It’s a story that sounds like something out of Tinker Tailor Soldier Spy by way of Wall Street – and has injected an equivalent level of drama into the trade-secrets arena of the intellectual property (IP) landscape. It may also come to define the treatment of an entire form of intangible asset that is often masked by the software it supports. That asset is source code – and the individual who has made it a talking point in US legal circles is Sergey Aleynikov.
In February, the Second US Circuit Court of Appeals cleared Aleynikov from two convictions: one under the 1996 Economic Espionage Act (EEA) for downloading a trade secret related to – or included in – a product produced for interstate or foreign commerce; and another under the 1948 National Stolen Property Act (NSPA) for transporting, transmitting or transferring wares, merchandise, securities or money of a value of $5,000 or more, ‘knowing the same to have been stolen, converted or taken by fraud’. The Appeals Court published its full decision in April.
For Goldman Sachs – the company whose evidence had helped to convict Aleynikov at the US District Court for the Southern District of New York – the acquittal represented the collapse of an apparently solid prosecution. So was the Appeals Court’s decision to acquit based upon semantics, or a clearer reading of the laws? NewLegal Review investigates.
Stage 1: Server trouble
In 2009, Aleynikov worked as a $400,000-per year developer for high-frequency trading (HFT) programs at Goldman Sachs. His job was to write the source code that formed the foundations of the company’s HFT suite, which was only ever used internally – never licensed to other businesses.
For global financial firms, HFT suites have become increasingly vital tools for contending with the dynamic and fluid nature of the markets. By having them to hand, institutions are able to rely on automated systems that bolster existing manpower by spotting fleeting advantages in market conditions. For Goldman Sachs’s part, its suite fulfilled three functions: i) processing real-time market data and executing trades; ii) using algorithms to determine which trades to make; and iii) facilitating the flow of information necessary to make those judgements.
In April 2009, Aleynikov was headhunted to become the $1m-plus-per year executive vice president of Chicago-based Teza Technologies LLC, a startup specialising in trading technology. His departure from Goldman Sachs came two months later. In the interim, Aleynikov received an email from Teza’s founder indicating that the company expected to have a functional HFT suite within six months of the programmer’s arrival. But constructing such a platform typically takes several years.
According to trial evidence, on 5 June 2009 – just hours before his leaving party – Aleynikov mass-encrypted half a million lines of Goldman Sachs HFT source code and uploaded them to a server based in Germany. He then deleted his actions from the office computer. Upon returning to his New Jersey home, Aleynikov retrieved the lines from the remote server, and, on 2 July, flew to Chicago to present a drive and laptop containing the code at a meeting with Teza staff. As soon as he arrived back at Newark Airport, he was arrested by the FBI.
His efforts at concealment had clearly fallen short.
Stage 2: Source of judgment
While the source code was an asset generated by an intellectual process, US authorities construed Aleynikov’s act as theft and industrial espionage, rather than infringement, and prosecuted him accordingly. The programmer had moved code – not copied a finished piece of patented software – and, in any case, that code had not been implemented in another HFT suite prior to Aleynikov’s indictment.
With respect to the NSPA, the district court found that the Goldman Sachs code constituted ‘goods’ that were ‘stolen’ in the meaning of the Act because it contained ‘highly confidential’ details related to the HFT suite that would benefit ‘any firm seeking to launch, or enhance, a high-frequency trading business’.
Regarding the EEA charge, the Court held that: i) the source code is a trade secret; ii) the Goldman Sachs HFT suite is a ‘product’ to which the code relates, built through the efforts of the company’s staff; and iii) the suite was ‘produced for’ and ‘placed in’ interstate commerce, because it facilitates the rapid execution of trades on territory-spanning markets.
Consequently, Aleynikov was sentenced to eight years imprisonment, to be followed by a three-year term of supervised release, and fined $12,500. Bail was denied, as the Court had taken note of Aleynikov’s dual US-Russian citizenship and deemed him a flight risk.
Stage 3: Elvis impersonation
Overturning the NSPA part of the District Court’s verdict, the three appeal judges looked to the 1985 Supreme Court decision in Dowling v United States: a case concerning an enterprise formed by Elvis Presley fanatics Paul Dowling and William Theaker to make and distribute bootlegged records by their hero.
Using a traditional vinyl press for making phonographic records, Dowling and Theaker duplicated Elvis material from a variety of different sources that had not appeared on LPs before. These included archive tapes and videos of Elvis concerts, soundtracks from his films, and bootlegs of studio outtakes that had made their way into fan circles.
In its assessment of Dowling, the Supreme Court noted that cases prosecuted under the NSPA have always involved ‘physical goods, wares, [or] merchandise’ that have themselves been ‘stolen, converted or taken by fraud’. This basic element, said the Court, ‘comports with the common-sense meaning of the statutory language: by requiring that the “goods, wares, [or] merchandise” be “the same” as those “stolen, converted or taken by fraud”, the provision seems clearly to contemplate a physical identity [emphasis added] between the items unlawfully obtained and those eventually transported’.
As Dowling and Theaker had taken Elvis material from a range of sources never before presented on vinyl, the Supreme Court deemed that their records were not the ‘same’ objects as assets sold by official licensors of Presley’s output. Simply put, they had not hijacked a batch of bona-fide Elvis records that were on their way to retailers.
‘There is no dispute in this case,’ added the Supreme Court, ‘that Dowling's unauthorised inclusion on his bootleg albums of performances of copyrighted compositions constituted infringement of those copyrights. It is less clear, however, that the taking that occurs when an infringer arrogates the use of another's protected work comfortably fits the terms associated with physical removal employed by [the NSPA].’
The appeal judges in Aleynikov’s case used Dowling as a strict template, following the Supreme Court’s narrow interpretation to the letter. Construing the source code as ‘purely intangible property’, they ruled out the presence of contestable, physical material in Aleynikov’s action.
Stage 4: System failure
On the question of the EEA, the appeal judges felt that the shroud of secrecy under which Goldman Sachs kept its HFT suite effectively hamstrung the company’s case. The software’s closely guarded, internal use automatically exempted it from much of the Act’s active language.
‘Goldman’s HFT system,’ they ruled, ‘was neither “produced for” nor “placed in” interstate or foreign commerce. Goldman had no intention of selling its HFT system or licensing it to anyone. It went to great lengths to maintain the secrecy of its system. The enormous profits the system yielded for Goldman depended on no one else having it. Because the HFT system was not designed to enter, or pass in, commerce – or to make something that does – Aleynikov’s theft of source code relating to that system was not an offence under the EEA.’
They added: ‘The conduct found by the jury [of the District Court] 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.’
Stage 5: What now?
Goldman Sachs has yet to comment on the intricacies of the ruling. But in an interview with Securities Technology Monitor, a spokeswoman for the Southern District of New York Attorney’s office – which prosecuted Aleynikov – implied a degree of surprise over the narrowness of the appeal judges’ readings. ‘Our charging decisions in every case are based exclusively on the facts and the evidence,’ she said. ‘We prosecute individuals and entities who violate the law, regardless of their status, when we believe we can prove the charges beyond a reasonable doubt – as we did in the case of Sergey Aleynikov.’
Meanwhile, Aleynikov’s lawyer, Kevin Marino, suggested that the Southern District had overplayed its hand, criticising ‘a hastily made decision to charge someone with crimes he did not commit, and slavishly stick to [that charge]’.
Software IP experts will now be eager to see whether Goldman Sachs will push for a re-examination of the case at the Supreme Court – potentially to argue that software source code should not be considered ‘purely intangible’, and that an HFT system’s role in global trading constitutes its production for, and placement in, interstate commerce. It also remains to be seen whether the company will launch civil actions against Aleynikov – or, indeed, Teza Technologies.
For now, though, the case indicates how corporate counsel should approach trade-secrets cases relating to source code for internal software systems. It also has plenty of governance lessons for ensuring that what has been developed in house stays in house.
For previous NewLegal Review coverage of trade secrets, click here