Friday, November 1, 2013

Aleynikov Turns the Tables on Goldman Sachs Group

Score one for the underdog.

In Sergey Aleynikov's latest legal battle against Goldman Sachs, he emerged victorious. Earlier this month, Aleynikov prevailed on summary judgment and obtained an advancement (that is, prepayment) of legal fees related to his legal defense of state criminal charges brought by the Manhattan District Attorney.

As many readers know, Aleynikov was convicted by a federal district court of violating the Economic Espionage Act related to his alleged theft of Goldman's trade secret high-frequency trading source code. The Second Circuit reversed that conviction - after Aleynikov spent many months in federal prison before the reversal - leading to a quick modification of the federal statute.

Soon thereafter, a grand jury in New York indicted Aleynikov on similar state charges. It's unclear what the DA hopes to accomplish since even if Aleynikov is convicted, he will receive credit for extensive time he served in the federal case. But, now at least, Aleynikov will be able to have Goldman advance his legal fees and forge a defense to the latest round of criminal charges.

Although Judge McNulty called the advancement question a close one, there are several lessons to be learned.

First, the advancement and indemnification rights afforded corporate officers and directors are broad in scope. To that end, any ambiguities are resolved in the indemnitee's favor. Here, although Aleynikov was not an "officer" in the traditional sense (as would be the case for Lloyd Blankfein), the court found Goldman reserved for itself broad discretion to determine who was eligible for fee advancement. In fact, Goldman had advanced fees to 51 of 53 people who applied for it (apparently, one other unlucky soul found himself viewed as equivalent in stature to Aleynikov) over a six-year period.

Second, rights to advancement require an analysis of state corporation law, corporate bylaws, and any governing agreements (such as employment contracts). Advancement rights are treated differently by the states, and often times states make distinctions between officers, directors, and employees. In some states, for instance, a corporate charter must opt-out of advancement for directors, or else it's mandatory. Goldman's corporate bylaws, mandated advancement to officers as long as certain conditions were met.

Third, the key analysis usually turns on whether an individual is a defendant "by reason of the fact" that he was an employee, officer, or director. This is usually where advancement cases turn, although in Aleynikov it wasn't the flash point at all. In Delaware (which most states will turn to for interpretive questions), this requires a court to consider the nexus or causal connection between the alleged wrongdoing (whether civilly or criminally based) and the individual's status. In Aleynikov's case, his theft of trade secrets occurred solely because of his access to them while he was a Goldman employee. To be sure, the act of misappropriation occurred before he quit. Therefore, Aleynikov wouldn't have been able to misappropriate the code (or understood his value) but for the exercise of his official duties as a Goldman employee. Several other courts have found improper pre-termination competitive activity (usually for trade secrets theft or violation of a fiduciary duty) as sufficient to establish the "by reason of the fact" test. Individual obligations arising after service ends, such as a non-compete violation, won't fall within the causal nexus and won't trigger advancement rights. (For this reason, it's exceedingly important for a plaintiff to consider the implications of its allegations and sought-after remedies.)

Simply because Aleynikov is entitled to fee advancement does not mean he is off the hook. If he loses and is found guilty by a Manhattan jury, he'll have to repay his fees - hence, the title "advancement." But he doesn't have to post security as a condition. Advancement is an unsecured undertaking (unless the corporate charter says otherwise), and it's hard to see where Aleynikov would ever have the practical ability to repay if things head further south.

A copy of Judge McNulty's lengthy advancement opinion is contained below.

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