Crime & Federalism

Aleynikov Hearing Today (12.16.2009)

What happened?  There are rumors of a plea agreement.  I hope Sergey refuses to plead guilty, since there is no way that he could be convicted at trial.  More details once they are available.  

Deferred Prosecution for Aleynikov?

In like a lion, out like a lamb:

In a court filing on Monday, federal prosecutors revealed that Aleynikov's attorney plans to seek a resolution of the case that could culminate in either a deferred prosecution agreement, or a plea to a reduced charge of a misdemeanor. Prosecutors say they intend to "evaluate'' the request for a deferred prosecution.

In light of the anticipated request from Aleynikov's lawyer, Assistant US Attorney Joseph Facciponti asked a U.S. magistrate judge to extend the time that prosecutors must act to begin trying Aleynikov on the theft of trade secrets charge until December 16. Aleynikov was originally arrested and arraigned on the theft charge over the July 4th weekend.

What a joke.  Facciponti is of course going to accept this plea offer.  There is literally no criminal case against Aleynikov.  There is no good-faith basis to move forward with the prosecution.  Aleynikov is factually innocent.

Aleynikov's lawyer is doing Facciponti a favor.  Facciponti will be able to get a pseudo-conviction out of this case without having to indict Aleynikov for crimes that Aleynikov did not commit.  

Facciponti's actions should serve as a cautionary tale for Department of Justice line lawyers.  When Goldman Sachs tells you that someone committed a crime and must be arrested within 48 hours: Goldman Sachs is lying.  Of course, Facciponti probably already knew this.  

Facciponti is no doubt hoping to cash out big time once he leaves the Department of Justice.  I guarantee that when Facciponti leaves DOJ, Goldman Sachs will be one of his clients.  

At least federal judges are on notice that Facciponti has no integrity.  It is an undisputed fact that Facciponti lied at Aleynikov's bail hearing.   It is also undisputed that Facciponti's arrest of Aleynikov was an embarrassing rush to judgment; and that Aleynikov's arrest was made without probable cause; and the arrrest violated official Department of Justice policy.

Aleynikov Hearing on Monday: Facciponti's Unanswered Questions

Will AUSA Joseph Paul Facciponti indict Aleynikov - who was arrested less than 48 hours after Goldman Sachs reported him for alleging stealing trade secrets?  (When Goldman calls: Arrest first, investigate later.)  Or will Facciponti ask for another 30-day continuance?  When is a federal judge going to stand up to Facciponti?  

Facciponti already lied in federal court.  He made a bad arrest.  Goldman said, "Jump," and he jumped.  Goldman Sachs pimped Facciponti.  Do the right thing, Joe.  Dismiss the case.  You are not Goldman Sachs' personal lawyer.  If you want to work for Goldman Sachs, join the private sector.  Facciponti lacks the moral courage to dismiss the case.  

It's time for a federal judge to force Facciponti to dismiss the case against Aleynikov.  Then the Office of Professional Responsibility needs to open an investigation into Facciponti.  Among other questions:

• Why did you arrest Aleynikov less than 48 hours after Goldman Sachs contacted you?  Is Goldman Sachs on a "priority list," such that you drop everything when they call?
• You said at the Aleynikov bail hearing that Aleynikov stole from Goldman Sachs, software that could "unfairly manipulate markets."  If that is true, why didn't you investigate Goldman Sachs for possessing market-manipulating software?  After all, Aleynikov allegedly stole the software from Goldman Sachs - which means that it's Goldman's software.  Did you investigate Goldman Sachs?  If not, why not?
• At the Aleynikov bail hearing, you said that Aleynikov's "dissemination of [Goldman's high frequency traidng software] program would be a substantial loss to them, a very substantial loss to them."  Yet days later, David Viniar, Goldman Sach's Chief Financial Officer, said: "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.”  Were you lying?  Or did David Viniar make a false statement of material fact to the investing public?  
• At the Aleynikov bail hearing, you demanded that Aleynikov be denied bail.  Can you identify any other trade-secrets theft case where the prosecutor sought to have a defendant remanded into custody?  Can you identify any cases involving non-violent defendants where the defendant was remanded into custody?
• Your initial actions towards Aleynikov were extremely aggressive.  Since his arrest, you've done nothing.  Why has there been such a dramatic change in your litigation posture?

Aleynikov Case Continued Again

The Department of Justice is attempting to distract us through boredom: 

ORDER TO CONTINUE IN THE INTEREST OF JUSTICE as to Sergey Aleynikov re: 6 Order to Continue - Interest of Justice. Time excluded from 10/16/09 until 11/16/09. Follows oral order of 10/16/09. (Signed by Magistrate Judge Douglas F. Eaton on 10/16/09)(aba) (Entered: 10/19/2009)

Let's take a quick look at the case chronology.  Sergey Aleynikov was arrested less than 48 hours after Goldman Sachs called the FBI on him.  Goldman Sachs called the FBI on Aleynikov on July 1st.  On July 3, 2009, Aleynikov was in custody.    At a bail hearing, AUSA Joseph Facciponti said: "[B]ecause of the way this software interfaces with the various markets and exchanges, the bank has raised a possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."

Since July 4th, DOJ has done nothing with the case.  They haven't even indicted Aleynikov.  Instead, they've kept asking for continuances.  (Here's the docket sheet.)

During Friday's hearing, DOJ received another continuance.  This is the fourth continuance in the case.  So what is going on?  What's the realpolitik of the case?

The United States Attorney's Office made a huge mistake in arresting Aleynikov.  They jumped too quickly for Goldman Sachs.  DOJ wants to dismiss this case - to walk away.  They can't, however, as the Aleynikov prosecution has received too much media attention.

Thus, DOJ wants Aleynikov to cop a plea to something.  Anything.  Please.  

Aleynikov's lawyer is too smart to fall for that.  She knows that DOJ has no case.  She is likely insisting that DOJ indict Aleynikov, or dismiss the criminal case against him outright.

In the meantime, AUSA Joseph Facciponti will keep continuing the case.  He hopes to bore us to death.  AUSA Facciponti misunderstands the legal blogosphere.  Legal bloggers obsess over a case.  We're not like other media - with writers forced to move on to the next story.  Indeed, we didn't even cover "balloon boy."   

Those of us following Aleynikov will dutifully check for case updates.  We're not going anywhere.

Our prior coverage of the Aleynikov case is available here.

Sergey Aleynikov Update

The Aleynikov prosecution received more attention that DOJ was prepared for.  DOJ is in a tough position - "tough" if you put personal interests ahead of your ethical and legal obligations, that is.

If DOJ indicts Aleynikov, they won't obtain a conviction.  Aleynikov is not guilty of the crimes he was arrested for.  If DOJ dismisses the charges against Aleynikov, DOJ looks like Goldman Sachs' stooge.   

Perhaps arresting Aleynikov with 48 hours of Goldman's call to DOJ was a bit rushed?  Perhaps an investigation into a criminal matter should include something more than, "Goldman Sachs said this was important, and that we must make an arrest ASAP"?  Perhaps, indeed.

DOJ, through AUSA Joseph Facciponti, is in denial.  Like a person ignoring the bill collector's calls, as if the problem will just go away, Facciponti is delaying and ignoring.  

Thus, at today's Aleynikov hearing, which was itself the product of a 30-day delay, Facciponti wants another delay:

NEW YORK, Sept 16 (Reuters) - The government will have another month to seek an indictment against or reach a settlement with a former Goldman Sachs Group Inc (GS.N) programmer accused of stealing trade secrets.

U.S. Magistrate Judge James Francis has delayed further proceedings by 30 days until Oct. 16 to let the government and the former programmer, Sergey Aleynikov, continue talks, a spokeswoman for prosecutors in the case said.

Matthew Goldstein, who broke the story, has more details here.  My take: One of two things are occurring.  First, it's possible that prosecutors are demanding that Sergey cop a plea to a marginal offense - some misdemeanor or other.  Aleynikov has a smart lawyer, though, who no doubt realizes that DOJ has no case.  

Aleynikov's lawyer is likely telling Sergey to accept no plea short of deferred prosecution - which allows a person to have his case dismissed.  In crim law land, a deferred prosecution is a victory.  It's not an outright dismissal, though, and thus stings.  To a lawyer, it's a dismissal.  And, legally, it is a dismissal.  To a client, it feels like a guilty plea.  After all, you must still appear before a judge and cop a plea to a dismissal.

Second, it could be that DOJ and Goldman Sachs want a release-dismissal agreement from Aleynikov.  In exchange for dismissal of criminal charges, Sergey will agree not to sue anyone for false arrest.  I think Aleynikov has a great case for false arrest.  (If Aleynikov does file a Bivens lawsuit, I will seek to consult on the case - pro bono.)  Given that Facciponti was intimately involved in the slip-shod, sub-48-hour investigation, Facciponti would not be entitled to prosecutorial immunity.

It's unlikely that Sergey is willing to accept anything short of outright dismissal.  The "evidence" against Aleynikov will not lead to a conviction, as I explained in this post.  His lawyer, however, wants to shepherd Aleynikov out of the criminal system.  

As one lawyer told me, "Being in the criminal system is like being in a cage with a bear.  As long as you get out of the cage, you've won."  An innocent citizen like Aleynikov, wants to fight the bear.

We'll keep fighting for you in the blogosphere, Sergey.  Facciponti's misconduct, including his lies to a federal judge, have not gone unnoticed.  We're still following your case.  We know you are innocent.  Keep up the good fight.

Sergey Aleynikov Hearing on Sept 16, 2009

The next hearing in U.S. v. Sergey Aleynikov, the most disgraceful criminal prosecution since the Duke Lacrosse Case, will be held this coming Wednesday.  While we don't know whether the charges against  Aleynikov will be dismissed, there has been a related development.

Bloomberg is reporting that the SEC wants to take a look inside Wall Street's black box:

Sept. 10 (Bloomberg) -- The U.S. Securities and Exchange Commission is "rigorously" investigating whether traders are using technology to manipulate markets, the agency's enforcement and inspections chiefs said today.

The regulator is probing suspected “market manipulation based on complex use of technology and advanced trading systems,” said SEC Enforcement Director Robert Khuzami and acting examinations director John Walsh in testimony prepared for a Senate Banking Committee hearing. They said the inquiry is among a list of active cases, also including unspecified Ponzi schemes, hedge-fund abuses and insider trading.

The SEC's Keystone Cops only learned about Wall Street's ability to "unfairly manipulate markets," after Goldman Sachs had DOJ arrest Sergey:

The Goldman Sachs programmer, Sergey Aleynikov, was arrested July 3 and charged the next day with theft of trade secrets and transportation of stolen property in foreign commerce. At Aleynikov’s arraignment, Assistant U.S. Attorney Joseph Facciponti said the programmer transferred code to a computer server in Germany and that others may have had access to it, a claim Aleynikov has denied. He is free on $750,000 bond.

Unlike AUSA Facciponti, the SEC wants to know: Why should Goldman Sachs be trusted with market-manipulating software?  While the SEC investigation continues, we'll know more about Sergey soon.

For the good of America, I hope the Aleynikov prosecution proceeds to trial.  Aleynikov will be entitled to put Goldman Sachs' market-manipulating software on trial.  We need to keep the public's eye on Wall Street.  We need the public, Congress, and the Judiciary to keep an eye on the Department of Justice.

Given that the Department of Justice did nothing about Bernie Madoff for years, members of the public as well as federal judges must ask how Goldman Sachs was able to reach the FBI at 3 a.m. to report theft of computer code; and have an arrest 48 hours later.  Does Goldman Sachs have a bat phone that connects to the Department of Justice?  If DOJ doesn't dismiss the case against Sergey, we might just find out.  

"Chasing Small Fry, S.E.C. Let Madoff Get Away"

The modern American prosecutorial novella has a simple theme.  Federal prosecutors ignore rich and powerful people like Bernie Madoff.  Instead, they prosecute small targets.  This June, 2009 New York Times article is typical:

Three months ago, in a courtroom in Bridgeport, Conn., a 72-year-old former Morgan Stanley broker named Richard A. Kwak was cleared of any involvement in a small-time stock manipulation scheme.

The S.E.C. retried Mr. Wilson in 2008. He was cleared. Finally, in March 2009, the S.E.C. retried Mr. Kwak, with the same result. The jury took less than four hours to exonerate him.

I bring all this up because this Monday, Bernard L. Madoff, a contender for the title of greatest financial criminal in history, will be sentenced for the Ponzi scheme he ran for years. Mr. Madoff ruined lives, destroyed philanthropies and cost his investors billions of dollars — yet the S.E.C. was nowhere to be found, despite the repeated entreaties of a whistle-blower, Harry Markopolos.

The Department of Justice is no different from the SEC.  For example, in United States v. Aleynikov, the following occurred: Goldman Sachs called the FBI at 3 a.m. to report that Sergey Aleynikov had stolen Goldman's proprietary software.  This software, Goldman reported, could be used to "unfairly manipulate markets." 

Instead of indicting Goldman Sachs for unfairly manipulating markets, within 48 hours of the call to the FBI, Aleynikov was arrested and in jail.  How does that make any sense?  

If someone came to you saying, "He stole my murder weapon," wouldn't you be more concerned with the murder than the theft?  If Goldman said that a former employee had stolen its market-manipulating software...Should you really be worried about the employee?

It makes total sence, once you realize that line federal prosecutors are much more concerned with getting cozy jobs in the private sector than they are with seeking justice.  Goldman Sachs can send a lot of work to a former AUSA.  

Folks like Aleynikov pay the price.  An innocent man's freedom is just the price the public must pay so that AUSAs may do business with the likes of Goldman Sachs.

Aleynikov Arrest Contradicted Formal DOJ Policy

Sergey Aleynikov was arrested for theft of trade secrets, in violation of 18 U.S.C. §1832.  The United States Attorneys Manual (USAM) is an internal document that "contains general policies and some procedures" regarding the prosecution of federal crimes.  Not every violation of the law can be prosecuted.  Thus, before each section covering major crimes, the USAM describes the policy objections.

The USAM notes: 

Economic Espionage Act of 1996 (18 U.S.C. §§ 1831-1837)—Prosecutive Policy  

The EEA is not intended to criminalize every theft of trade secrets for which civil remedies may exist under state law. It was passed in recognition of the increasing importance of the value of intellectual property in general, and trade secrets in particular to the economic well-being and security of the United States and to close a federal enforcement gap in this important area of law. 

Trade secret cases are rarely prosecuted, and for good reason.  A large company like Goldman Sachs is perfectly capable of obtaining an injunction, preventing someone from revealing its trade secrets.  Limited judicial resources should not be spent doing for Goldman what Goldman may do for itself.  Nevertheless, Aleynikov was arrested, even though Goldman had civil remedies under state law.

The USAM also describes the elements of the crime Aleynikov was arrested under.  

Elements of the Offense Under 18 U.S.C. § 1832
In order to establish a violation of 18 U.S.C. § 1832, the government must prove: 

• (1) the defendant stole, or without authorization of the owner, obtained, destroyed or conveyed information; 
• (2) the defendant knew this information was proprietary; 
• (3) the information was in fact a trade secret; 
• (4) the defendant intended to convert the trade secret to the economic benefit of anyone other than the owner; 
• (5) the defendant knew or intended that the owner of the trade secret would be injured; and (6) the trade secret was related to or was included in a product that was produced or placed in interstate or foreign commerce.

The government has not been able to produce any evidence regarding elements (4) and (5).  None.  All the government has been able to show is that Aleynikov dowloaded less than 1% of a computer program's code.  They haven't established why he did this - let alone whether he downloaded the code to benefit a third part or to injure Goldman Sachs.

Here is what the United States Attorney Manual says about element (4):

Under § 1832, the government must prove that the act of misappropriating the trade secret was intended for the economic benefit of a person other than the rightful owner (which can be the defendant or some other person or entity). This differs from § 1831 where foreign government activity is required, and the benefits may be non-economic. Therefore, a person who misappropriates a trade secret but who does not intend for anyone to gain economically from the theft cannot be prosecuted under § 1832.

Again, there has been no evidence establishing that Aleynikov intended to use the software to benefit a third party. 

Here is the USAM on element (5):

Beyond demonstrating that the defendant both knew the information taken was proprietary and intended that the misappropriation economically benefit someone other than the rightful owner, the government in a § 1832 case also must prove a third mens rea element: that the defendant intended to "injure" the owner of the trade secret.

Where is the evidence showing that Aleynikov intended to injure Goldman Sachs?  There is no such evidence.  

The case against Aleynikov must be dismissed.  If anything, the arresting officers should be concerned that Aleynikov might file a Bivens action for false arrest.  There was no probable cause that Aleynikov intended to violate elements (4) and (5), and thus the arrest was unlawful.

New York Times Reports on Aleynikov Arrest

Alex Berenson of the New York Times is asking the right questions about the arrest of Sergey Aleynikov.  Check out his Times report here.

Update on Sergey Aleynikov Case (UPDATED)

Today there was a hearing scheduled in United States v. Aleynikov.  I haven't seen any reports of today's hearing.  The docket sheet for PACER isn't showing any updates.  (See update, below.)  Bloomberg, however, is reporting:

Aug. 17 (Bloomberg) -- Former Goldman Sachs Group Inc. computer programmer Sergey Aleynikov, who was charged last month with stealing sophisticated trading software, wants his criminal case to be dismissed.

At a hearing in Manhattan federal court on Aug. 10, defense attorney Sabrina Shroff said she will seek to persuade prosecutors to enter into a rare “deferred prosecution” agreement. 

That outcome would not surprise me.  The prosecution of Aleynikov is a scadal.  He was arrested less than 48 hours after Goldman Sachs called the FBI on him.  His crime?  He allegedly stole a few lines of computer code from Goldman Sachs.

The prosecutor, Joseph Facciponti, told a federal judge that the computer code "theft" could cost Goldman Sachs millions of dollars.  The prosecutor also said that the software could be used to "manipulate markets."  Soon thereafter, the New York Times and other media outlets began reporting on Goldman Sachs' high frequency trading software.

A public trial of Aleynikov would expose Goldman Sachs.  After receiving too much attention, Goldman Sachs told the United States Attorneys Office to back off.  It seems that the same prosecutor who lied in open court is all too willing to do Goldman's bidding.

UPDATE: Reuters has this important update.