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Goldman Sachs must pay ex-VP’s legal bills

Judge rejects claim of ‘courtesy title’

Legal bills for former Goldman staffer Sergey Aleynikov (left) grew after the state of New York charged him following his successful fight against federal charges.

John Marshall Mantel/New York Times/File 2012

Legal bills for former Goldman staffer Sergey Aleynikov (left) grew after the state of New York charged him following his successful fight against federal charges.

NEW YORK — A federal judge ruled Tuesday 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.

Judge Kevin McNulty of US District Court in New Jersey said Goldman had a legal obligation to pay certain lawyer bills for the former Goldman programmer, Sergey Aleynikov, because he was an officer of the bank.

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“I hold that the term officer encompasses Aleynikov’s position as a vice president of GSCo,” the judge wrote.

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

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

“As a result of these two misguided prosecutions, Serge 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 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 declined to comment, as did representatives of the US attorney’s office and the Manhattan district attorney’s office.

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The question of who should pay the legal bills of an employee accused of wrongdoing has become an increasingly important topic at banks and inside the white-collar bar. State statutes and corporate bylaws typically permit, and sometimes require, companies to pay legal defense fees for 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.

Sprawling investigations of 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 employees’ defense fees.

The issue of corporate indemnification has become pitched at Goldman.

It has paid more than $35 million in lawyer fees for a former director, Rajat K. Gupta, who was convicted in an insider trading case of leaking boardroom talks to the hedge fund magnate Raj Rajaratnam. Gupta agreed to repay Goldman if a court denies his appeal.

The bank also paid for the defense of Fabrice Tourre, a former vice president accused of securities fraud. A jury found Tourre liable.

But Goldman drew the line at Aleynikov, a Russian immigrant who served as a vice president in the high-frequency trading group.

Four years ago, federal authorities arrested him after Goldman reported his misconduct. Aleynikov was charged with stealing secret source code for high-frequency trading software as he was leaving to join a start-up. A jury found him guilty in 2010, and Aleynikov was sentenced to eight years in federal prison. An appeals court reversed that conviction on the grounds the government had misapplied corporate espionage laws to his case.

Aleynikov was released from prison, but six months later, Cyrus R. Vance Jr., the Manhattan district attorney, filed his own case, accusing Aleynikov of state crimes. He is fighting those charges.

After the state charged Aleynikov, his lawyers sued Goldman in federal court. They said their client had exhausted his financial resources.

Goldman argued Aleynikov was not a bank officer but “a midlevel computer programmer with no managerial responsibilities.” And “vice president” was nothing more than a courtesy label.

The judge disagreed.

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