Case Report: United States v. Aleynikov

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.