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Goldman Sachs Trade Secrets Case Hits Bump|With Testimony From Trader’s New Boss

MANHATTAN (CN) - Two government witnesses -- both of them executives with trading company Teza Technologies -- denied on Monday that programmer Sergey Aleynikov ever promised them proprietary code for a high-frequency trading system belonging to Goldman Sachs. Aleynikov is charged with theft of trade secrets, transporting stolen property in foreign commerce and unauthorized computer access.

Goldman claims that Aleynikov, a former employee, swiped computer code for its software that enables it to make trades milliseconds faster than competitors.

But Teza founder Mikhail Malyshev testified that he felt Goldman Sachs, as a bank, was "not a significant competitor" in the high-frequency trading market.

Had Aleynikov even suggested that he would steal Goldman Sachs code for Teza's benefit, Malyshev said, he would have called him "an idiot" and "fired him on the spot."

Malyshev said that, on principle, he requires employees to build systems "from scratch."

Born in the Soviet Union, Malyshev said he grew up in Shuya, a rural town with no running water, and left at 17 to study at the Moscow Institute of Physics and Technology, which he described as a Russian equivalent of an Ivy League college for physics students. The only other course offering was a history of the Communist Party, Malyshev said to laughter in the courtroom.

After graduating with honors, Malyshev said he immigrated to America and was accepted into Princeton. From there, he says he "built the team" that made the company Citadel competitive in the high-frequency trading market, and he founded Teza out of an urge "to do something entrepreneurial."

"People who succeed are people whose drive to succeed is highest," Malyshev said.

He added that to be competitive with a high-frequency trading company, "To be the best, you have to build it yourself."

He said that he would not have accepted the Goldman Sachs program wholesale even if it were freely offered to him.

Teza's standard contracts include confidentiality agreements barring employees from using former employers' codes, Malyshev said.

Aleynikov's contract with Teza, submitted as evidence by prosecutor Joseph Facciaponte, offered Aleynikov $25,000 per month not to compete for 1 year if his contract were terminated.

After a standard clause prohibiting employees from using a former employer's intellectual property, Malyshev testified that Aleynikov wrote in the contract, "What about open source?"

Defense attorney Kevin Marino claims that Aleynikov never intended to steal code that belonged to Goldman Sachs, but used only lines of code that came from open source material available on the Internet.

In response to Aleynikov's proposed change, the final contract allowed code used by a former employer only if "you have a specific license to do so," Malyshev said.

When Marino asked whether Aleynikov's question about open source code was a "valid concern," Malyshev replied, "Yes, sir."

Teza programmer Demian Kosofsky also testified Monday, and said he had no reason to believe that Aleynikov brought Goldman Sachs code to Teza.

Before working at Teza, Kosofsky said, he worked at UBS, where he interviewed Aleynikov about a high-frequency trading system. "I found him to be very technically sharp," Kosofsky said. He said that UBS did not hire Aleynikov due to pay concerns.

In negotiations with Teza, Aleynikov demanded and received $300,000 in base salary and $700,000 in guaranteed bonuses in order to justify the risk of leaving Goldman Sachs for a new employer.

In addition, Aleynikov requested that Teza, which was opening a New York office at the time, secure property in Lower Manhattan that would be convenient for him to commute to from New Jersey.

When Teza chose a Midtown location to accommodate more employees, Aleynikov demanded a parking stipend of $200 per month, a request Malyshev found "immature" from a programmer who would soon be a millionaire. But Malyshev said he granted it.

"Honestly, I probably didn't do such a good job negotiating," Malyshev said.

Under cross-examination, Malyshev acknowledged that Aleynikov was not looking for a job when Teza scouted him, and said that Aleynikov probably would not have accepted if Teza had not acceded to his demands.

Meanwhile, in a written submission, prosecutors are trying to exclude evidence that FBI Agent Michael McSwain is a Goldman Sachs shareholder.

Last week, Marino suggested in discussions with U.S. District Judge Denise Cote that Aleynikov's indictment may have been based on statements that McSwain made to a grand jury, based on hearsay statements from Goldman Sachs employees acting "with malice" against Aleynikov.

According to the government's motion, "Special Agent Michael McSwain, the case agent in this matter ... currently owns approximately 50 shares of Goldman Sachs stock with a present total value of approximately $8,000. The Case Agent purchased these shares in or about 2005, four years prior to the initiation of this case.

"In addition, in or about July and August 2009, the Case Agent's investment advisor purchased, without the Case Agent's knowledge, an additional 50 shares. In or about September 2009, the Case Agent discovered that the investment advisor had purchased the additional 50 shares, and that the total value of all Goldman Sachs shares owned by the Case Agent was approximately $16,300.

"Later in September 2009, after receiving approval from the Department of Justice, the Case Agent instructed his fund manager to sell the additional 50 shares, and to not purchase any additional shares of Goldman Sachs."

The government contends that this information is not relevant to the jury because the value of the stock has never exceeded $16,300, which is less than the $25,000 minimum set by Department of Justice regulations.

The motion also argues that "there is no reason to believe that the outcome of this case will have any significant effect on the price of shares of Goldman Sachs stock."

"Finally, cross examination about this subject would only serve to embarrass and harass the Case Agent, while revealing nothing regarding his character for truthfulness or untruthfulness," the motion states.

As the issue had not yet been raised before Judge Cote, defense attorney Kevin Marino declined to comment.

If convicted, Aleynikov could spend up to 25 years in prison. The trial continues today.

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