A recent New York Times story, “Wall Street Debates Who Should Pay Legal Bills,” by Andrew Ross Sorkin reports that the debate about who should foot the legal bill is an increasingly common question 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 the 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 it investigation and pleaded guilty to insider trading.

The implication of who is – or who is not – 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.”

There is no absolute rule or law that says a company must pay defense fees for its employees, but Delaware law – where most companies are incorporated – 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 by insurance to pay the fees.  In almost all cases, employees must repay the legal fees and often other restitution if they are found guilty.