Updated, 8:05 p.m. | A federal judge has ruled that Goldman Sachs must pay the legal fees of a former computer programmer accused of stealing code from the bank, a decision that wades into a hot-button issue as more and more Wall Street employees find themselves ensnared in lawsuits and investigations.
In an opinion issued Tuesday, Judge Kevin McNulty of Federal District Court in New Jersey said Goldman had a legal obligation to pay certain lawyer bills for its former programmer, Sergey Aleynikov, because he was an officer of the bank during the time in question.
“I hold that the term ‘officer’ encompasses Aleynikov’s position as a vice president” of Goldman Sachs, the judge wrote.
The judge noted that during the last six years, Goldman had paid the lawyer bills for 51 of 53 employees who needed a legal defense.
Mr. Aleynikov’s situation has been one of the more unusual white-collar criminal prosecutions in recent years. After Goldman reported him to the authorities, federal and state officials separately brought charges against him. Now, depending on the final outcome, the government’s actions against Mr. Aleynikov could cost Goldman more than $4 million.
“As a result of these two misguided prosecutions, Sergey Aleynikov lost his marriage, his home, his job, his life savings, his good name and, for a full year, his freedom,” Kevin Marino, a lawyer for Mr. Aleynikov, said in an e-mail. “That the party which provoked all that misfortune must now begin to underwrite it is good news indeed.”
A spokesman for Goldman Sachs, Michael S. DuVally, declined to comment. Representatives of the United States attorney’s office for the Southern District of New York and the Manhattan district attorney’s office also declined to comment.
The question of who should pay the legal bills of an employee accused of wrongdoing has become an increasingly important topic at banks and among the white-collar bar.
Corporate bylaws and state statutes typically permit, and sometimes require, companies to pay legal defense fees for their directors, officers and employees. Without such rules, companies would probably find it difficult to hire and retain people. The policy is intended to protect employees from lawsuits or investigations that relate to their work.
In the postcrisis era, sprawling government investigations including mortgage fraud, insider trading, money-laundering and the global benchmark interest rate Libor have led hundreds of bank employees to retain lawyers.
This wave of white-collar prosecutions has required financial firms to make hard choices on whether to pay defense fees for their employees.
Morgan Stanley paid the legal fees of Joseph F. Skowron III, a fund manager accused of insider trading while working for the bank. But after Mr. Skowron pleaded guilty, Morgan Stanley successfully clawed back $10 million in salary and lawyer fees from its former employee.
SAC Capital Advisors, the giant hedge fund charged with insider trading, has picked up the bill for former employees fighting the government. It is financing the defense, for instance, of two former portfolio managers, Michael S. Steinberg and Mathew Martoma, who are awaiting trial. But the fund is not paying the legal bills of former employees who have pleaded guilty, like Richard S. Lee or Noah Freeman.
“Mounting a defense in any federal criminal case is extraordinarily expensive, particularly in the context of large-scale financial frauds,” said Harlan Protass, a defense lawyer at Clayman & Rosenberg. “Today, that cost has only increased with the sheer volume of e-mails and other documents that have to be reviewed.”
The issue of corporate indemnification has become especially pitched at Goldman, which is mired in several prominent cases.
It has paid more than $35 million in lawyer fees for a former director, Rajat K. Gupta, who was convicted in an insider trading case of leaking boardroom talks to the hedge fund magnate Raj Rajaratnam.
In the case of Mr. Gupta, as a director, he was entitled to have his legal fees paid under the bank’s bylaws. Mr. Gupta has agreed to reimburse Goldman if a court denies his appeal.
The bank also made a decision to pay for the defense of Fabrice Tourre, a former Goldman vice president accused of securities fraud. A jury found Mr. Tourre liable after a three-week civil trial this summer.
But Goldman drew the line at Mr. Aleynikov, a Russian immigrant who served as a vice president in Goldman’s high-frequency trading group.
Mr. Aleynikov’s legal odyssey began four years ago, when federal authorities arrested him after Goldman reported his misconduct to the United States attorney in Manhattan. Mr. Aleynikov was charged with stealing secret source code for high-frequency trading software as he was leaving to join a start-up.
A jury found him guilty in 2010, and Mr. Aleynikov was sentenced to eight years in federal prison. But an appeals court reversed that conviction last year on grounds that the government misapplied the corporate espionage laws to his case.
Mr. Aleynikov was released from prison, but six months later, Cyrus R. Vance Jr., the Manhattan district attorney, filed his own case, accusing Mr. Aleynikov of state crimes. Mr. Aleynikov is fighting those charges.
After the state charged Mr. Aleynikov, his lawyers sued Goldman in federal court. They argued that Goldman was obligated to pay his bills, relying on a section of the bank’s bylaws that require the firm to pay lawyer fees for employees charged in criminal or civil proceedings in connection with their role as an officer of the bank.
Goldman denied he was an officer of the bank. It described Mr. Aleynikov as “a midlevel computer programmer with no managerial responsibilities.” And his position as a “vice president,” the bank said, was nothing more than title inflation, a courtesy label used on Wall Street to make jobs sound more important than they actually are.
Judge McNulty disagreed with the bank. He ordered Goldman to advance Mr. Aleynikov the money that he was spending to fight the state case, an amount already exceeding $700,000.
The court also said Goldman must pay reasonable legal fees incurred by Mr. Aleynikov fighting the bank on the legal-fee issue. So far, those fees are $1.1 million, though Goldman could dispute the amount.
Judge McNulty ordered further discovery on the amount owed Mr. Aleynikov related to the federal case. Mr. Aleynikov’s lawyers have put that amount at about $2.3 million.
The judge offered Goldman some grim consolation.
“Goldman may understandably find the result galling; it believes that Aleynikov has stolen its property,” wrote the judge. “If there is any comfort, it may lie in the fact that Goldman has also indemnified and advanced fees in cases where the conduct was alleged to be unlawful and, in the broader sense, no less harmful to Goldman.”