Verdict Reversed in Goldman HFT Code Theft Case

The US Second Circuit Court of Appeals has found that two key pieces of legislation do not adequately cover the theft of source code from Goldman Sachs’ high-frequency trading (HFT) engine in 2009 by a former employee.

In a unanimous opinion, the appeals court ruled that the transmission of Goldman's proprietary code by Sergey Aleynikov, a programmer at the bank, did not constitute a criminal offence by the definitions of the statutes used to bring charges. His prior conviction by a district court and subsequent imprisonment was reversed as a result.

Specifically, the lack of a tangible product removed from Goldman Sachs by Aleynikov, who uploaded significant portions of the code to a German server shortly before leaving the firm, could not come under the provisions of the National Stolen Property Act (NSPA). The law makes it a criminal offence to knowingly transport stolen goods, but as the code was not a physical asset, it could not be defined as such in a legal framework. Although Aleynikov, who left Goldman to take on a lead role at Chicago-based Teza Technology with the specific aim of building an HFT engine, later allegedly transported the code on flash drives, this also did not come under the remit of the law. The transfer of an intangible property to a tangible medium, said the ruling, did not transform the good itself into stolen property.

The second charge, relating to the Economic Espionage Act (EEA), was also dismissed by the court as being insufficient as a matter of law. As Goldman's HFT engine was proprietary in nature, and the firm had no visible intention of placing it into the marketplace, or making a product derived from it to do so, the court ruled, it did not constitute an offense under the EEA.

A third charge, that Aleynikov exceeded his authority by accessing the source code, was struck down on the grounds that his level of privilege adequately covered his activities in this regard.

The key aspect of the ruling was the ephemeral nature of the digital product, as opposed to anything that could be readily identified as a tangible good stolen from Goldman under the provisions of the statutes invoked. In summary, the court said that it would decline to "stretch or update statutory words of plain and ordinary meaning in order to better accommodate the digital age."

While Aleynikov's actions, in the appeal court's ruling, did not constitute a criminal offense, he could be liable for civil action depending on the circumstances of the case.

SST Analysis
The ruling by the Second Circuit Court of Appeals, while correct in the literal interpretation of the law and prior cases, raises questions about the ability of legislation to keep up with technological development.

In particular, the increasingly electronic nature of trading makes it difficult to identify physical assets, which the legal framework of federal crimes such as this are built around. If cases such as this continue to occur, as seems likely, the importance of technical innovation in financial services and other sectors could force a legal review.