No Federal Prohibition on Stealing Code for Trading Infrastructure

When Sergey Aleynikov walked out of prison this February, the fact drew considerable attention, and allowed room for some guesswork as to the reason.

Aleynikov, a one-time Goldman Sachs programmer, had been convicted after a jury trial of stealing his employer’s computer code in violation of both the National Stolen Property Act and the Economic Espionage Act, and was sentenced in March 2011 to eight years in prison.

An April 11th opinion has now clarified the rather gnomic February order that set Aleynikov free. Also, this full opinion includes a concurrence that suggests that Congress should revisit the issue and try to tighten up the wording so that a less lenient fate may await future Aleynikovs. Arguments about what role the federal government and its criminal enforcement authority ought to play in this area will no doubt continue, and may well in time have a great impact on the worlds of algorithmic and high-speed trading.

The NSPA was the more easily disposed-of count. The court relied upon existing precedents, including a 1985 decision of the U.S. Supreme Court, to the effect that the NSPA specifically prohibits the theft and transport of tangible goods. Indeed the EEA was enacted in part to plug the hole that those precedents created as intangible property became a more important share of the economy.

Three Arguments

The defense, as noted here, had made three arguments about the inapplicability of the Economic Espionage Act to Aleynikov’s activities:

  • That the infrastructure that allowed Goldman Sachs’ high-frequency trading was never placed in a stream of commerce, but remained entirely an in-house system;
  • That with regard to the state-of-mind required by the EEA, there was insufficient evidence to support Aleynikov’s conviction as a matter of fact, and
  • That the government “constructively amended” its indictment, thus short-circuiting the Fifth Amendment requirement that no person be held to answer for an “infamous crime” except by presentment or indictment of a Grand Jury.

The three-judge panel’s order in February left considerable room for doubt as to which or which combination of those arguments worked. The court’s long-awaited opinion, written by Chief Judge Dennis Jacobs, now tells us that the “stream of commerce” point is the critical one.

The pertinent section of the Act, sect. 1832, says: “Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof [emphases added],”  is guilty of a federal offense.

One Argument

Jacobs said that this language refers on the one hand to products that have “already been introduced into [placed in] the stream of commerce” and on the other hand to those that “are still being developed or readied” [produced for] such placement. The words evoke two distinct sets of products with a sequential relationship to one another, which satisfies well-established rules of statutory construction.

Aleynikov’s work was specifically in the development of “infrastructure programs that facilitate the flow of information throughout the trading system and monitor the system’s performance.” That trading system was created for the sake of engaging in commerce without regard to state or national lines. But the infrastructure of that system does not thereby satisfy either of the two sequential references of the language “produced for or placed in….”

The district court had upheld the indictment against challenge along these lines, because the district court had construed the language to include the production of anything whose purpose is “to facilitate or engage in such commerce.” The appeals court panel found error here.

As to the other arguments Aleynikov had advanced, the court said as courts generally do in such matters that it will not decide what it need not:  given the determination that “the indictment failed to state an offense,” it would not “resolve these additional challenges.”

The three-judge panel reached this decision unanimously, though with an asterisk and one that may prove important. Circuit Judge Calabresi wrote a concurring opinion to state a significant shade of difference. Calabresi suspects that Congress did not mean to “exempt the kind of behavior in which Aleynikov engaged” and that the statutory language on which Jacobs relies is Congress’ sloppy draftsmanship. He will not dissent, though, Calabresi added in effect, because sloppy draftsmanship has consequences, the majority’s analysis of the text is persuasive and at any rate “ambiguous criminal statutes must be read in favor of the defendant.”

Nonetheless, Calabresi concludes with the statement of a hope that our solons will “return to the issue” soon and will perhaps criminalize behavior such as that in which Aleynikov appears to have engaged with closer attention to the particular words they are using while they are doing it.

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