Sergey Aleynikov, a former Goldman Sachs employee, allegedly stole software from Goldman Sachs that, according to Goldman Sach's lawyer, Assistant United States Attorney Joseph Paul Facciponti, "could [be] use[d] it to manipulate markets in unfair ways." In a bail hearing held before Magistrate Judge Kevin N. Fox, Facciponti said that the software would cauue Goldman’s “profit margin [to be] be eroded.” According to Facciponti, Goldman faced damages in the “millions upon millions of dollars.”
On Tuesday, July 14, 2009, Goldman Sach's Chief Financial Officer, David Viniar, stated: “We still have all of the code. It is not like the code had been lost to Goldman Sachs. And even if it had been, it is a small piece of our business.” What is going on?
It could be that Facciponti commited fraud on the Court. That possibility was explored in this post. It could also be that Viniar is attempting to do damage control. There is a good explanation why.
No one knows what Goldman's stolen software does. Does it allow Goldman Sachs to front run trades? On theory is that the software allows Goldman to learn about trades milliseconds before those trades are finalized. Goldman Sachs then front runs those trades.
Front running works like this: Imagine you're going to sell some stock. The current bid price is $10.02. You tell your broker (via eTrade or Fidelity or whatever) that you want to sell you stock for $10.02. You hit "Confirm the transaction."
Well, stock prices fluctuate according to the laws of supply and demand. There are always a lot of people in line willing to sell their stock. If a bunch of people want to sell their stock for $10.02, then the stock price will fall. You want to be in front of the line before stock prices fall.
Thus, Goldman Sachs, sensing market movement, uses its software to get in front of you. They sell their shares for $10.02. By the time it's your turn in the line, your stock is only work $10.02.
Jumping to the front of the line is called front running, and yes, it's a felony. It seems probable that the Goldman software allows Goldman to front run the market.
When Goldman learned that Aleynikov had the software, Goldman panicked. If Aleynikov had uploaded the software or explained what it had done, even the same SEC and DOJ that allowed Bernie Madoff to bilk investors over decades would be forced to do something. Goldman might actually face government scrutiny.
As it turns out, Aleynikov did not have all of the software code. He downloaded roughly less than 10% of the code. Thus, no one will know what this black box software will do. Aleynikov only has part of the puzzle. Goldman Sachs has the rest.
Thus, Goldman Sachs is backing away from its initial theory of the case. Now the sofware, which according to Joseph P. Facciponti, "could [be] use[d] it to manipulate markets in unfair ways," is no big deal.
Assistant United States Attorney swore an oath to uphold the Constitution. Facciponti works for the taxpayers of the United States of America. He is not - though his behavior suggests otherwise - Goldman's personal lawyer. If Facciponti wants to represent Goldman Sachs, he is free to quit his job for the private sector.
Facciponti has an ethical and constitutional obligation to determine why Goldman Sachs, through Viniar, is now proclaiming that this software that can "manipulate markets in unfair ways" is suddenly no big deal.
Either Facciponti lied, or Viniar is lying. Which is it, Attorney Facciponti?
