Conviction of Ex-Goldman Programmer Overturned

Once in a while, the system works.

It was stunning that Goldman was able to get its former employee Sergey Aleynikov arrested, and then convicted, for allegedly stealing computer code (“allegedly” is the right word, since the lower court verdict is now officially an acquittal). The fact that the securities firm could sic the FBI on the case in such short order seemed proof of the strongest form of “Government Sachs” conspiracy theories.

The idea that an intellectual property violation against a private was taken up by a prosecutor, the Manhattan US Attorney, looked like a perverse extension of the “corporations are people” view of the world. Goldman is a very profitable firm with numerous lines of business. The idea that loss of IP in one business could constitute serious harm to the firm seems quite a stretch, particularly in the area in which Aleynikov worked, high frequency trading. I’d imagine that any strategies in that arena have a very short shelf life, and thus whatever damage might have been done would have been of limited duration.

But the critical bit is the criminal versus civil distinction. While it was most decidedly not cool that Aleynikov made off with Goldman code, one has to question why taxpayer-funded prosecutors and prisons are being used to enforce less than crystal clear rights (“trade secrets” are far less clearly defined than copyright or patents).

The three judge appeals court panel not only took the unusual step of issuing its decision mere hours after the hearing (ruling to follow), but also by reversing the lower court decision, appears to have barred an appeal (note the report at Bloomberg suggests an appeal may still be possible).

The two charges in the criminal case were economic espionage and transportation of stolen property across state lines. This is the Wikipedia summary of the Economic Espionage Act:

This law contains two sections criminalizing two sorts of activity. The first, 18 U.S.C. § 1831(a), criminalizes the misappropriation of trade secrets (including conspiracy to misappropriate trade secrets and the subsequent acquisition of such misappropriated trade secrets) with the knowledge or intent that the theft will benefit a foreign power. Penalties for violation are fines of up to US$500,000 per offense and imprisonment of up to 15 years for individuals, and fines of up to US$10 million for organizations,

The second section, 18 U.S.C. § 1832, criminalizes the misappropriation of trade secrets related to or included in a product that is produced for or placed in interstate (including international) commerce, with the knowledge or intent that the misappropriation will injure the owner of the trade secret. Penalties for violation of section 1832 are imprisonment for up to 10 years for individuals (no fines) and fines of up to US$5 million for organizations.

Superficially, this law looks heinous, but actually, there are a number of hurdles that must be overcome, and the defense argued (and the judges apparently agreed) that the lower court judge had strained to apply the espionage law to this case. First, it is hard to prove that a business practice rises to the level of a trade secret. My former client, O’Connor & Associates, won a suit against a former employee who set up a software company and claimed to have software that sounded identical to O’Connor code. They considered it a coup to have persuaded the court that their software was indeed a trade secret (and O’Connor did statistical arbitrage, which like HFT was a high-speed, low profit per trade strategy). O’Connor believed that part of its success in getting the court to agree that its code was indeed a trade secret was the lengths to which it went to limit access to it, including restricting employee access to various areas of the firm (O’Connor had the firm subdivided into many small sections, with each employee’s access card limiting him to “need to be there” areas of the firm). Second, the appropriation of the IP has to take place “with the knowledge or intent” that it will either help a foreign power (section 1) or hurt the owner of the trade secret as a result of being produced for or placed in interstate/international commerce.

Per Bloomberg:

During oral arguments yesterday, the three-judge appeals panel criticized the government’s application of the espionage act to Aleynikov’s actions, asking the prosecutor how the crime occurred and how it affected commerce.

The judges — Dennis Jacobs, 67, Guido Calabresi, 79, and Rosemary Pooler, 73 — also asked if taking Goldman Sachs’s trading code was comparable to taking copyrighted material or bringing an employee manual to a new job.

[Defense attorney Kevin] Marino argued that the trial judge had “bent over backward” to let the government apply the espionage statute and argued the case should have been prosecuted in state court.

Marino argued, as he had during the trial, that Aleynikov only took open-source code he had written at Goldman Sachs. He said the government had tried to expand its reading of the Economic Espionage Act to encompass that.

“There is no trade secret,” Marino told the court. “He took it to make his new job easier, he never intended to harm Goldman.”

And this comment from the New York Times:

The reversal deals a major blow to the Justice Department, which has made the prosecution of high-tech crime and intellectual property theft a top priority. This case tested the boundaries of the Economic Espionage Act, a 15-year-old law that makes it a crime to steal trade secrets. Federal prosecutors held up the arrest of Mr. Aleynikov as an example of the government’s crackdown on employees who steal valuable and proprietary information from their employers..

A crucial issue in the appeal — and a main focus of Thursday’s oral argument — was whether Mr. Aleynikov’s actions constituted a crime under the statutory language of the Economic Espionage Act. The debate centered on whether Goldman’s high frequency trading system was a “product produced for interstate commerce” within the meaning of the law.

Lawyers for Mr. Aleynikov argued that the bank’s trading platform was built for internal use and never placed in the stream of commerce. The government countered that the high-frequency trading system, which Goldman used to trade in markets around the globe, was clearly produced for interstate and foreign commerce.

I am looking forward to reading the ruling.