What do Rajat Gupta and Sergey Aleynikov have in common? Not
much, on the surface. One is the patrician former McKinsey chief
and Goldman Sachs director, the other a scruffy young computer
programmer. But as you probably know, Gupta and Aleynikov both
got on the wrong side of Goldman Sachs. Gupta was convicted this
summer of leaking inside information about the bank to Galleon
Group founder Raj Rajaratnam. Aleynikov, a former Goldman
computer programmer, was convicted in 2010 on federal charges of
stealing the bank's high-frequency trading code when he defected
to a rival start-up but was set free last April by the 2nd
Circuit Court of Appeals. (He has since been charged by the
Manhattan district attorney for state-law crimes.)
Gupta and Aleynikov have also both learned the consequence
of crossing Goldman Sachs: The bank will not willingly pay their
legal fees. Goldman moved in October for restitution of some $7
million it laid out for Gupta's defense in his criminal case in
federal court in Manhattan. (Like Morgan Stanley in its pursuit of $5 million from inside trader Joseph "Chip" Skowron, Goldman
also demanded the return of part of Gupta's compensation as a
director.) On Friday, Gupta's counsel, Richard Davis, filed a
brief before U.S. Senior District Judge Jed Rakoff, arguing that
Goldman is not entitled to restitution because, among other
things, Goldman wasn't a victim of the conspiracy at the heart
of his conviction. There's precious little precedent on this
kind of claim, but last March Rakoff's Manhattan federal court
colleague Denise Cote found that Morgan Stanley was, indeed, a
victim of Skowron's trading, even though the only direct effect
on the bank was the $32 million it paid to settle the Securities
and Exchange Commission's case.
Aleynikov's fee dispute with Goldman presents a different
but equally novel question: Who exactly is indemnified under the
bank's protection for "officers"? Aleynikov, who had the title
of vice president at Goldman, Sachs & Co, a subsidiary of the
Goldman Sachs Group, says he's an officer and thus entitled to
indemnification for his defense fees. Goldman argues that the
programmer's title was a meaningless courtesy that's understood
in the industry to carry no actual officer's duties.
Indemnification, according to the bank's lawyers at Boies,
Schiller & Flexner, doesn't apply to lower-level employees like
Aleynikov; Goldman offered an affidavit from Goldman Sachs Group
general counsel Gregory Palm to support its assertion.
On Friday, U.S. District Judge Kevin McNulty of Newark, New
Jersey, denied cross-motions for summary judgment by Goldman and
Aleynikov, ruling that neither side had persuaded him that its
definition of an officer should prevail. But McNulty also
ordered discovery to answer the question of who is an officer.
"An entity may decide whom to designate as an officer," he
wrote. "But because GS Group points to no such written policy,
because it is in possession of all the facts on this point, and
because there has been no discovery, it would be unfair to
conclude from a blanket statement in an affidavit that it is
true. Aleynikov is entitled to probe these matters."
Aleynikov's lawyer, Kevin Marino of Marino, Tortorella &
Boyle, said Goldman would not be able to dispute his client's
indemnification if he had been a vice president at Goldman Sachs
Group, rather than Goldman, Sachs & Co. He told me the same
should be true of officers of the subsidiary. "I've never heard
anyone say a vice president is not an officer," Marino said. "I
guess we're going to take discovery now to get to the bottom of
it." (If you doubt that Marino has expertise on the issue of
banks and legal fee indemnity, consider this: He represents
Morgan Stanley in its litigation against Chip Skowron.)
What's so intriguing about Goldman's argument in the
Aleynikov case is that Fabrice Tourre, the only individual
facing Securities and Exchange Commission civil charges in
connection with Goldman Sachs's infamous Abacus collateralized
debt obligation, had the same title as the erstwhile computer
programmer: vice president of Goldman, Sachs & Co. Similarly,
Neil Morrison, who was named in September in an SEC complaint
alleging a pay-to-play scheme to obtain municipal underwriting
business, was a vice president of Goldman, Sachs & Co. Both
Tourre and Morrison are contesting the SEC's allegations, which
is an expensive undertaking. But there's been no public
indication that Goldman Sachs has balked at paying their legal
fees. (I left a message with a bank representative and with
Tourre's lawyer, Pamela Chepiga of Allen & Overy. Neither called
me back; I could not determine who is representing Morrison.)
You can bet that when Marino digs into discovery in
Aleynikov's case -- which could include a demand to depose
Goldman GC Palm -- he's going to ask some tough questions about
whether the bank is funding the defense of Tourre and Morrison,
and, if so, how it can justify refusing to indemnify someone
with the same title. Of course, Tourre and Morrison, unlike
Aleynikov, allegedly engaged in misconduct that benefited
Goldman Sachs, at least in the short term. It will be very
interesting to see if that's the bank's real standard for
indemnification.
(This post has been corrected. A previous version
incorrectly reported that Gupta's counsel in the fee dispute is
Weil, Gotshal & Manges.)
(Reporting by Alison Frankel)
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