Goldman: Pwned?

[Magda Hassan]

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public today.

Now, GS knows how to use this programme. But they would neeeeeeveeeeeeer manipulate the market in unfair ways would they? Being a force for good and all? Nah. Good.

Sergey quit a firm described as "Financial Institution" in the affidavit, which according to circumstantial evidence and according to Goldstein is none other than Goldman Sachs, on June 5, at that time earning $400,000 annually. As Goldstein reports, he proceeded to move to a Chicago firm engaged in "high volume automated trading" where he would make 3x his $400k salary.

Well, they should have looked after their employees better. He probably invented the thing in the first place and and they wouldn't give him a cut.

What is probably most notable, in less than a month since Sergey's departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.

I would say the FBI acted in this case unseemly fast. The writer does have a point here.

So now is the question in the air is, has Goldman Sachs lost it's secret computer program, its code? Is the curtain being pulled back to reveal the inner workings of Goldman Sachs or will this all conveniently disappear ?

Yep. Like those US treasury bonds being smuggled by the Japanese into Switzerland via Italy. Gone. It never was.

[Peter Lemkin]

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public today.

Now, GS knows how to use this programme. But they would neeeeeeveeeeeeer manipulate the market in unfair ways would they? Being a force for good and all? Nah. Good.

Sergey quit a firm described as "Financial Institution" in the affidavit, which according to circumstantial evidence and according to Goldstein is none other than Goldman Sachs, on June 5, at that time earning $400,000 annually. As Goldstein reports, he proceeded to move to a Chicago firm engaged in "high volume automated trading" where he would make 3x his $400k salary.

Well, they should have looked after their employees better. He probably invented the thing in the first place and and they wouldn't give him a cut.

What is probably most notable, in less than a month since Sergey's departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.

I would say the FBI acted in this case unseemly fast. The writer does have a point here.

So now is the question in the air is, has Goldman Sachs lost it's secret computer program, its code? Is the curtain being pulled back to reveal the inner workings of Goldman Sachs or will this all conveniently disappear ?

Yep. Like those US treasury bonds being smuggled by the Japanese into Switzerland via Italy. Gone. It never was.

The essence of a magic show, covert operation or covert economic operation is misdirection of the attention of those watching. The Magician doesn it with the hand flourishes and visually-attracting items on stage. The little or not seen hand is doing the REAL effects. Same for covert (deep black) ops. Just as the "Japanese Bonds" have disappeared with no one in power asking why nor where...so will this GS 'event'...as have so many others. Maybe there is a Mad Hatter's Tea Party with LHO, the Nazi Gold, Bormann, OBL, the real perpetrators of 9/11, the dead antrax experts, and all the other mysteries, disappeared persons, documents, evidence, events - having a good laugh and tea.....we are never invited. Sometimes we just get a peek down the rabbit hole for a few moments.....

[Jan Klimkowski]

Ah Mr Denninger is getting the GS front-running vibes now too...

His insight is important because he is an active market trader.

**FLASH** Goldman Code Theft BOMBSHELL?
The Market Ticker
Wednesday, July 8. 2009

Something really ugly popped up on Daily Kos yesterday late in the afternoon.....

...GS, through access to the system as a result of their special gov't perks, was/is able to read the data on trades before it's committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the punters world.

Two things come out of this:

1. If true, this should be highly illegal, and would, in any sane country result in something like what happened to Arthur Andersen...

(2. ... is way off point....)

God help Goldman if this is true and the government goes after them. This would constitute massive unlawful activity. Indeed, the allegation is that Goldman alone was given this access!

God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap." Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.

There apparently is reason to believe that Sergey might have been involved in exactly this sort of coding implementation. Specifically, look at the patent claims cited on DailyKos; his expertise was in fact in this general area of knowledge in the telecommunications world......

This is precisely the sort of thing that a Unix machine, sitting on a network cable where it can "see" traffic potentially not intended for it, could have an interface put into what is called "promiscuous mode" and SILENTLY sniff that traffic!

ASSUMING THE TRAFFIC IS PASSING BY THE MACHINE ON THE WIRE THIS IS TRIVIALLY EASY FOR ANY NETWORK PROGRAMMER OF REASONABLE SKILL TO DO. IF THAT TRAFFIC IS EITHER UNENCRYPTED OR IT IS EASY TO BREAK THE ENCRYPTION.....

Folks, I have no way to know what the code in question does, but if there's anything to this - anything at all - there is a major, as in biggest scam of the century - scandal here - something much, much bigger than Madoff or Stanford.

What would this mean, if it was all to prove up?

It would mean that Goldman was able to "see" transaction order flow - bid, offer, and execute messages - before they were committed in the transaction stream. Such a "SNIFF" would be COMPLETELY UNDETECTABLE by the sender or recipient of the message.

The implication of this would be that they would be able to front-run any transaction where the data was visible to them, thereby effectively "stealing pennies" from each transaction they were able to front-run.

Again: I have absolutely nothing on the content of the allegedly-stolen code nor can I validate the claim made that Goldman had "special network access." Nothing. All I have to go on with regards to "market manipulation" (which such a program would be, writ large!) is the statement of the US Attorney that I cited in my earlier Ticker.

This may be nothing more than a crazy conspiracy theory put out by someone at Daily Kos. But consider the following:

The last few days the the market has traded "organically." I and many other market participants have noted that prior to the week before July 4th the market had been acting "very odd" - normal correlations between interest rate, foreign exchange the the stock markets had been on "tilt" for the previous couple of months, with the amount of "tiltage" increasing dramatically in the last three or four weeks. In fact, many of my usual indicators that I use for daytrading had become completely useless. Suddenly, just before the July 4the weekend, everything started correlating normally again. I have no explanation for this "light-switch" change but it aligned almost exactly with the day the NYSE had "computer problems" and extended trading by 15 minutes. Was there a configuration change made to their networking infrastructure, one asks?

Zerohedge's information, if you believe it, seems to point toward some sort of distortion. The cite above claims statistically "as likely as an asteroid hitting earth it is not true" proof of distortion in the market. I have not analyzed the data to independently validate that conclusion, but even if the odds of these "effects" in the market being random chance are only as good as getting hit by a tornado this afternoon......

Every market participant deserves answers on this point. Specifically to the NYSE and all other markets where colocation connections are made and allowed:

1.
Was it possible for message traffic to be "seen" by computers on your network and colocated into your infrastructure by other than the originator and recipient? That is, was it physically possible for anyone to "sniff" messages to and from other market participants.
2.
If it was possible, is it no longer possible, and if so, when was that change made?

I believe the SEC and FBI must direct a subpoena at all market exchanges for an under-oath answer to question #1. If the answer to that question is "yes" then every market participant who had or has equipment colocated on the NYSE infrastructure must be immediately served with a subpoena for a true and complete copy of all software operating on every machine connected to said infrastructure for immediate forensic investigation to ascertain if any participants were indeed "sniffing" traffic and front-running orders.

The charge made on the pages of Daily Kos is incredibly serious. If this happened it is a case of literal robbery of every market participant for the entire duration of the time that the code in question was executing on the network, with losses to market participants potentially running into the hundreds of billions of dollars.

Market participants deserve an answer to these questions.

http://market-ticker.org/archives/1192-F...SHELL.html

[Jan Klimkowski]

Those Goldman folk sure do get around...

Hell - it's a tough job being a "force for good" around the clock...

Duncan L. Niederauer has been Chief Executive Officer of NYSE Euronext Inc. since December 1, 2007. Mr. Niederauer served as President and co-Chief Operating Officer of NYSE Euronext Inc. since April 9, 2007. He joined NYSE Group following a 22-year career at Goldman Sachs. He served as a Managing Director of Goldman Sachs since 1997 and was responsible for U.S. cash equities operations, including Institutional and Member Firm Client Group sales and client services for ... both the New York Stock Exchange and NYSE Arca. Mr. Niederauer was previously a Partner at The Goldman Sachs Group, Inc. (United States) ("GS") where he held many positions, among them, co-head of the Equities Division execution services franchise since 2005 and the Managing Director responsible for Goldman Sachs Execution & Clearing, L.P. (formerly known as Spear, Leeds & Kellogg L.P.). He joined Goldman Sachs in 1985 and the Equities Division in 1987.

http://investing.businessweek.com/busine...85&ric=NYX

[Jan Klimkowski]

:listen:

Lastly, and somewhat most peculiarly, Jean-Pierre Aguillard (together with his co-pilot), died in a freak glider accident over the weekend. Many have not heard of Aguilard: it may be surprising for people to learn that he is the French equivalent of Jim Simons, as his firm Capital Fund Management, with $2.7 billion in assets, is one of the largest French hedge funds and at the forefront of electronic and program trading. Curiously, CFM was in the news as recently as on April 22, 2009, CFM replaced its legacy market data distribution system with NYSE Technologies' Market Data Platform at its New York and Paris operations. In fact Automated Trader has quite an in depth article on what happened a mere two months ago in an article titled "Capital Fund Management selects NYSE Technologies for new electronic trading platform."

NYSE Technologies has announced that Capital Fund Management (CFM), the French private hedge fund, has licensed its high-speed real-time market data distribution and integration software.

CFM has replaced its legacy market data distribution system with NYSE Technologies' Market Data Platform at its New York and Paris operations. NYSE Technologies’ sub-millisecond feed handlers and high performance Middleware Agnostic Messaging API (MAMA) deliver data to CFM’s trading systems, which handle 100% of the firm’s order flow electronically.

Jacques Sauliere, Chief Operating Officer at CFM, commented, “Since we connect to all major US, European and Asian markets, NYSE Technologies was the clear choice considering the breadth of coverage available through its extensive range of feed handlers, its cutting-edge market data distribution platform and comprehensive value-added services.”

NYSE Technologie will provides CFM with connectivity to a mix of direct market data feeds including NYSE OpenBook, NYSE ARCA Options, NASDAQ ITCH and CME Multicast. This is complemented with connectivity to a vendor consolidated data feed. Sauliere explains, “The consolidated datafeed serves as a back-up, providing the optimal mix of resilience and coverage needed for CFM’s global trading operations.”

Sauliere adds, “During the implementation phase, NYSE Technologies provided us with the ability to work alongside our existing middleware vendor while we transitioned to our new low-latency platform. We were able to consolidate our use of APIs by using its middleware API and write all of our applications to MAMA with the ability to upgrade our middleware in line with technology advances.”

In addition, CFM also uses NYSE Technologies’ Data Access and Reporting Tools (DART) Entitlements to control user and application access to the market data feeds and report on unused or underused market data services. Other value-added services include performance monitoring and a real-time tick capture adapter that consumes data from any industry standard or ODBC database for post-processing of internal data.“CFM is a pioneer in the adoption of pure electronic trading systems generating value for their investors. Being trusted with their business in New York and Paris is something we’re extremely proud of and validates our strategy in serving the buy-side,” said Stanley Young, CEO of NYSE Technologies and Co-Global CIO of NYSE Euronext.

“CFM’s enterprise deployment firmly secures NYSE Technologies as the partner of choice for connectivity, transaction solutions and data management services at the world’s largest and most active trading firms and leading markets.” (highlights mine)


Zero Hedge extends its condolences to Aguilard's family. We, of course, hope that the fund's recent close entanglement with the NYSE for program trading facilitation and the loss of the fund's CEO are purely coincidental, especially in these difficult times for the integrity of program trading courtesy of Goldman Sachs' recently disclosed scandals.

http://zerohedge.blogspot.com/2009/07/in...tions.html

Hmmm what was it that Michael Riconoscuito claims to have done to Inslaw's PROMIS software?

Oh yeah - he claimed to have reprogrammed Inslaw's case-management program (Promis) with a secret "back-door" to allow clandestine tracking of individuals and bank details by certain US agencies.

Here's Mikey's affidavit that got him disgraced and locked up in Terminal Island (my emphasis):

6. Among the frequent visitors to the Wackenhut-Cabazon joint venture
were Peter Videnieks of the U.S. Department of Justice in Washington, D.C.,
and a close associate of Videnieks by the name of Earl W. Brian. Brian is a
private businessman who lives in Maryland and who has maintained close
business ties with the U.S. intelligence community for many years.

7. In connection with my work for Wackenhut, I engaged in some software
development and modification work in 1983 and 1984 on the proprietary PROMIS
computer software product. The copy of PROMIS on which I worked came from the
U.S. Department of Justice. Earl W. Brian made it available to me through
Wackenhut after acquiring it from Peter Videnieks, who was then a Department
of Justice contracting official with responsibility for the PROMIS software.
I performed the modifications to PROMIS in Indio, California; Silver Spring,
Maryland; and Miami, Florida.

8. [U]The purpose of the PROMIS software modifications that I made in 1983
and 1984 was to support a plan for the implementation of PROMIS in law
enforcement and intelligence agencies worldwide. [/U]Earl W. Brian was
spearheading the plan for this worldwide use of the PROMIS computer software.

9. Some of the modifications that I made were specifically designed to
facilitate the implementation of PROMIS within two agencies of the Government
of Canada: the Royal Canadian Mounted Police (RCMP) and the Canadian Security
and Intelligence Service (CSIS). Earl W. Brian would check with me from time
to time to make certain that the work would be completed in time to satisfy
the schedule for the RCMP and CSIS implementations of PROMIS.

10. The proprietary versions of PROMIS, as modified by me, was, in fact,
implemented in both the RCMP and the CSIS in Canada. It was my understanding
that Earl W. Brian had sold this version of PROMIS to the Government of Canada.

11. In February 1991, I had a telephone conversation with Peter
Videnieks, then still employed by the U.S. Department of Justice. Videnieks
attempted during this telephone conversation to persuade me not to cooperate
with an independent investigation of the government's piracy of INSLAW's
proprietary PROMIS software being conducted by the Committee on the Judiciary
of the U.S. House of Representatives.

12. Videnieks stated that I would be rewarded for a decision not to
cooperate with the House Judiciary Committee investigation. Videnieks
forecasted an immediate and favorable resolution of a protracted child custody
dispute being prosecuted against my wife by her former husband, if I were to
decide not to cooperate with the House Judiciary Committee investigation.

13. Videnieks also outlined specific punishments that I could expect to
receive from the U.S. Department of Justice if I cooperate with the House
Judiciary Committee's investigation.

14. One punishment that Videnieks outlined was the future inclusion of
me and my father in a criminal prosecution of certain business associates of
mine in Orange County, California, in connection with the operation of a
savings and loan institution in Orange County. By way of underscoring his
power to influence such decisions at the U.S. Department of Justice, Videnieks
informed me of the indictment of these business associates prior to the time
when that indictment was unsealed and made public.

15. Another punishment that Videnieks threatened against me if I
cooperate with the House Judiciary Commitee [sic] is prosecution by the U.S.
Department of Justice for perjury. Videnieks warned me that credible
witnesses would come forward to contradict any damaging claims that I made in
testimony before the House Judiciary Committee, and that I would subsequently
be prosecuted for perjury by the U.S. Department of Justice for my testimony
before the House Judiciary Committee.

FURTHER AFFIANT SAYETH NOT.
[ Michael J. Riconosciuto ]

http://groups.google.fm/group/alt.activi...56d96b5?q=

[Magda Hassan]

http://code.google.com/u/saleyn/updates
Use your google account to sign in and view.
It is the supposed Goldman Sachs code so I'm told.

[Jan Klimkowski]

A technical but important article by Ticker Forum's Karl Denninger.

A free market?

No. A casino rigged in favour of certain financial elites - such as Goldman Sachs.

Posted by Karl Denninger in Regulatory at 08:22

High Frequency Trading Is A Scam
The NY Times has blown the cover off the dark art known as "HFT", or "High-Frequency Trading", perhaps without knowing it.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

But then the NY Times gets the bottom line wrong:

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

No. The disadvantage was not speed. The disadvantage was that the "algos" had engaged in something other than what their claimed purpose is in the marketplace - that is, instead of providing liquidity, they intentionally probed the market with tiny orders that were immediately canceled in a scheme to gain an illegal view into the other side's willingness to pay.

Let me explain.

Let's say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer will accept any price up to $26.40.

But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their "flash orders" (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) "immediate or cancel" orders - IOCs - to sell at $26.20. If that order is "eaten" the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become "more efficient."

Nonsense; there was no "real seller" at any of these prices! This pattern of offering was intended to do one and only one thing - manipulate the market by discovering what is supposed to be a hidden piece of information - the other side's limit price!

With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this - your order is immediately "raped" at the full limit price! You got screwed, as the fill price is in fact 30 cents a share away from where the market actually is.

A couple of years ago if you entered a limit order for $26.40 with the market at $26.10 odds are excellent that most of your order would have filled down near where the market was when you entered the order - $26.10. Today, odds are excellent that most of your order will fill at $26.39, and the HFT firms will claim this is an "efficient market." The truth is that you got screwed for 29 cents per share which was quite literally stolen by the HFT firms that probed your book before you could detect the activity, determined your maximum price, and then sold to you as close to your maximum price as was possible.

If you're wondering how this ramp job happened in the last week and a half, you just discovered the answer. When there are limit orders beyond the market outstanding against a market that is moving higher the presence of these programs will guarantee huge profits to the banks running them and they also guarantee both that the retail buyers will get screwed as the market will move MUCH faster to the upside than it otherwise would.

Likewise when the market is moving downward with conviction we will see the opposite - the "sell stops" will also be raped, the investor will also get screwed, and again the HFT firms will make an outsize profit.

These programs were put in place and are allowed under the claim that they "improve liquidity." Hogwash. They have turned the market into a rigged game where institutional orders (that's you, Mr. and Mrs. Joe Public, when you buy or sell mutual funds!) are routinely screwed for the benefit of a few major international banks.

If you're wondering how Goldman Sachs and other "big banks and hedge funds" made all their money this last quarter, now you know. And while you may think this latest market move was good for you, the fact of the matter is that you have been severely disadvantaged by these "high-frequency trading" programs and what's worse, the distortion that is presented by these "ultra-fast" moves has a nasty habit of asserting itself in an ugly snapback a few days, weeks or months later - in the opposite direction.

The amount of "slippage" due to these programs sounds small - a few cents per order. It is. But such "skimming" is exactly like paying graft to a politician or "protection money" to the Mafia - while the amount per transaction may be small the fact of the matter is that it is not supposed to happen, it does not promote efficient markets, it does not add to market liquidity, the "power" behind moves is dramatically increased by this sort of behavior and market manipulation is supposed to be both a civil and criminal violation of the law.

While the last two weeks have seen this move the market up, the same sort of "acceleration" in market behavior can and will happen to the downside when a downward movement asserts itself, and I guarantee that you won't like what that does to your portfolio. You saw an example of it last September and October, and then again this spring. As things stand it will happen again.

This sort of gaming of the system must be stopped. Trading success should be a matter of being able to actually determine the prospects of a company and its stock price in the future - that is, actually trade. What we have now is a handful of big banks and funds that have figured out ways around the rules that are supposed to prohibit discovery of the maximum price that someone will pay or the minimum they will sell at by what amounts to a sophisticated bid-rigging scheme.

Since it appears obvious that the exchanges will not police the behavior of their member firms in this regard government must step in and unplug these machines - all of them - irrespective of whether they are moving the market upward or downward. While many people think they "benefited" from this latest market move, I'm quite certain you won't like it if and when the move is to the downside and the mutual fund holdings in your 401k and IRA get shredded (again) by what should be prohibited and in fact result in indictments, not profits.

http://market-ticker.org/archives/1259-H...-Scam.html

[Magda Hassan]

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.
http://www.nakedcapitalism.com/2012/02/c...urned.html

[Ed Jewett]

Goldman Sachs Programmer Back in Court on New Charges

• BY KIM ZETTER
  
• EMAIL AUTHOR
  
• 08.09.12 2:46 PM
  

Sergey Aleynikov, wearing a baseball cap, leaves Manhattan federal court in February after his conviction for stealing Goldman Sachs' high-speed trading code was reversed. Photo: AP

Just when he thought his troubles were over, a former programmer for Goldman Sachs who downloaded source code for the investment firm's high-speed trading system from the company's computers is back in New York state court on new charges that he unlawfully duplicated and used the company's proprietary code.
Sergey Aleynikov was re-arrested last week, according to his attorney, and is being arraigned in Manhattan criminal court Thursday afternoon on state charges of "unlawful use of secret scientific material" and "unlawful duplication of computer related material."
The new charges come after Aleynikov defeated previous federal charges against him for theft of the code. His defense attorney calls the new charges "improper."
"I think it seems vindictive, and I'm confident that he's going to prevail," defense attorney Kevin Marino told Wired.
Aleynikov, 42, was convicted in 2010 under the Economic Espionage Act of 1996 (EEA), in a high-profile case that was held up by federal prosecutors as an example of the Justice Department's serious intent to prosecute the theft of intellectual property and trade secrets.
But last February, an appellate court reversed that conviction and sprung Aleynikov from prison a year after he had begun to serve an eight-year sentence. The appellate court ruled that Aleynikov had been wrongly charged with theft of property because the code did not qualify as a physical object under a federal theft statute.
"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]," the 2nd Circuit Court of Appeals wrote in its opinion.
The three-judge appellate panel also ruled that Aleynikov was wrongly charged with espionage, since the code was not a product designed for interstate or foreign commerce, a requirement under the Economic Espionage Act with which he was charged and convicted. The court found that Goldman's system was neither "produced for" nor "placed in" interstate or foreign commerce, nor did the company have any intention of selling its system or licensing it to anyone.
The new charges allow the government to come after Aleynikov from a different path.
"It's hard to believe that the authorities would think it appropriate to pursue state charges against a man who has already spent a year in prison for a federal crime he did not commit arising from the same facts that underlie the state charges," Marino said. "But apparently that's what they've chosen to do, so we will vigorously defend him."
Aleynikov has acknowledged that he violated the bank's confidentiality policy in downloading the source code from the company's computers, but he has long asserted that what he'd done was not a criminal act.
Prosecutors argued to the appeals court that Congress amended the Economic Espionage Act in 1998 to include the transfer and transmission of non-physical forms of stolen property in the law, thereby covering source code. But the judges rejected this claim, stating that the 20-year-old amendment clearly had been meant to cover the transfer and transmission of money, not the theft of source code in the computer age.
The Russian-born Aleynikov worked for Goldman Sachs until June 2009, when authorities said he siphoned source code for the company's valuable software on his way out the door to take a new job with another company.
Aleynikov, a naturalized U.S. citizen who emigrated from the disintegrating Soviet Union in 1991, earned nearly $400,000 a year as a vice president with Goldman Sachs. He was arrested in July 2009 at the Newark Airport in New Jersey as he returned from a trip to Chicago to meet his new employers.
Authorities said he stole "hundreds of thousands of lines" of source code from Goldman Sachs in the days before he left the company, downloading various software from the Goldman Sachs network and transferring it to a storage website hosted in Germany, before trying to erase his tracks from Goldman Sachs' network.
The software is used to make sophisticated, high-speed, high-volume stock and commodities trades and had earned the company "many millions of dollars in profits" each year, according to prosecutors.
Prosecutors said Aleynikov made several copies of the code and had it on his laptop when he met his new employers at Teza Technologies in Chicago, although a later search of Teza computers uncovered no copies of Goldman Sachs' source code.
Goldman Sachs only uncovered the theft after it began monitoring HTTPS transfers and saw a large volume of data leaving its network, according to court documents. The company initiated the monitoring after noticing suspicious activity on the network.
At the time of his arrest, Aleynikov acknowledged taking the code, but told FBI agents he only intended to collect open source software files on which he had worked, and that his collection of proprietary files on his last day of work had been inadvertent.

http://www.wired.com/threatlevel/2012/08...w-charges/