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Programmer Freed Since Software Code Isn’t Goods

MANHATTAN (CN) - Federal espionage and stolen property laws cannot touch suspected software-code thieves, the 2nd Circuit said, explaining why it freed a former Goldman Sachs programmer.

Though the three-judge panel had been unanimous, a concurring opinion called for Congress to plug the loophole.

On Dec. 10, 2010, a jury convicted Sergey Aleynikov of stealing the code behind Goldman Sachs' high-frequency trading system, which places orders as market data gets processed through its system.

"This is a business where fractions of a second count," Assistant U.S. Attorney Joseph Facciponti said at a sentencing hearing early last year.

Defense attorney Kevin Marino has said FBI Agent Michael McSwain, a Goldman Sachs shareholder, rushed to judgment and arrested Aleynikov based on tips from bank employees.

Though Aleynikov admitted that he downloaded Goldman Sachs' proprietary code, he claimed throughout trial that he only wanted to use it as a reference to extract open-source code that belonged to the public.

Prosecutors argued that he stole the code to more than double his previous salary and make more than $1 million with Goldman Sachs' competitor, Teza Technologies.

The federal appeals court overturned Aleynikov's conviction in February without explanation.

When it elaborated on that decision Wednesday, the three-judge panel sidestepped the question of Aleynikov's motives, and focused instead on the legal basis of the charges against him.

Chief Judge Dennis Jacobs, the lead author of the 30-page opinion, explained why the National Stolen Property Act (NSPA) and Economic Espionage Act (EEA) of 1996 could not touch Aleynikov.

"The decisive question is whether the source code that Aleynikov uploaded to a server in Germany, then downloaded to his computer devices in New Jersey, and later transferred to Illinois, constituted stolen 'goods,' 'wares,' or 'merchandise' within the meaning of the NSPA," Jacobs wrote. "Based on the substantial weight of the case law, as well as the ordinary meaning of the words, we conclude that it did not."

The first charge against Aleynikov required the stealing of "tangible property," which web code is not, Jacobs explained, citing precedent.

Aleynikov was improperly charged with the espionage charge, he continued, because the statute relates to the theft of trade secrets "that is related to or included in a product that is produced for or placed in interstate or foreign commerce."

The Goldman Sachs code was intended for strict secrecy, not public sale, he added.

"Goldman's HFT system was neither 'produced for' nor 'placed in' interstate or foreign commerce," the opinion states, abbreviating high-frequency trading. "Goldman had no intention of selling its HFT system or licensing it to anyone. It went to great lengths to maintain the secrecy of its system. The enormous profits the system yielded for Goldman depended on no one else having it. Because the HFT system was not designed to enter or pass in commerce, or to make something that does, Aleynikov's theft of source code relating to that system was not an offense under the EEA."

In a two-page concurring opinion, Judge Guido Calabresi said he wished "to express the hope that Congress will return to the issue and state, in appropriate language, what I believe they meant to make criminal in the EEA."

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