Aleynikov Released: Second Circuit Doesn’t Love a Wall
|Feb 27th, 2012 | Filed under: Algorithmic and high-frequency trading, Alpha Strategies, Hedge Fund Strategies, Today's Post | By: cfaille||
If you manage algorithmic funds you know perfectly well that your ability to produce for your investors depends upon an evanescent ‘edge.’ You have to be doing something that is different from what all the other algorithmic funds are doing.
There are several reasons why no edge lasts long. First, algorithmic trading is a field that invites both parallel invention and reverse engineering. The competitors who know what you’re doing can hire smart people to figure out how. Second, although the law would offer protection against reverse engineering – or independent invention for that matter – if you were patenting your innovations, you almost certainly aren’t. The process of applying for patent protection is itself quite cumbersome (and worryingly transparent) from the perspective of this field. Better to try to keep your secrets secret. Third, though, you can’t really ensure that everybody who now or who used to work for you does keep secrets.
You can enter into confidentiality and non-compete agreements, of course, but the nature of human beings and of markets ensures that information will leak out. You can only hope it doesn’t do so too quickly, and that you can stay ahead of it.
In the words of Robert Frost:
Something there is that doesn’t love a wall,
That sends the frozen-ground-swell under it,
And spills the upper boulders in the sun.
Some managers at least must have felt some relief upon the arrest of Sergey Aleynikov in July 2009, his conviction in December 2010, or his imprisonment the following March. Programmers in the financial world were put on notice that criminal prosecution was among the possible consequences were they to treat their knowledge of their employer’s edge as a marketable commodity. The U.S. Attorney’s office might help shore up informational walls.
Victory for The Frozen-Ground-Swell
Thus, the news on Friday that Aleynikov is now a free man came as something of a jolt. The one-paragraph order from a three-judge panel of the U.S. Court of Appeals leaves something of a mystery about the reasons, since the defense offered a range of arguments. The judges only promised that an opinion “will follow in due course.”
Here are the background facts: from 2007 into 2009, Aleynikov, a computer programmer, worked for Goldman Sachs on code for Goldman’s HFT operation. In April 2009, a Chicago based start-up, Teza Technologies, hired him to work on its own HFT system. June 5th was to be his last day of work at Goldman.
The U.S. has alleged that Aleynikov, on that last day, transferred thousands of computer files relating to his work to a server in Germany that was not blocked by Goldman’s firewall. That evening, at his home, Aleynikov downloaded the material from the German server to his personal computer and from there to his laptop and a thumb drive, so that he could make it available to Teva.
Aleynikov was arrested in Newark Airport less than a month later (July 3). In December 2010 he was convicted of violations of the Interstate Transportation of Stolen Property Act and the Economic Espionage Act, and sentenced to 97 months (8 years and 1 month) in prison.
The defense has argued that ITSPA does not cover intangible goods such as computer source code. Indeed, it contends that this was one reason for the enactment of the EEA in 1996. With regard to the EEA, it has made several arguments, among them:
- That Goldman’s HFT was never placed in the stream of commerce by redistribution, it was entirely an in-house system,
- That with regard to the intention requirements of the EEA statute, there was insufficient evidence to support Aleynikov’s conviction as a matter of fact, and
- That the government “constructively amended” its indictment.
The issue of intent arises in part because much the code the defendant routed to his home computer and other devices was not proprietary. Some of it was open source. The defense maintains that the proprietary code was included as a unintended side-effect of taking the open-source code, and that (in the words of a document submitted to the trial court) the “very existence of that open source code makes it impossible to conclude beyond a reasonable doubt that Aleynikov intended to steal proprietary code.”
Separately: constructive amendment is a no-no for constitutional reasons. The Fifth Amendment says that no person shall be held to answer for an “infamous crime” unless by presentment or indictment of a Grand Jury. If the government ends up surreptitiously prosecuting a defendant for anything other than what the indictment charges, if there is in other words a “constructive” rather than an explicit amendment of that indictment, then any conviction on that basis must be reversed.
But, working from the reported comments from the bench during oral argument, it seems most likely this reversal and Aleynikov’s freedom after a year of confinement, turned on the “stream of commerce” requirement. Although the trades executed according to these programs were clearly interstate and international in nature, the code in question wasn’t intended for sale or licensure.
All we know for sure is that the three judges accepted some combination of the defense’s range of arguments. Until their opinion appears, lawyers will be trying to reverse engineer their wetware.
Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."