  Office of Inspector General, dated February 23, 2005, to Thomas F. 
    Smegal, Jr., Chairman, Friends of the Legal Services Corporation



  Letter from Thomas F. Smegal, Jr., Chair, Friends of Legal Services 
  Corporation, dated March 2, 2005, to Kirt West, Inspector General, 
      Office of the Inspector General, Legal Services Corporation



 Letter from Laurie Tarantowicz, Assistant IG and Legal Counsel, Legal 
Services Corporation, Office of Inspector General, dated March 7, 2005, 
   to Thomas F. Smegal, Jr., Chairman, Friends of the Legal Services 
                              Corporation



Response to Post-Hearing Questions from Thomas Smegal, Chairman of the 
            Board, Friends of the Legal Services Corporation



 Response to Post-Hearing Questions from Frank B. Strickland, Chairman 
         of the Board of Directors, Legal Services Corporation




    Response to Post-Hearing Questions from R. Kirt West, Inspector 
                  General, Legal Services Corporation



Letter from Thomas Smegal, Chairman of the Board, Friends of the Legal 
 Services Corporation, dated October 13, 2005, to the Honorable Melvin 
 L. Watt, Subcommittee on Commercial and Administrative Law, Committee 
                            on the Judiciary



                                 
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