It's just an artifact of the costuming and the way the scenes were lit. In the lab, there's a bright light that's directly overhead Crofoot. In addition, there seems to be some extra fabric at the crotch which kind of tents in front of him and reflects the overhead lights. You can see it in the image @Michael posted. In the corridor scenes you don't have the same harsh lighting, and because they are walking the tenting isn't as visible.
Thanks for that. I just thought at first the scene may have been edited to hide his privates a little! JB
This episode does make you wonder, if Data could easily give Lal a more human appearance, why didn't he do the same for himself and change the colour of his skin and eyes?
Maybe Data didn't think there was any need to do so. He looks the way he was built and didn't think he needed to look any different. Data wasn't human. If later in the future he was able to be more human, have emotions and all that, perhaps he might even want to look more like human?
Data absolutely can have his appearance changed (Unification part 1), so evidently he does not want to.