Crime & Federalism

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.

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  

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.

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.

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.

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

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:

Connecticut Senator Christopher Dodd received a better mortgage deal from subprime lender Countrywide, simply because Dodd was a United States Senator.  Today, the United States Senate cleared Dodd of wrongdoing.  According to CNBC:

Matthew Goldstein, the Reuters blogger who broke the Aleynikov story, is reporting:

Aleynikov will be given a super-sweet plea bargain. If his case proceeds towards trial, the world will learn about Goldman Sach's high frequency trading program. Sure, AUSA Joseph Facciponti will try to keep the case under seal. Too many people are paying attention. Reporters and judges want to know what is up with Goldman Sachs....

The case against Aleynikov needs to go away. Quietly. Keep an eye on PACER.

We at Crime & Federalism will not remain quiet.  Nor will Mr. Goldstein.  Please read more about Facciponti's and Goldman's efforts to cover-up Aleynikov case here.

If I were Sergio Aleynikov's lawyer, I'd seek to dismiss the case under a class-of-one equal protection theory.  Why is Aleynikov, unlike other people who allegedly stole trade secrets from Wall Street firms, being criminally prosecuted?  Does AUSA Joseph Facciponti, the attorney prosecuting Aleynikov, have a secret and improper relationship with Goldman Sachs?  

Why did the FBI, less than 48 hours after Goldman Sachs reported the alleged theft, arrest Aleynikov?  Why did Facciponti work all nighters and lie to a federal judge?  These are questions that we should ask.  There needs to be a full evidentiary hearing into Facciponti's prosecutorial misconduct; and to the Department of Justice's preferential treatment of Goldman Sachs.

The New York Times has an excellent article on high frequency trading.  Sergey Aleynikov, a man did something very right for the wrong reasons, even makes a cameo.  Read the whole thing.

If you want to get a better feel for the issues, the Themis Trading blog shows how high frequency trading looks:

The three HFT horsemen are C, BAC and CIT. These three stocks traded 860 million shares today which is 10% of all US Equity volume. 

Look at the intraday chart of all three of these stocks and you will see a something in common: an early morning move followed by a flatline with a very tight range (around .05). Meanwhile, while these stocks were flatlining the market was heading higher. The S&P 500 gained around 10 points in the afternoon (or 1%) but these 3 stocks did not move. 

There was a constant bid to these stocks yet anytime they wanted to lift there seemed to be a constant offer just a few pennies higher. This is what HFT looks like. The HFT’s made a killing in these 3 names today – in addition to the .01-.02 spread, they collected about .005/share in liquidity rebates. Not a bad day for a supercomputer.

Aleynikov will be given a super-sweet plea bargain.  If his case proceeds towards trial, the world will learn about Goldman Sach's high frequency trading program.  Sure, AUSA Joseph Facciponti will try to keep the case under seal.  Too many people are paying attention.  Reporters and judges want to know what is up with Goldman Sachs.

Fortunately, C&F's post disclosing Facciponti's fraud in open court has made the rounds.  Unless Facciponti finds a judge who is willing to serve as his co-counsel, it's unlikely that Facciponti will continue to get away with lying to federal judges.

The Southern District of New York is on notice: Facciponti is serving as Goldman Sachs' de facto lawyer.  Facciponti, less than 48-hours after Goldmans' software code was reportedly stolen, worked all-nighters to get Aleynikov arrested.  In a trade secret case.  There is no other trade secrets case where a government lawyer moved so quickly to serve private interests.

Goldman Sachs has already downplayed the Aleynikov case.  The code theft, which caused a man to be arrested less than 48 hours after the Department of Justice was called, was no big deal.  That's what Goldman must say.  To speak the truth would be to invite people more skeptical than AUSA Facciponti.  Indeed, the New York Times is now covering high frequecy trading.

The case against Aleynikov needs to go away.  Quietly. Keep an eye on PACER.

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?

Sergey Aleynikov allegedly stole some software from Goldman Sachs.  While on the job, Aleynikov, a former quant at Goldman Sachs, would allegedly downlownd Goldman's software.  Assistant United States Attorney Joseph Facciponti is prosecuting Aleynikov for theft of trade secrets.  At Aleynikov's bail hearing, Facciponti argued that Aleynikov should not be released on bail.  Yes, this is a trade secrets and not a murder prosecution. 

In oral argument before Magistrate Judge Kevin N. Fox, Facciponti stated:

If this code is allowed to go to a competitor or to an entity that is not necessarily legal but can start trading with this, the bank itself stands to lose its entire investment in creating this software to begin with, which is millions upon millions of dollars.

The bank’s profit margin will be eroded -- and I’ll explain why in a minute -- by the other competit activity. In addition, because 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.

In other words, they can take steps, they can start building a new program, they can -- I’m not exactly sure what steps they can take. But even if they could take steps, my understanding from them is that any dissemination of this program would be a substantial loss to them, a very substantial loss to them.