Sep 10

Goldman Sachs Case: Know and Understand Your Corporate By-Laws Concerning Legal Fees

Goldman Sachs Group Inc. has recently garnered a lot of press on the ongoing litigation on former Goldman programmer and vice president Sergey Aleynikov’s demands for indemnification and advancement of attorneys’ fees. These fees arise from what The New York Times has called “the bizarre and protracted legal odyssey” of Aleynikov, who was first charged with stealing some of the firm’s computer code in 2009. Last week, the Third Circuit reversed an order that required Goldman Sachs to pay millions in legal fees for Aleynikov’s defense. The appellate majority sent this case back to the district court because the firm’s by-laws were ambiguous.

At the heart of this pending litigation that began when Aleynikov sued for indemnification is what the definition of “an officer” is at Goldman. If he fits the definition of an officer, Goldman Sachs would have been required under its by-laws to cover his legal costs, to the tune of more than $2.4 million. The firm’s by-laws state “officers” must be indemnified but doesn’t provide a specific definition of what that means, and Goldman’s policy has been described as “permissive indemnification.” Goldman Sachs has stated it was within its “business discretion” to deny indemnification. In his dissenting opinion, Judge Julio M. Fuentes argued that the effect of the firm’s policy was inconsistent Delaware law (Goldman Sachs’ state of incorporation).

Companies rightfully worry about paying legal fees for employees who have been accused of misconduct by the government, and as Richard L. Scheff, our Chairman at MMWR, has pointed out, “This is a very delicate area these days.” If you are in-house counsel, take the time now to understand your corporate by-laws concerning indemnification of legal fees for employees. Make sure you take the time to understand the interplay between these laws and any state laws governing indemnification. And, if you deem it necessary and appropriate, recommend amending those by-laws—before your company is dragged into protracted and costly litigation on whether you need to pay legal fees to defend a former employee accused of multiple illegal acts. And if you’re an employee accused of misconduct (or representing an employee accused of misconduct), make sure you know your rights to indemnification from your employer.

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