As If Wall Street Didn’t Have Enough Problems…

The Second Circuit issued what could be a significant blow to the one percent last week. Wall Street has been using the Economic Espionage Act (“EEA”) as an important weapon in its arsenal to protect its trade secrets against theft by rogue employees. For example, Goldman Sachs Group, Inc’s former programmer was convicted under the EEA of stealing Goldman’s confidential high-frequency trading code and giving it to his new employer, startup fund Teza Technologies, LLC. In a cryptic bare-bones order, the Second Circuit overturned Sergey Aleynikov’s conviction on charges of trade secrets theft and interstate transportation of stolen property, seeming to buy the defense’s position that the EEA doesn’t apply to the Goldman system because the stolen code did not relate to a product that is “produced for or placed in” the stream of commerce.

Aleynikov was convicted in December 2010 and sentenced on March 18, 2011, to more than eight years in prison, based on, at least in part, Goldman’s testimony in his criminal trial that the trading program generated more than $300 million a year for the firm. On February 17th, 2012, the Second Circuit reversed the conviction and said it would issue an opinion “in due course” explaining its decision. Aleynikov was released from a New Jersey federal prison Friday on his own recognizance.

The fight was over Goldman’s system which uses complex algorithms to quickly gather and synthesize market data in order to direct strategy and inform the way trades and deals are made. In this case, the parties were warring over the meaning of the 15-year-old EEA’s provision which only addresses and prohibits the theft of trade secrets which relate to a product “produced for or placed in” the stream of commerce. Prosecutors argued that the Goldman system fit this description, while Aleynikov’s lawyers argued it was merely used internally and thus was not produced for or placed in commerce. The Second Circuit’s decision last Thursdaycould  indicate that the court found that the trading system was not a commercial product and its theft was not covered under the EEA.

While obviously there are other ways to protect these types of systems as trade secrets or otherwise, i.e. under the particular state’s uniform trade secrets laws, state or federal unfair competition laws, or through the Copyright Act, the case is a significant one to the financial giants on Wall Street because it may destroy their ability to deter these kinds of thefts through criminal prosecution, via the EEA. It seems Wall Street just can’t catch a break these days.

The case is USA v. Aleynikov, case number 11-1126, in the U.S. Court of Appeals for the Second Circuit.

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