Judge Orders Goldman to Pay Programmer’s Legal Bills

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 that Goldman has a legal obligation to pay certain lawyer bills for Sergey Aleynikov, the former Goldman programmer, 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 GSCo,” wrote the judge.

The judge noted that during the past six years, Goldman has 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, both federal and state officials have each 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, Serge Aleynikov lost his marriage, his home, his job, his life savings, his good name and, for a full year, his freedom,” said Kevin Marino, a lawyer for Mr. Aleynikov, 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 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 inside the white-collar bar.

State statutes and corporate bylaws typically permit, and sometimes require, companies to pay legal defense fees for its directors, officers and employees. Without such rules, companies would likely find it difficult to hire and retain people. The policy is intended to protect employees from lawsuits or investigations that relate to their work.

Sprawling government investigations including mortgage fraud, insider trading, money laundering and the global benchmark interest rate Libor have forced hundreds of bank employees to lawyer up.

This wave of white-collar prosecutions since the crisis has forced financial firms to made hard choices as to whether to pay defense fees for their employees.

Bear Stearns, and then JPMorgan after it acquired the failed bank, has paid tens of millions of dollars funding the legal defense of Ralph Cioffi and Matthew Tannin, the two former Bear executives who faced criminal charges and several other lawsuits connected to their mortgage-backed securities hedge fund. A jury acquitted the men in 2009.

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 from $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 tab for former employees fighting the government. It has financed the defense, for instance, of two former portfolio managers, Michael S. Steinberg and Mathew Martoma, who are awaiting trials. But the fund is not paying legal bills for 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 has become mired in several high-profile 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 refund Goldman if a court denies his appeal.

The bank also made a decision to pay for the defense of Fabrice Tourre, the 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. Then a Goldman vice president, 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. An appeals court reversed that conviction last year on the grounds that the government misapplied the corporate espionage laws to his case.

Mr. Aleynikov was released from prison, but six months later, Cyrus Vance, the Manhattan district attorney, filed his own case, accusing him of violating state crimes. Mr. Aleynikov is fighting those charges.

After the state charged Mr. Aleynikov, his lawyers sued Goldman in federal court. They said that their client had exhausted his financial resources and could not afford to pay his lawyers.

They argued that Goldman was obligated to pay Mr. Aleynikov’s bills, relying on a section of the bank’s bylaws requiring 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 argued that Mr. Aleynikov was not an officer of the bank. It described Mr. Aleynikov as “a mid-level computer programmer with no managerial responsibilities.” His position as a “vice president,” the bank said, was nothing more than Wall Street title inflation, a courtesy label used by the bank to make jobs sound more important than they actually were.

Judge McNulty disagreed with the bank. He ordered that Goldman advance Mr. Aleynikov the money that he is spending to fight the state case, an amount already exceeding $700,000. Goldman is expected to seek reimbursement from Mr. Aleynikov if he is unsuccessful in his defense.

The court also said that the bank must pay reasonable legal fees that have been incurred by Mr. Aleynikov fighting Goldman on the legal-fee issue. Thus far, those fees are $1.1 million, though Goldman could dispute the amount as unreasonable.

Judge McNulty ordered further discovery on the amount the bank owes Mr. Aleynikov related to the federal charges. Mr. Aleynikov’s lawyers have put that amount at about $2.3 million.

The judge appeared to sympathize with Goldman’s predicament, but suggested that it was singling out Mr. Aleynikov.

“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.”