Internal Investigation Fees Awarded to Goldman Sachs

Gavel and Hundred-Dollar Bill

On Monday, February 25, Goldman Sachs won its bid to force former director Rajat K. Gupta to pay legal fees it incurred while investigating Gupta’s insider trading activities. In October 2012, Gupta was sentenced to two years in prison following his conviction on conspiracy and securities fraud charges. As part of those sentencing proceedings, Judge Jed Rakoff of the Southern District of New York has now ordered Gupta to pay Goldman Sachs $6.2 million, an amount equal to approximately 90 percent of the legal expenses the banking firm sought to recover. See United States v. Gupta, Case No. 11 CR 907 (S.D.N.Y. Feb. 25, 2013).

Background on the Ruling

Goldman Sachs sought its fees under the Mandatory Victim Restitution Act (“MVRA”), which allows some crime victims to recover expenses they incur as a result of a criminal defendant’s wrongful conduct. See 18 U.S.C. §3663A.

Judge Rakoff’s restitution order requires Gupta to pay the legal fees Goldman Sachs incurred conducting an internal investigation; responding to grand jury subpoenas and document requests from the U.S. Attorney’s Office, the Securities and Exchange Commission (“SEC”), and from Gupta himself; collecting and reviewing millions of documents leading to document productions of over 400,000 pages; and providing counsel to represent various of its officers and employees in depositions and at trial. The restitution order also covered fees Goldman Sachs incurred relating to the criminal investigation of Raj Rajaratnam, who was unaffiliated with Goldman Sachs but convicted for his role in the same insider trading scheme. Finally, Judge Rakoff ordered Gupta to pay Goldman Sachs its fees associated with preparing the request for restitution.

Implications of the Ruling

In ordering restitution, Judge Rakoff found that the requested attorney’s fees were “necessary,” were “incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense,” and were incurred by a “victim.” While one may not have thought of Goldman Sachs – the entity from whom Gupta, the tipper, acquired the inside information – as a traditional victim of insider trading, in interpreting that term as anyone who was “directly and proximately harmed” by the offense of conviction, the Court had no difficulty in finding that Goldman was a victim and thus awarding it the attorney’s fees.

Goldman’s fee recovery adds to a growing line of cases allowing businesses to recover legal fees spent on internal investigations, even if those investigations preceded a later government investigation or arose out of a related criminal case. Last year, Morgan Stanley was able to recover its legal fees and costs incurred in conducting an internal investigation and cooperating with the SEC’s investigation of Joseph Skowron III, a Morgan Stanley managing director convicted of securities fraud and obstruction of justice. See United States v. Skowron, Case No. 11 CR 699 (S.D.N.Y. Mar. 20, 2012). Skowron’s appeal of that Order is currently pending before the U.S. Court of Appeals for the Second Circuit. See United States v. Skowron, Case No. 12 CR 1284 (2d Cir.).

Recovering legal fees spent on a voluntary internal investigation is not a settled issue, as other courts have denied recovery of these fees, strictly interpreting the MVRA’s language that only requires restitution of “expenses incurred during participation in the investigation or prosecution of the offense,” and declining to apply that language to a voluntary internal investigation undertaken well before any criminal prosecution has commenced. Courts refusing to award restitution typically note that the internal investigation was neither required nor requested by government investigators or prosecutors. Conversely, judges deciding that the MVRA covers internal investigation costs do so on the grounds that the insider’s criminal acts forced the corporation to launch an internal investigation and/or cooperate with a government investigation, making the costs a direct and foreseeable result of the criminal offense.

Significantly, recovery under the MVRA is available to victims of a wide variety of criminal offenses, including “offenses against property,” “offenses committed by fraud or deceit,” and “any offense in which an identifiable victim or victims has suffered a physical injury or pecuniary loss.” The MVRA does not provide coverage in cases where the number of identifiable victims makes restitution impracticable, or where complex fact issues unduly complicate or prolong the sentencing process. Thus, in cases involving an employee’s or other insider’s criminal wrongdoings – cases beyond insider trading and including crimes as varied as embezzlement, theft of trade secrets, securities fraud and mortgage fraud – the company that had been affiliated with the wrongdoer may be able to recover the legal costs incurred in uncovering and exposing those criminal acts. Arguably, this interpretation of the MRVA is also broad enough to allow a corporate victim to recover fees incurred when a competitor commits crimes like antitrust violations, computer hacking or economic espionage.

While it is not yet clear whether this ruling will stand up on appeal, it is nonetheless significant as it provides a much more streamlined process of recovering these fees – filing a motion in criminal court – than initiating a full-fledged civil lawsuit.