Goldman Sachs Wins Fight Over Ex-Programmer’s Legal Fees

  • Delaware judge found VP title didn’t warrant fee coverage
  • Sergey Aleynikov seeking to recover fees over criminal charges

Goldman Sachs Group Inc. isn’t required to cover the legal fees of a former programmer accused of stealing the investment bank’s computer-trading code simply because he held a vice president’s title, a judge said.

Delaware Chancery Court Judge Travis Laster Wednesday rejected Sergey Aleynikov’s claims the vice president’s title made him a corporate officer and entitled him to coverage for legal costs under the company’s bylaws. Aleynikov’s demand that the bank pick up the tab for fees tied to theft charges over the code wasn’t legitimate, Laster concluded.

Aleynikov may now have to pay his own fees stemming from criminal charges and lawsuits in New Jersey over the trading codes, estimated to total about $7 million, including about $550,000 at issue in Delaware. Aleynikov’s federal theft conviction was overturned in 2012. Three years later, a judge threw out state-court charges that he pilfered the bank’s intellectual property. Prosecutors are appealing.

The programmer failed to prove that an employee who held “the bare title of vice president,” but didn’t have any managerial responsibilities, “qualified as an officer for the purposes” of recouping legal fees, Laster concluded in a 17-page ruling.

Goldman officials were pleased with the decision, Michael DuVally, the bank’s spokesman, said in an e-mailed statement. Kevin Marino, Aleynikov’s lawyer, said the decision “raises a host of interesting issues” and his defense team intends to press forward with the reimbursement claims.

Goldman Sachs argued Aleynikov, whose saga helped inspire Michael Lewis’s book “Flash Boys,” was a VP in name only and wasn’t entitled to perks set aside for true corporate officers, such as covering lawyers’ bills. Aleynikov’s attorneys countered that corporate titles carry their own weight and must be honored.

Code Transferred

Aleynikov, a Russian immigrant, was a VP at Goldman Sachs until leaving to join Teza Technologies LLC in 2009 and was arrested later that year. His lawyers argued the programmer didn’t pilfer the intellectual property while transferring so-called open source code to a personal e-mail account.

The investment bank acknowledged in court filings it sometimes paid legal fees for a “broad array of employees,” including positions below the vice president’s level. Still, Goldman’s lawyers said getting tapped as a vice president didn’t automatically make an executive an officer under the bank’s bylaws, which gives managers wide latitude in deciding whose legal bills to cover.

Goldman Sachs had paid the legal fees of 51 of 53 employees who requested it, including 15 who were vice presidents, Aleynikov’s lawyers countered in court documents. Among them was Fabrice Tourre, an ex-vice president nicknamed “Fabulous Fab” who was found liable in 2013 for defrauding investors in deals involving mortgage-backed securities.

While only about $550,000 in legal fees and the question of officer status were at stake in the Delaware proceeding, Laster’s ruling may affect the outcome of Aleynikov’s lawsuit in New Jersey, where he sought fees after being cleared of federal charges.

Ruling Overturned

A judge there ordered Goldman Sachs to pay $2.3 million in Aleynikov’s legal bills, a ruling later overturned by the U.S. Court of Appeals in Philadelphia that said ambiguity in the firm’s bylaws must be decided under the law in Delaware, where the bank is incorporated. Goldman Sachs countersued in New Jersey, claiming Aleynikov breached his duty by “misappropriating” code.

Laster said he was required to defer to the appeals court’s finding that simply because Aleynikov held a vice president’s title didn’t mean he was automatically a corporate officer entitled to have his legal fees covered. The ex-programmer couldn’t produce enough evidence to make it clear that Goldman Sachs’s bylaws intended to bestow officer status on junior executives, such as vice presidents, the judge added.

The Delaware case is Aleynikov v. Goldman Sachs Group Inc., CA10636, Delaware Chancery Court (Wilmington). The New Jersey case is Aleynikov v. Goldman Sachs Group, 15-cv-2057, U.S. District Court for the District of New Jersey (Newark).

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