Wall St. Debates Who Should Pay Legal Bills

Who should foot the legal bill?

That’s an increasingly common question â€" and debate â€" within legal circles amid the current spate of prominent Wall Street white-collar cases with bills ballooning, by the hour, into the tens of millions of dollars, if not more.

Goldman Sachs paid several millions of dollars to defend, unsuccessfully, its former trader, Fabrice Tourre, in his civil fraud case. He was found liable on six counts of civil securities fraud. Even though he lost, the firm is not seeking reimbursement from Mr. Tourre, according to people involved in the matter. In fact, the firm plans to pay for his appeal and has privately indicated it might even pay whatever money he could ultimately be fined, these people said.

In contrast, Goldman, after spending more than $35 million on the legal fees for one of its directors, Rajat Gupta, who was convicted in criminal court of insider trading, is seeking to be repaid; Mr. Gupta may not have the money.

Steven A. Cohen’s hedge fund, SAC Capital Advisors, is picking up the tab for some of its traders ensnared in the continuing criminal insider trading investigation into the firm, but not others. Despite firing one of its traders, Mathew Martoma, the fund is now covering the bills for his defense against securities fraud and conspiracy charges. The firm is also paying legal bills for Michael Steinberg, who remains on the firm’s payroll and has also been accused of insider trading.

On the other hand, SAC did not pay the legal bills for another former employee, Richard S. Lee, who is cooperating with the government in its investigation and pleaded guilty to insider trading.

The implication of who is â€" or who is not â€" paying legal fees could have a large effect on the defense’s strategies for defendants. But in addition to that, it is increasingly raising questions in the industry.

“It’s a more significant issue today than it’s ever been,” said Kevin H. Marino, a partner at Marino, Tortorella & Boyle. “In this era, positions on Wall Street are fraught with all sorts of perils and more individuals are finding themselves ensnared in lawsuits and investigations.”

Mr. Marino knows more than most about the issue of who gets stuck with the bill. He recently represented Morgan Stanley in its effort to claw back $10 million in salary and legal defense fees it had advanced to one of its employees, Joseph F. Skowron III. Mr. Skowron, a former manager at FrontPoint Partners, which used to be owned by Morgan Stanley, mounted a defense against insider trading charges against him in 2011 only to later plead guilty. Morgan Stanley had paid $3.8 million in defense fees on his behalf. An appeals court ruled in favor of Morgan Stanley last month.

However, Mr. Marino is on the opposite side of a case over legal fees, too. He is suing Goldman on behalf of his client, Sergey Aleynikov, a computer programmer who is accused of stealing computer code from the firm before leaving for another job. His conviction in federal court was overturned, but state prosecutors are pursuing a similar case. Mr. Marino argues, somewhat counterintuitively, that Goldman should pay Mr. Aleynikov’s legal fees because the allegations against him involved illegal activity while on the job. Goldman argues that it is the victim of Mr. Aleynikov’s theft.

There is no absolute rule or law that says a company must pay defense fees for its employees, but Delaware law â€" where most companies are incorporated â€" allows legal fees to be paid and in certain cases has required it on the theory that it is good public policy to protect employees from lawsuits that result from work that advances the interests of the employer. Depending on a corporation’s bylaws, directors, officers and, in some cases, employees, are often indemnified. Most companies buy insurance to pay the fees. In almost all cases, employees must repay the legal fees and often other restitution if they are found guilty.

In February, Mr. Gupta was ordered by Federal District Court Judge Jed S. Rakoff to pay $6.2 million to Goldman for its legal fees related to the case. Goldman had sought $6.9 million but Judge Rakoff derisively commented, “On a few occasions, the number of attorneys staffed on a task, while perhaps perfectly appropriate on the assumption that Goldman Sachs wished to spare no expense on a matter of great importance to it, exceeded what was reasonably necessary.”

While the legal world is often acutely aware of who is paying the bill, the public and juries are usually never told about the deals made behind the scenes. Judges, in some cases, have prevented lawyers from telling juries about the payment arrangements for fear that it could prejudice a jury â€" some jurors might hold an individual accountable for something they project onto the corporation paying the bill while other jurors might side with the individual because the payment suggest the corporation stands behind them.

Several lawyers told me privately that when companies pay for the defense of an employee, the company often seeks to be briefed on legal strategies in advance of trials and often provide suggestions and other feedback.

In the case of Mr. Tourre, his lawyers reviewed the defense team’s plans with Goldman several times before the trial and Goldman sent a representative to watch the trial and take notes, these people said, though none said that Goldman sought to influence the strategy.

Surprisingly, Goldman does not have a written contract with Mr. Tourre to support his defense, nor does the firm have insurance to pay such bills for its employees, these people said.

“You can always speculate that the entity providing legal fees has the leverage,” Mr. Marino said. “But I have represented corporate officers at the expense of the corporation.”

Still, he said he wondered whether legal fees were “being extended or withheld because the firm is trying to control the legal advice that is being recommended.”

Andrew Ross Sorkin is the editor-at-large of DealBook. Twitter: @andrewrsorkin