Goldman Stung by Legal-Bill Ruling ; Bank Compelled to Pay Defense Fees in Trial over Theft of Its Own Code

By Lattman, Peter | International Herald Tribune, October 24, 2013 | Go to article overview

Goldman Stung by Legal-Bill Ruling ; Bank Compelled to Pay Defense Fees in Trial over Theft of Its Own Code


Lattman, Peter, International Herald Tribune


The ruling highlights growing concern among banks whose bylaws compel them to pay the legal fees of employees accused of wrongdoing.

A U.S. judge has ruled that Goldman Sachs must pay the legal fees of a former computer programmer accused of stealing code from the bank, a decision that wades into a hot-button issue as more and more Wall Street employees find themselves ensnared in lawsuits and investigations.

In an opinion issued Tuesday, Judge Kevin McNulty of the Federal District Court in New Jersey said Goldman had a legal obligation to pay certain lawyer bills for its former programmer, Sergey Aleynikov, because he was an officer of the bank during the time in question.

"I hold that the term 'officer' encompasses Aleynikov's position as a vice president" of Goldman Sachs, the judge wrote.

The judge noted that during the past six years, Goldman had paid lawyer bills for 51 of 53 employees who needed legal defenses.

Mr. Aleynikov's situation has been one of the more unusual white- collar criminal prosecutions in recent years. After Goldman reported him to the authorities, federal and state officials separately brought charges against him. Now, depending on the outcome, the government's actions against him could cost Goldman more than $4 million.

"As a result of these two misguided prosecutions, Sergey Aleynikov lost his marriage, his home, his job, his life savings, his good name and, for a full year, his freedom," Kevin Marino, a lawyer for Mr. Aleynikov, said in an e-mail.

"That the party which provoked all that misfortune must now begin to underwrite it is good news indeed."

A spokesman for Goldman Sachs, Michael S. DuVally, declined to comment. Representatives of the U.S. attorney's office for the Southern District of New York and the Manhattan district attorney's office also declined to comment.

The question of who should pay the legal bills of an employee accused of wrongdoing has become an increasingly important topic at banks and among the white-collar bar.

Corporate bylaws and state statutes typically permit, and sometimes require, companies to pay legal defense fees for their directors, officers and employees. Without such rules, companies would probably find it difficult to hire and retain people. The policy is intended to protect employees from lawsuits or investigations that relate to their work.

In the postcrisis era, sprawling government investigations including mortgage fraud, insider trading, money-laundering and the global benchmark interest rate Libor have led hundreds of bank employees to retain lawyers.

This wave of white-collar prosecutions has required financial firms to make hard choices on whether to pay defense fees for their employees.

Morgan Stanley paid the legal fees of Joseph F. Skowron III, a fund manager accused of insider trading while working for the bank.

But after Mr. Skowron pleaded guilty, Morgan Stanley successfully clawed back $10 million in salary and lawyer fees from its former employee.

"Mounting a defense in any federal criminal case is extraordinarily expensive, particularly in the context of large- scale financial frauds," said Harlan Protass, a defense lawyer at Clayman & Rosenberg. …

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