What is Goldman Sachs’s standard for indemnifying legal fees?

By Alison Frankel
December 18, 2012

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 pursuitof $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 at Weil, Gotshal & Manges filed a brief before U.S. Senior District JudgeJed 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 individualfacing 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.

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