Goldman Sachs Just Says 'Vice President' to Be Polite
My basic view of Sergey Aleynikov -- the former Goldman Sachs programmer who left for a high-frequency trading firm, took some code on his way out the door, was arrested by the FBI at Goldman's instigation, was convicted of theft and sentenced to eight years in prison, was released after about a year when an appeals court ruled that he hadn't committed a crime, and was then charged with the theft again in state court just out of prosecutorial spite 1 -- is that Goldman has been unnecessarily mean to him and that the very least it can do would be to pay his (more than $2.3 million!) legal bills for the absurd criminal cases it put him through.
Goldman's view differs. So Aleynikov sued the firm for the money, on the theory that Goldman's bylaws require it to indemnify its officers for their legal expenses, and that he was an officer of Goldman Sachs. After all, he was a vice president, and "vice president" sure sounds like it means "officer." No one would argue that Joe Biden is not an officer of the U.S. government. Goldman's theory, on the other hand, is that "vice president" is a "courtesy title" handed out to roughly one-third of its employees, and of course they're not all officers. Aleynikov persuaded a trial court that he was right, but yesterday a federal appeals court overturned that ruling and, amazingly, sent the case back for a jury trial on whether Goldman Sachs's vice presidents are officers.
Some disclosure: On the one hand, I used to work at Goldman, and still own a bit of restricted stock, so I have theoretical incentives to root for Goldman, and I suppose it's better for them to save $2.3 million than not. On the other hand, I used to be a vice president at Goldman, and I feel like I still own some stock in the Worldwide Confraternity of Investment Bank Vice Presidents. So, both to enhance the prestige of the title and to help keep my brother and sister VPs out of jail, I root for VPs to be officers. 2
Are they though? What a silly question. They are vice presidents. They are not, you know, the vice president. There are thousands of them, and they are called that mainly to reassure clients that the awfully young-looking person running their merger is a senior executive and global head of something or other, 3 and can therefore be trusted to make important decisions with no adult supervision.
But it's not a metaphysical question; it's a question of, should banks be responsible for and to their vice presidents? Obviously the banks get some benefits from calling VPs VPs, mainly inflating titles to impress clients without actually devoting senior resources to those clients. The banks certainly want clients to think that vice presidents are senior people, acting for the firm. And the VPs probably suffer the burden of responsibility for their inflated titles: It seems to me that poor schmoes like Fab Tourre and Julien Grout were attractive scapegoats for the government because of their overly fancy titles. "See, we went after important executives at banks! Vice presidents, even!"
Similarly, Goldman gets the benefit of the implication that Vice President Fabrice Tourre was in a powerful enough position to commit securities fraud without any culpability by anyone else at the bank, but also can argue that Vice President Greg Smith was a nobody who did nothing and whose complaints about the bank are invalid because he was so junior. And it gets to argue that Vice President Sergey Aleynikov was powerful enough to steal code that, if it "fell into the wrong hands," "could be used to 'manipulate markets in unfair ways,'" but was also just a schlub in possession of a mere courtesy title and not an officer of the firm. 4
The appeals court sort of threw up its hands at this duality. Here's the opinion, which concludes that the word "officer" in Goldman's bylaws is ambiguous, and the whole thing should be handed to a jury to figure out. Here is an actual sentence in the opinion:
A jury must determine the interpretive value of Goldman’s extrinsic evidence in resolving the ambiguity in the By-Laws.
Because that is what 12 randomly selected laypeople are particularly good at: determining the interpretive value of extrinsic evidence in resolving ambiguity in corporate documents.
Actually you can read Goldman's bylaws here and ... I don't know, doesn't it sound like a VP is an officer? It kind of sounds like that to me, but I'm biased. I'll put the parsing in a footnote, 5 because it is not really fit for human consumption, though I guess a jury will have to consume it.
Indemnification is always a weird thing, and it is not intuitive to most people that a bank should have to pay the legal bills for people accused of committing crimes against that bank. It is nonetheless a longstanding and important part of corporate law, for pretty obvious reasons. People who run corporations get sued a lot, and arrested a little, for doing corporate stuff, and they'd rather the shareholders pay their bills. Or here is how the court puts it:
The Delaware General Assembly’s enactment of the statute promoting advancement “plainly reflect[s] a legislative determination to avoid deterring qualified persons from accepting responsible positions with financial institutions for fear of incurring liabilities greatly in excess of their means.”
On the one hand, Aleynikov plainly had a "responsible position," and one that created the risk -- and the reality -- of incurring liabilities greatly in excess of his means. Banking will be a less attractive job if lots of mid-level workers, as part of their jobs, run huge legal risks that their banks won't cover. And, as it happens, those mid-level workers do run lots of legal risks -- and Goldman almost always covers them. 6
On the other hand ... it is not a great look for banks to say, "Hey, we know that lots of our vice presidents are going to get in legal trouble, so we'll cover their costs." 7 You can understand why Goldman would want to keep things ambiguous: It wants to attract worker bees without having them worry too much about legal risk. But it wants them to worry a little; it's not like VPs just recklessly running around incurring liability are a great asset for the bank.
And it certainly doesn't want to explicitly promise to thousands of employees that it will help keep them out of jail if they do bad stuff! As a matter of public relations, banks need to be able to disclaim the bad stuff that some of their thousands of midlevel employees will inevitably get up to. Vice presidential ambiguity is a big help with that. Promising to defend everything that those VPs get up to is not.
The best telling of the Aleynikov story is of course that of my Bloomberg View colleague Michael Lewis, in his book "Flash Boys" or in this Vanity Fair article. I find it completely convincing and am Team Aleynikov here. In particular, Lewis makes the case that Aleynikov believed -- probably correctly -- that the code that he took was open-source and so not Goldman's property at all. Perhaps he was wrong, and Goldman could have sued him and his new firm over the intellectual property rights. But having him arrested was just plain nuts.
By the way, you can also get the outlines of the Aleynikov story from Wikipedia, and can you guess the tone of a Wikipedia article about the arrest of a programmer for taking code that was probably open-source?
I also once clerked for the U.S. Court of Appeals for the Third Circuit, which decided this case, so I want them to be right. Conflicts everywhere.
Global (or U.S., or European, or ...) head of something or other is an even more abused title than vice president. At this point people have mostly figured out that there are a lot of VPs, but the benefits of the global-head title are that:
- It is unique, in the sense that there can be only one global head of any particular thing,
- It is infinitely expandable, in the sense that there are unlimited things to be global head of, and
- It is entirely informal and can be made up on the spot.
In my banking career I was introduced -- perfectly legitimately -- as the U.S. head of at least two things and the global head of one or two others. Each of those things had at most three employees (me and perhaps an associate and/or analyst), and at least one of them had zero all-time worldwide revenue. You could be Global Head of Dragon Treasure Currency Hedging and also Head of Unicorn Securitization for Northern Europe and it would not take too much of your time.
- It is unique, in the sense that there can be only one global head of any particular thing,
From the court's opinion:
Goldman introduced “trade usage” evidence, which Aleynikov has not rebutted, from publications like The Economist and The Los Angeles Times and deposition testimony showing that title inflation in the financial services industry is prevalent and the title of vice president is not particularly meaningful. See App. 465 (“[I]n the investment banking and brokerage industries, just about everyone is a vice president . . . .”); App. 468 (“Almost everybody in banking from the receptionist upwards is a president of some sort.”); App. 470 (“[M]anagement titles such as senior vice president . . . have spread so widely that ‘in many cases being a vice president means nothing.’”).
I love that Goldman actually gave a court a bunch of evidence that its VPs are worthless goons. (Incidentally, from the district court ruling, I gather that the in-house lawyer who produced this evidence is a managing director, so.)
First, Section 4.1 empowers the board of Goldman Sachs Group -- the public company -- to appoint officers, including "one or more Vice Presidents." So a vice president of Goldman Sachs Group is pretty unambiguously an officer. And Section 6.4 requires Goldman to indemnify anyone for legal expenses incurred "by reason of the fact that such person or such person’s testator or intestate is or was a director or officer of the Corporation."
This doesn't settle the matter because Aleynikov was not employed by Goldman Sachs Group, but rather by Goldman, Sachs & Co., a limited partnership subsidiary of Goldman Sachs Group. But the indemnification also applies to anyone who "is or was a director, officer, trustee, member, stockholder, partner, incorporator or liquidator of a Subsidiary of the Corporation." So if Aleynikov was an officer of Goldman, Sachs & Co., then he should be indemnified.
The definition of "officer" in Section 6.4 imports the definition from Section 4.1, in determining officers of Goldman Sachs Group. But "when used with respect to a Subsidiary or other enterprise that is not a corporation or is organized in a foreign jurisdiction, the term 'officer' shall include in addition to any officer of such entity, any person serving in a similar capacity or as the manager of such entity." The court rightly concludes that this is spaghetti:
At first blush, the definition of “officer” with respect to non-corporate subsidiaries is fairly circular. “Officer,” as used in the By-Laws, includes: (1) any officer; (2) a person serving in a similar capacity; or (3) a person serving as the manager of the non-corporate subsidiary.
But it seems to me that a natural reading of this is to import the previous sentences defining the term "officer" -- at least via "any person serving in a similar capacity" -- and so concluding that vice presidents of Goldman, Sachs & Co., like vice presidents of Goldman Sachs Group, are "officers" for indemnification purposes. Like, the bylaws really do say that vice presidents are officers; it's not unreasonable for Aleynikov to think that he was an officer because he was a VP.
But not always! From the opinion:
Over a six year period, fifty-three people associated with GSCo were considered for advancement and/or indemnification. Of these fifty-three, Goldman paid the attorney’s fees for fifty-one. Aside from Aleynikov, Goldman refused to pay indemnification and/or advancement for one other person who sought it, also a GSCo vice president. However, of the fifty-one whose fees Goldman paid, fifteen were GSCo vice presidents.
Abstractly it's not a great look to say, "Hey our directors and senior executives will get in lots of legal trouble so we'll cover them" either. But the reality of corporate life is that directors and senior executives get sued all the time for corporate actions, including actions they didn't have much to do with, and it really would be pretty unfair for the corporation not to manage that defense. More junior employees don't really have that excuse; if you're a VP being sued or arrested, it's probably for something that you personally did.
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