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News April 16, 2012 Issue

Goldman Programmer Not Guilty of Stealing Trading Code

In a move sure to make quant managers everywhere shudder, a federal appeals court has overturned the conviction of an alleged computer code thief on the grounds that the crime was outside the reach of the laws.

"We decline to stretch or update statutory words of plain and ordinary meaning in order to better accommodate the digital age," said the Second Circuit Court of Appeals in an opinion released last week.

Sergey Aleynikov, a former Goldman Sachs programmer, was convicted back in December 2010 of taking a high-frequency trading code with him when he left Goldman for a new job with Teza Technology. Aleynikov was accused of transferring the code to an overseas server in Germany to avoid the bank’s security system, and then downloading the code onto a thumb drive and a laptop.

The federal government charged Aleynikov with violations of the Economic Espionage Act (EEA) and National Stolen Property Act (NSPA). Under those laws, the federal district court convicted Aleynikov of stealing trade secrets and the transportation of stolen property.

The three-judge appellate panel unanimously agreed that the alleged crimes fell short of the requirements of either law. The computer code was not an economic good under the EEA because it "was not designed to enter or pass in commerce, or to make something that does," said the court. Even though the code was designed to execute a pattern of rapid trading in the financial markets, the court found that Goldman had no intent to sell or market it.

Further, the NSPA did not cover "intangible" property such as computer code, and transferring the code to the tangible medium of a hard drive did not convert it into a stolen good under that law.

"The conduct found by the jury is conduct that Aleynikov should have known was in breach of his confidentiality obligations to Goldman, and was dishonest in ways that would subject him to sanctions; but he could not have known that it would offend this criminal law," said chief Judge Dennis Jacobs.

Aleynikov’s lawyer, Kevin Marino, said the decision "represents a total repudiation of the government’s prosecution." Marino suggested that Goldman had used its "tremendous power" to bring about a criminal prosecution rather than pursue civil allegations. Aleynikov spent a little over a year in jail until he was freed upon the appellate court’s initial decision in February.

Venable partner William Devaney told DealBook that "this is a case where the facts didn’t fit the federal statute." It would take an amendment of the laws in Congress to correct, and he said he wouldn’t be surprised to see an attempt made to extend the law to cover fact patterns like the ones presented in this case.

Firms consider proprietary quantitative codes to be trade secrets and valuable property, which they aggressively protect and maintain.

In a separate concurring opinion, Circuit Judge Guido Calabresi said that even though the current law would require [impermissible] stretching to cover Aleynikov’s acts, it was hard for him to conclude "that Congress, in this law, actually meant to exempt the kind of behavior in which Aleynikov engaged."