February 26, 2013

In addition to having federal prosecutors breathing down their necks, insider traders might like to note that if they are caught going rogue, they will need to pay their former employer back for any legal fees relating to their case.

Under the Mandatory Victims Restitution Act, a law that allows corporations to be reimbursed as a victim of an insider trading crime by a rogue employee, a judge has just ordered Rajat Gupta, who was sentenced to two years for leaking boardroom secrets about Goldman to the hedge fund manager Raj Rajaratnam, to pay Goldman Sachs back $6.2 million as part of its internal probe into the case.

8 Most Scandalous Statements From the Gupta/Stanford Trials.]

Under the same law, a federal judge last spring ordered Joseph F. Skowron, a former Morgan Stanley hedge fund manager to pay his former employer $10.2 million in legal fees, as well as a portion of his past compensation.

Looking over the billing books in the Goldman case was no mean feat. Judge Jed S. Rakoff had to review no less than 542 pages of billing records relating to Gupta’s case. His conclusion? The number of attorneys working on the case perhaps unsurprisingly “exceeded what was reasonably necessary” under the statute, although “perhaps perfectly appropriate on the assumption that Goldman Sachs wished to spare no expense on a matter of great importance to it.”

In fact, the judge noted that Goldman Sachs has proved that 90 percent of its tendered expenses were both “necessary and incurred during its participation in the investigation and prosecution of the offense of conviction," the Wall Street Journal reported .

Ultimately, Gupta’s legal fees will of course cost him much more than the $6.2 million he has been ordered to pay Goldman. His defense has exceeded more than $30 million to date, the New York Times reports. In fact, Gupta’s legal costs are still rising as he waits for his appeal while free on bail. And in the meantime, Goldman must continue to pay Gupta’s bills until the resolution of his appeal, since the bank’s bylaws require it to pay the legal fees of its top officers and directors.

Still, Gupta shouldn’t have too much trouble paying Goldman back. In April 2008, he had a net worth of around $84 million, according to testimony during the trial, although the court heard that he took a hit during the financial crisis.

The judge's order still leaves one question unanswered. As one reader of the Wall Street Journal commented, “Will Goldman reimburse the investors who bought and sold stocks at less favorable prices due to the malfeasance of their former director?”

ABOUT THE AUTHOR
Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in ...