January 4, 2013 7:48 pm

Goldman seeks $7m legal costs from Gupta

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Goldman Sachs is seeking nearly $7m from a former board member convicted of insider trading to cover its legal fees and expenses, following a judge’s description of the bank as a “victim” of the crime.

Goldman said it had spent $6.9m investigating allegations that Rajat Gupta, a director on the board from 2006 until 2009, had shared confidential financial information about the bank with his former friend Raj Rajaratnam, founder of Galleon Group hedge fund.

Gupta and Rajaratnam were both subsequently convicted of insider trading. Both men are appealing against the verdicts.

“The legal demands placed upon Goldman Sachs as a result of Gupta’s conduct were substantial,” the bank said in court filings.

Goldman said its law firm, Sullivan & Cromwell, produced more than 400,000 documents to respond to government inquiries about the trading and prepared 18 witnesses, including Lloyd Blankfein, the bank’s chairman, to testify.

The bank noted that it was not seeking restitution “for the very substantial value” of the time its top officials and in-house lawyers devoted to investigating the conduct.

Lawyers for Gupta are defending Goldman’s restitution claim, arguing that it should be limited.

At a hearing Friday, Judge Jed Rakoff, who oversaw Gupta’s trial, queried lawyers for both sides but reserved decision.

Goldman said it also intends to seek $35m in fees it advanced to Gupta for his legal defence, led by Gary Naftalis, a veteran white-collar crime attorney. The bank’s bylaws require it to advance legal fees to officers and directors, and most contracts allow the bank to reclaim those fees if the former officer is convicted and all appeals are exhausted. Those claims will be made at a future date.

In its claim against Gupta, Goldman quoted Judge Rakoff who previously said that “Goldman Sachs was the victim of Gupta’s crimes” and that the “heart of Gupta’s offences… was his egregious breach of trust... [and] fiduciary duty of confidentiality to Goldman Sachs.”

Not all companies seek restitution for insider trading, but winning it is not unusual.

Last March, a federal judge awarded Morgan Stanley $10.2m in legal fees, past compensation, and related costs stemming from a government investigation into Joseph “Chip” Skowron, a portfolio manager with FrontPoint Partners, a hedge fund owned by the bank. Morgan Stanley had sought $44.8m in restitution.

Mr Skowron had pleaded guilty to one count of conspiracy for trading after learning the results of a clinical drug trial from a doctor advising pharmaceutical company Human Genome Sciences. Human Genome Sciences did not seek restitution.

In finding Morgan Stanley was entitled to legal fees, the judge said that Mr Skowron’s “crimes deprived Morgan Stanley of the honest services of its employee, diverted valuable corporate time and energy in the defence of Skowron and FrontPoint, and injured Morgan Stanley’s reputation.”

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