close the courtroom (.pdf) for portions of testimony involving the company’s proprietary software, and to seal exhibits and transcripts pertaining to the company’s trade secrets.

The case involves a Russia-born programmer who worked for Goldman Sachs until last year when authorities say he siphoned source code for the company’s valuable software on his way out the door. The software is used to make sophisticated, high-speed, high-volume stock and commodities trades and earns the company “many millions of dollars in profits” each year, according to prosecutors.

Sergey Aleynikov, 40, was arrested in July 2009 at the Newark Airport in New Jersey as he returned from a trip to Chicago, where he’d met with his new employers at a competing firm, Teza Technologies. After Aleynikov cooperated with agents and allowed searches of his computers and home, he was indicted seven months later on charges of unauthorized computer access, theft of trade secrets and interstate and foreign transport of stolen property. He’s scheduled to go on trial November 29.

Prosecutors wrote that if information about the investment bank’s software were made public “the very purpose of this trade-secret prosecution would be defeated and other victims of trade-secret thefts would be discouraged from reporting those crimes.” The Wall Street Journal reported first about the motion to seal.

In their motion, prosecutors also asked that evidence and arguments about the nation’s financial crisis not relevant to the case be excluded from the trial.

Specifically, prosecutors asked that information about Goldman Sachs’ receipt of funds from the government’s bank bailout program be excluded, as well as information about the company’s bonus pool, bonuses and salaries paid to Goldman Sachs employees other than programmers relevant to the case. They also want civil and regulatory proceedings involving Goldman Sachs to be precluded, and information about SEC investigations of, and proposed regulation of, high-frequency trading.

High-speed trading software has been in the crosshairs since a recent SEC investigation found that trading algorithms were responsible in part for a drastic one-day stock-market crash last May.

Prosecutors asserted in their motion that “the legality of high-frequency trading is not an issue here.”

Aleynikov, a naturalized American citizen from Russia who immigrated to the United States in 1991, earned nearly $400,000 a year as a vice president with Goldman Sachs, but his new job with Teza would have paid him about $1.2 million.

Authorities allege he stole “hundreds of thousands of lines” of source code from Goldman Sachs in the days before he left the company on June 5 last year. They allege that he downloaded various software from the Goldman Sachs network and transferred it to a storage website hosted in Germany before trying to erase his tracks from Goldman Sachs’ network. Company computer logs show that on at least two occasions, he transferred the data remotely while logged into his company’s network from his home computer. Prosecutors maintain that among the data he downloaded was source code constituting “a substantial portion of the company’s proprietary source code” related to high-speed trading.

At Aleynikov’s bail hearing last July, Assistant U.S. Attorney Joseph Facciponti called it “the most substantial theft that the bank can remember ever happening to it,” and said repeatedly that the theft constituted the company’s “entire platform” for high-speed trading.

Goldman Sachs only uncovered the theft in late June after it began monitoring https transfers and saw a large volume of data leaving its network, according to the complaint. The company initiated the monitoring after noticing suspicious activity on the network.

Aleynikov allegedly used a script to copy, compress, encrypt and rename files, and then upload them to the server in Germany. Once the data was transferred, the program used to encrypt the files was erased, and he allegedly attempted to delete the network’s batch history showing his activity.

Prosecutors said Aleynikov made several copies of the code and had it on his laptop when he flew to Chicago to meet his new employers at Teza Technologies, though they acknowledge that a search of Teza computers uncovered no copies of Goldman Sachs’ source code.

Aleynikov acknowledged taking the code but told FBI agents he only intended to collect “open source” software files on which he had worked, and that his collection of proprietary files on his last day of work had been inadvertent. His attorneys say he never gave the proprietary files to anyone else and that the portion of proprietary code he took inadvertently was miniscule — just 32 of about 1,224 megabytes of code — and hardly constituted the company’s “entire platform.”

Aleynikov’s attorney did not respond to a call for comment.

Goldman Sachs, itself, seemed to contradict prosecutors’ assessment of the importance of the alleged theft during an earnings call last year. Chief Financial Officer David Viniar told reporters that losses sustained as a result of the alleged theft would be “very, very immaterial.”

“We still have all of the code,” he said. “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.”

According to the complaint, Aleynikov had been employed since May 2007 to develop Goldman Sachs’ trading software. The system allowed the company to swiftly process quickly changing market data and place automated trades based on the latest market conditions.

Companies can invest hundreds of millions of dollars in building their trading programs. It’s not unusual for firms to accuse former programmers and other employees of stealing proprietary code when they leave for a competitor, but such disputes are generally handled in civil court. In this case, Aleynikov was arrested two days after Goldman Sachs contacted the FBI with evidence that he had downloaded proprietary code.

A spokeswoman for the U.S. attorney’s office told Threat Level, “We will bring a criminal case when we think that criminal statues or laws have been violated.”

During discovery, Aleynikov’s attorneys have sought a number of documents from prosecutors and Goldman Sachs, including source code and UNIX and Slang scripts used by Goldman Sachs. They’ve also sought network logs showing https inbound and outbound connections to and from Aleynikov’s personal computer between March 1 and the time Aleynikov left the company, the full content of the company’s software build and developer directories, the content of trading parameter tables, as well as numerous other files and documents (.pdf).

Based on the request list, it’s likely that Aleynikov’s attorneys will argue in part that Goldman Sachs did little to protect its proprietary information. At a hearing last July, his then public defender Sabrina Schroff told the court, “If Goldman Sachs cannot possibly protect this kind of proprietary information that the government wants you to think is worth the entire United States market, one has to question how they plan to accommodate any other breach.”

Photo: Goldman Sachs’ New Jersey headquarters, courtesy lymangsrs.

See also:

• FBI: Russian Programmer Stole Stock-Trading Secret Code

Authors: Kim Zetter

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