October 29, 2014

Who’s an “officer” for purposes of corporate indemnification?

Posted in Corporate Litigation, Employment Law by Gene Killian |

Years ago, my wife worked for a large bank on Wall Street. Her first title at the bank was “Assistant Treasurer.” Later, she progressed to “Vice-President.” Because of my juvenile sense of humor, I got a huge kick out of these titles. It seemed to me that the bank was bestowing titles upon here akin to the title of “Doctor of Thinkology” from the Wizard of Oz, without conferring any real power. Somehow she didn’t think that was very funny. (And she eventually did progress to a position of authority before she retired from the financial services industry.)

The title of “Vice-President” recently became a serious issue in a case involving Goldman Sachs, however.  Aleynikov was a computer programmer who worked at Goldman for two years, and, naturally, was given the vice-presidential title.  After accepting an employment offer from another company, Aleynikov (allegedly illegally) copied and stole proprietary source code from Goldman’s computer system and transferred it to a server in Germany.  (For the technologically unsavvy, like me:  “Source code” is basically a collection of computer instructions that form the basis for a computer program.)   The source code related to Goldman’s  high-frequency trading system.  Aleynikov got caught, and following an eight-day federal trial, he was convicted and sentenced to eight years in prison. But the appeals court reversed his conviction and ordered him released from jail. New York State authorities then arrested him and charged him with state crimes based upon the same alleged conduct. And the grand jury returned an indictment.  As I write this, the state court case is pending.

The fun began after the appeals court reversed his federal conviction.  Aleynikov then claimed that he was an “officer” under the Goldman by-laws, which entitled him to indemnification and advancement of legal fees (to the tune of $2.3 million) from the corporation in connection with the criminal proceedings.  The District Court agreed with him (somewhat amazingly to me) and granted summary judgment in his favor, but the Third Circuit reversed, holding that the term “officer” was ambiguous and required further factual exposition. You can read the Third Circuit’s decision here.    

Specifically, the Third Circuit wrote: “Aleynikov hangs his hat only on his vice president title in claiming entitlement to advancement [of legal fees], and industry usage of this term informs industry understanding of who qualifies as an officer, and in particular, whether a GSCo vice president can be considered an officer... The evidence presented to this Court strongly suggests that to the extent that Aleynikov understood himself to be an officer, this was unreasonable in the relevant industry, given the trade usage of the words ‘officer’ and ‘vice president.’  We stop short of making this determination, as it is a factual question to be resolved by a jury.”

The Court also noted Goldman’s record of providing indemnification or advancement to other officers. Over a six-year period, 53 people associated with the company were considered for advancement of legal fees or indemnification. Of these 53, Goldman paid the attorneys’ fees for 51. Apart from Aleynikov, Goldman refused to pay indemnification or advancement for only one other employee who sought it, also a vice-president. Of the 51 employees whose fees Goldman paid, 15 were vice-presidents. Goldman contended that, for at least some of these people, it had simply invoked its discretion in agreeing to pay the fees, even if the particular person was not necessarily entitled to indemnification or advancement under the bylaws. The Third Circuit held that the “discretion” issue should be resolved at trial.

We’re not transactional lawyers here, and we don’t draft bylaws. We generally get involved with things only after a train wreck has already occurred. It seems to me, though, that if I were drafting bylaws in a large organization, I would consider being more careful in defining the term “officer,” especially if I had hundreds of vice-presidents running around.  (We do traffic in insurance coverage matters here, though, and the issue of who is an “officer” and who is not may be relevant to your D & O coverage. Read your policy carefully.)  Also, from the perspective of a trial lawyer, I’m not crazy about this business of “discretionary” indemnification. With the current anti-corporate mindset of many Americans, my instinct tells me that jurors will not like the fact that some employees are being treated differently from others based upon the “discretion” of management.

-        Gene Killian