United States v. Aleynikov

10-00096
February 10, 2010
Federal Court
2nd Circuit
Southern District of New York

In 2011, Sergey Aleynikov was sentenced to more than eight years in prison for the theft of trade secrets under the Economic Espionage Act and transportation of stolen property in interstate commerce under the National Stolen Property Act (NSPA). This case marked the first instance of federal prosecutors using the Economic Espionage Act (EEA) to police the misuse of source code related to high frequency trading. The trade secrets at issue are segments of computer source code from Goldman Sachs & Co. (Goldman) that are used in its high frequency trading platform.

In February 2012, the court reversed Aleynikov's conviction of trade secrets theft in a one-page order. In an opinion published April 11, 2012, the Second Circuit held that Sergey Aleynikov was wrongly charged with theft of property because the code did not qualify as a physical object under a federal theft statute. The court held that "because Aleynikov did not ‘assume physical control’ over anything when he took the source code, and because he did not thereby ‘deprive [Goldman] of its use,’ Aleynikov did not violate the [National Stolen Property Act]." It also ruled that Aleynikov was wrongly charged with espionage, since the code was not a product designed for interstate or foreign commerce. The decision called into question the government's ability to prosecute theft of internal trading systems or other internal financial instruments under the Economic Espionage Act.

Denise Cote
United States
Sergey Aleynikov
Economic Espionage Act

Filings from this case

Complaint | 2009-07-04
Brief for Defendant | 2011-06-03
Order | 2012-02-16
Opinion | 2012-04-11

Case Report

On April 11, 2012, Sergei Aleynikov was acquitted by the Second Circuit court of Appeals of violating § 1832 of the Economic Espionage Act of 1996 (EEA). Following the court's invitation to amend the wording of the interstate commerce requirement in the statute, Congress amended the EEA.

Facts:

Goldman Sachs ("Goldman") employed Aleynikov in the New York area from May 2007 through June 2009 to develop key high frequency trading ("HFT") source code. HFT software executes a large number of trades in a fraction of a second, generating substantial revenue: just three of Goldman's HFT groups generated a combined $300 million in revenue in 2009. Aleynikov was paid an annual salary of $400,000, the highest salary of the twenty-five programmers in his group.

In April of 2009, he accepted the position of Executive Vice President of Teza Technologies LLC in Chicago at an annual salary of $1.15 million. Teza's founder told Aleynikov that Teza expected to develop an HFT system in six months, whereas the court found that it usually takes years to develop an HFT system.

Over a period of several months, Aleynikov transferred files from his work computer to his home computer. The FBI arrested Aleynikov at Newark Liberty International Airport on July 3, 2009 when he returned from a trip to Teza in Chicago, where he had brought a laptop and flash drive containing Goldman source code. Aleynikov claimed that he had not given the data in the laptop and flash drive to Teva.

District Court:

Aleynikov was indicted on three counts:

  • Count one: three counts of theft of trade secrets in violation of 18 U.S.C. §§ 1832(a)(2) of the Economic Espionage Act of 1996 (EEA).
  • Count two: transportation of stolen property in interstate commerce, in violation of 18 U.S.C. § 2314 of the National Stolen Property Act (NSPA).
  • Count three: unauthorized computer access and exceeding authorized access in violation of 18 U.S.C. §§ 1030(a)(2)(C) and 1030(c)(2)(B)(i)-(iii) of the Computer Fraud and Abuse Act (CFAA).

The district court (Judge Denise Cote) dismissed count three. A jury found Aleynikov guilty on counts one and two and he was sentenced to 97 months of imprisonment followed by a three-year term of supervised release, and fined $12,500. Bail pending appeal was denied because Aleynikov, a dual citizen of the United States and Russia, was feared to be a flight risk. Aleynikov appealed.

Court of Appeals:

The Court of Appeals dismissed both remaining counts.

The court found that the NSPA did not criminalize the taking of intellectual property, citing numerous cases, of which Bottone and Dowling were the most important. In United States v. Bottone, 365 F.2d 389 (2d Cir.1966) (Friendly, J.), the court held that photocopied documents describing a valuable manufacturing process were tangible goods, but noted in dicta that had no photocopies been physically transported across state lines, there would have been no violation of the NSPA. In Dowling v. United States, 473 U.S. 207 (1985), the Supreme Court held in a 6-3 decision that the NSPA did not apply to a bootleg music business because the NSPA was designed to cover theft of physical goods, and the Court refused to extend the NSPA to cover patent and copyright infringement.

More controversially, the court found that the EEA did not cover the theft of source code that was never "produced for" or "placed in" interstate commerce. Under 18 U.S.C. § 1832, Aleynikov was charged with taking a trade secret "that is related to or included in a product that is produced for or placed in interstate or foreign commerce." The court noted that the language of § 1832 was narrower than the language of § 1831 (covering foreign espionage), and held that the court therefore had to construe § 1832 as protecting only those trade secrets that were placed in or were to be placed in interstate commerce. The Goldman Sachs source code, while perhaps used to conduct interstate commerce, was never intended to be placed in interstate commerce.

Thus, the court held that while what Aleynikov did was morally wrong; Aleynikov did not commit a federal crime.

Judge Guido Calabresi concurred, but asked Congress to "state, in appropriate language, what I believe they meant to make criminal in the EEA."

Trade Secrets Clarification Act of 2012

The Theft of Trade Secrets Clarification Act was signed into law by President Obama on December 28, 2012 (Pub. L. 112-236, 126 Stat. 1627 (2012)). It rewrites the EEA as follows:

Section 1832(a) of title 18, United States Code, is amended in the matter preceding paragraph (1), by striking "or included in a product that is produced for or placed in" and inserting "a product or service used in or intended for use in".

Introduction

In 2011, Sergey Aleynikov had been sentenced to more than eight years in prison for the theft of trade secrets under the Economic Espionage Act and transportation of stolen property in interstate commerce under the National Stolen Property Act (NSPA). This case marked the first instance of federal prosecutors using the Economic Espionage Act (EEA) to police the misuse of source code related to high frequency trading. The trade secrets at issue are segments of computer source code from Goldman Sachs & Co. (Goldman) that are used in its high frequency trading platform. In February 2012, the court reversed Aleynikov's conviction of trade secrets theft in a one-page order. In an opinion published April 11, 2012, the Second Circuit held that Sergey Aleynikov was wrongly charged with theft of property because the code did not qualify as a physical object under a federal theft statute. The court held that "because Aleynikov did not ‘assume physical control’ over anything when he took the source code, and because he did not thereby ‘deprive [Goldman] of its use,’ Aleynikov did not violate the [National Stolen Property Act]." It also ruled that Aleynikov was wrongly charged with espionage, since the code was not a product designed for interstate or foreign commerce. The decision called into question the government's ability to prosecute theft of internal trading systems or other internal financial instruments under the Economic Espionage Act.

In December 2010, Aleynikov, a former computer programmer for Goldman Sachs, had been found guilty of stealing proprietary source code from the bank’s high-frequency trading platform. According to the charges, Aleynikov copied hundreds of thousands of lines of code related to Goldman Sachs' high-frequency trading business and relied on the stolen data to develop plans for a similar high-frequency trading platform at a fledgling firm named Teza Techologies. Aleynikov maintains that he merely took publicly available open-source code.

Facts of the Case

Goldman presented the U.S. Attorney’s Office with evidence of Sergey Aleynikov’s (Aleynikov) theft of segments of code and contended that misuse of this platform could disrupt the financial markets. Acting on Goldman’s tip, on July 3, 2009, the FBI arrested Aleynikov at Newark Airport after he returned from a trip to Chicago to visit his new employer Teza Technologies, LLC (Teza).

Aleynikov held the title of Vice President in Goldman’s Equities Division for two years. He was a member of a team of computer programmers who were responsible for developing and improving portions of the code for Goldman’s high frequency trading platform. Teza approached Aleynikov and offered him the position of Executive Vice President, Platform Engineering at triple his $400,000 salary in order to develop its own high frequency trading business. On June 5, 2009, the eve of his departure from Goldman, Aleynikov copied thousands of lines of code and uploaded them to a German code repository. Aleynikov then covered his tracks by deleting the history of his most recent computer commands. Aleynikov subsequently accessed the code repository and copied the Goldman code to his home computer and then to two other home computers and a flash drive. On his trip to Chicago, Aleynikov brought with him a laptop computer and flash drive containing Goldman’s source code, including some of the code he had copied and uploaded on June 5th. Although Aleynikov admitted that he breached Goldman’s confidentiality provisions, he maintained that he only copied sections of open source code which he had produced.

Criminal Charges and Procedural History

On February 11, 2010, Aleynikov was indicted in the Southern District of New York, on three counts: theft of trade secrets under the Economic Espionage Act 18 U.S.C. § 1832(a)(2) & (4), transportation of stolen property in interstate commerce under the National Stolen Property Act (NSPA) 18 U.S.C. § 2314, and unauthorized computer access and exceeding authorized access under the Computer Fraud and Abuse Act (CFAA) 18 U.S.C. § 1030(a)(2)(C). The case was assigned to the Honorable Denise Cote.

On July 16, 2010, Aleynikov moved to dismiss the case under Rule 12(b)(3)(B) on the basis that the indictment failed to invoke the court’s jurisdiction or state an offense. The motion was fully submitted on Aug. 13, 2010. On Sept. 3, 2010, the court granted in part and denied in part the defendant’s motion to dismiss, maintaining the charges under the EEA and NSPA, but dismissing the charges under the CFAA. United States v. Aleynikov, 737 F. Supp. 2d 173 (S.D.N.Y. 2010). After a two week long trial, the jury unanimously convicted Sergey Aleynikov both remaining counts, under the EEA and NSPA, on Dec. 10, 2010.

On Dec. 23, 2010, Aleynikov filed a motion for acquittal or new trial. The government’s opposition was filed on Jan. 21, 2011 and Aleynikov filed a subsequent reply on Jan. 28, 2011. On Feb. 24, 2011, the court revoked Aleynikov’s bail and remanded him to the custody of the U.S. Marshal’s Service. On Feb. 25, 2011, Aleynikov filed an interlocutory Notice of Appeal to the Second Circuit regarding the revocation of his bail. On March 14, 2011, Judge Cote denied Aleynikov’s motion for acquittal or a new trial. He was held until his sentencing on March 18, 2011, where he was sentenced to a little over 8 years, followed by 3 years of supervised release, and a $12,500 fine. Aleynikov faced a maximum of 10 years of imprisonment for the theft of trade secrets under the Economic Espionage Act and transportation of stolen property in interstate commerce under the National Stolen Property Act (NSPA). This case marked the first instance of federal prosecutors using the Economic Espionage Act (EEA) to police the misuse of source code related to high frequency trading. The trade secrets at issue are segments of computer source code from Goldman Sachs & Co. (Goldman) that are used in its high frequency trading platform. On March 23, 2011, Aleynikov filed a notice of appeal of his conviction to the Second Circuit.

The Decisions Below and On Appeal

The court, in its Sept. 3, 2010 opinion, rejected Aleynikov’s argument that source code for Goldman’s trading system is not a “product” that is “produced for or placed in interstate and foreign commerce” under the EEA. In maintaining the EEA charge against Aleynikov, the court clarified the meaning of “product” and “produced for interstate commerce” and explained how the source code that comprised Goldman’s Trading System fell within the ordinary meaning of the terms.

The court concluded that the EEA does not define the term “product” and defined the term according to its “ordinary meaning” and held that “[t]he ordinary meaning of “product” is something that is the result of human or mechanical effort or some natural process.” Aleynikov, 737 F. Supp. 2d at 178. Specifically, the court rejected arguments that the word “product” only pertained to tangible items and held that it was inappropriate to use a definition from products liability for a statute created to protect intellectual property. The court held that Goldman’s trading system fell within the ordinary meaning of product, and further that Goldman’s lack of intent to sell or license the trading system did not alter its definition as a “product” under the EEA. Addressing the term “produced for . . . interstate commerce,” the court held that the very purpose of creating the Trading System was to engage in interstate and foreign commerce. The court supported its holding with the legislative history of the EEA, which showed that the purpose of the EEA was to protect “intangible assets” such as trade secrets in the “high-technology, information age.”

Additionally, the court rejected Aleynikov’s contention that the scope of protection under the EEA differed based on the recipient of the stolen trade secret. Aleynikov presented the argument that theft of a trade secret to benefit “anyone other than the owner thereof” under 18 U.S.C. § 1832 has narrower protection than a trade secret stolen to benefit a “foreign government, foreign instrumentality, or foreign agent” under 18 U.S.C. § 1831. The court noted that although violations under § 1831 and § 1832 bear different penalties, they criminalize identical specified acts.

In February 2012, the Second Circuit reversed Aleynikov's conviction of trade secrets theft in a one-page order. In an opinion published on April 11, 2012, the court held that Sergey Aleynikov was wrongly charged with theft of property because the code did not qualify as a physical object under a federal theft statute. There, the court held that "because Aleynikov did not ‘assume physical control’ over anything when he took the source code, and because he did not thereby ‘deprive [Goldman] of its use,’ Aleynikov did not violate the [National Stolen Property Act]." It also ruled that Aleynikov was wrongly charged with espionage, since the code was not a product designed for interstate or foreign commerce.

Relevance of Decision

This case was the first of several prosecutions for the theft of high frequency trading source code under the EEA. The prosecution of Aleynikov was swiftly followed with the April 19, 2010 arrest of Samarth Agrawal, a former Société Générale SA trader for theft of trade secrets related to high frequency trading under the EEA. See United States v. Agrawal, No. 10-00417 (S.D.N.Y. May 13, 2010). Although Agrawal was arrested approximately nine months after Aleynikov, he was convicted by a jury and sentenced to only three years. United States v. Agrawal, No. 10-00417 (S.D.N.Y. Feb. 27, 2011). By comparison, Aleynikov was sentenced to approximately 8 years.
The February 2012 reversal of Aleynikov's conviction of trade secrets theft - especially the Second Circuit’s ruling that Aleynikov was wrongly charged with espionage, since the code was not a product designed for interstate or foreign commerce - called into question the government's ability to prosecute theft of internal trading systems or other internal financial instruments under the Economic Espionage Act.

On Monday July 6, 2015 Judge Conviser of the New York State Supreme Court acquitted Sergey Aleynikov. This marks the second acquittal Aleynikov has received since his initial arrest in July 2009. It was then that Aleynikov was accused of stealing software code that could be used to unfairly manipulate stock prices. Aleynikov was convicted of, and sentenced to eight years in prison for, violating the National Stolen Property Act and the Economic Espionage Act. Aleynikov had only spent one year in a federal prison at the time that the Second Circuit Court of Appeals overturned his conviction.

The appellate court ruled that federal prosecutors misapplied the corporate espionage laws. In their opinion, the court highlighted that the Economic Espionage Act contained two operative provisions. The first, 18 U.S.C. §1831(a), which broadly expresses that “[w]hoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly … without authorization … downloads, uploads, … transmits, …. or conveys a trade secret” is guilty of a federal offense, and may be imprisoned for up to 15 years. See 18 U.S.C. §1831(a).

However, Aleynikov was charged with violating a second provision, 18 U.S.C. §1832(a) which imposes a limitation that “[w]hoever, with intent to convert a trade secret, that is related to or included in a product that is placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner…” 18 U.S.C. §1832(a) (emphasis added). The court held that Goldman’s HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce. Goldman had no intention of selling its HFT system of licensing it to anyone. U.S. v. Aleynikov 676 F.3d 71, 81 (2d. Cir. 2012)(citing United States v. Aleynikov, 737 F.Supp. 2d 173, 175 (S.D.N.Y 2010)). The court further stated that Goldman went to great lengths to maintain the secrecy of the system and that it was not decided to enter or pass in commerce. Therefore, the theft of the source code relating to the system was not an offense under the Economic Espionage Act. Aleynikov 676 F.3d at 81.

Shortly after his release from federal prison, Aleynikov was arrested again and charged in New York State court. In May 2015, a jury convicted Aleynikov. However in his opinion, Judge Conviser stated that in order to find Aleynikov guilty under the charges the prosecution needed to establish that Aleynikov made a “tangible reproduction” of Goldman’s source code for its high-frequency trading business, and that he intended to claim most of the code’s economic value for himself. The prosecution failed to prove either and the jury verdict had to be overturned.

This case has highlighted just how far the legislature is behind technology. Laws have not been updated to keep up with advances in technology. After Aleynikov’s initial acquittal Congress amended the Economic Espionage Act of 1996. Judge Conviser implored that District Attorney Vance make a similar appeal to New York legislators in regard to the state law under which Aleynikov was charged.

On the flip side, it has been raised that this trial from the beginning has been a “civil dispute masquerading as a criminal case,” and that regardless of the antiquated statutes under which Aleynikov was charged this case should simply not be criminal. However, Goldman Sachs may not like their position on a civil claim for trade secrets misappropriation. It is not clear that the source code was even a trade secret. Goldman admitted that part of the code was based on open source code, and therefore was a conglomeration of code based on open source information, some proprietary information, and other sources in the public domain.

The case is People v. Aleynikov, New York State Supreme Court, New York County, No. 60353/2012

Additional information on United States v. Aleynikov can be found here

Vanity Fair's 2013 story profiling Aleynikov can be found here