Crime & Federalism

Justice in an Oligopoly

In an official court proceeding, federal prosecutor Joseph Facciponti told a federal judge that "[Goldman Sachs] has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."

That is a scandalous allegation, isn't it? A federal prosecutor admits that Goldman Sachs has market-manipulating software. What do you suppose happened?

Rather than indict Goldman Sachs for having software that "somebody [could] use .. to manipulate markets in unfair ways," the federal government indicted a computer programmer for stealing the code!

After a show trial where portions of the proceedings were sealed from the public view, Sergey Aleynikov was convicted:

A jury has found a former Goldman Sachs computer programmer guilty of stealing source code from the bank’s high-frequency trading platform.

The trial of Sergey Aleynikov, a 40-year-old Russian immigrant, spotlighted the world of high-frequency trading, which uses complex computer algorithms to make rapid-fire trades to exploit tiny price discrepancies. High-frequency trading has become a growing important source of revenue atWall Street firms. As a result, banks fiercely protect the code underpinning their businesses.

Mr. Aleynikov faces up to 10 years in prison when he is sentenced.

Sergey faces ten years in prison from stealing market-manipulating code, while Goldman Sachs gets to keep its code. 

Do you seriously want to argue that the United States is not an oligopoly resembling post-Soviet Russia?

Goldman Sachs' Cronies at DOJ Seek Star Chamber in Aleynikov Prosecution

This is revolting although not surprising:

 Federal prosecutors in Manhattan have asked a judge to seal the courtroom in an upcoming corporate-espionage trial to protect the secret of Goldman Sachs’ controversial high-speed trading software.

According to Assistant United States Attorney Joseph Facciponti, "The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."  Is it any surprise, then, that Facciponti doesn't want members of the public and media to learn about Goldman Sachs' market-manipulating software?

Does Joseph Facciponti represent the interests of the United States of America - which is what his Oath of Office requires - or the interests of Goldman Sachs?   

Prior coverage on Goldman Sachs'/Facciponti's prosecution of Aleynikov is here.  

 

High Frequency Trading, Goldman Sachs, Stop-Loss Orders, and Accenture (ACN)

Imagine you had a stop-loss order in on Accenture for $36.  Average investors always put in stop-loss orders to prevent them from suffering a catastrophic loss on a stock.  Regular investors, however, do not have computer algorithms that can buy in sell the same stock every millisecond.  

An average investor in Accenture literally had his stock stolen from himself today.  The stock dropped from from $41.09 to $.04 - triggering your stop-loss order at $.04.  After all, the stock didn't take a normal drop from $41.09 to $38.52 to $36.  Instead, it fell off a cliff to...

...Four cents.  

One of Goldman Sachs' algorithm picked up your shares for four pennies in the second that your stop-loss order was triggered.  That the stock immediately returned to it's market value means nothing.  You shares are gone.

Goldman wins, you lose.  I'll give you ten-to-one odds that Goldman Sachs made over $100 million today.  Want to take the other side of the bet?  

Goldman Sachs did not win because they are smarter than the average investor.  They won because they manipulate the stock market through its high frequency trading (HFT) programs.

Look at this chart, and explain to me why Goldman Sachs traders should not be hanging from stop lights on Wall Street?  People are worried about illegal immigration in Arizona when traders are robbing people in plain sight.

Goldman Sachs has already confessed its crimes to AUSA Joseph Facciponti, who said that: "The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."

This is what a market manipulated in unfair ways looks like:

 

Goldman Sachs is Under Criminal Investigation

Ding dong the witch is (almost) dead:

Federal prosecutors have opened an investigation into trading at Goldman Sachs, raising the possibility of criminal charges against the Wall Street giant, according to people familiar with the matter.

While the investigation is still in a preliminary stage, the move could escalate the legal troubles swirling around Goldman.

Dear Department of Justice lawyers who read this page: I guarantee you that I can make a criminal case against Goldman Sachs.  Call me.  I will work pro bono.  You can have all of the glory.

You should also talk to AUSA Joseph Paul Facciponti.  He's the lawyer prosecuting Sergey Aleynikov on behalf of Goldman Sachs.  At Aleynikov's bail hearing, Facciponti told a judge that Aleynkikov allegedly stole software from Goldman Sachs that could "manipulate markets in unfair ways."

Perhaps you should ask AUSA Facciponti why Goldman Sachs has in its possession software that unfairly manipulate markets.  Perhaps Goldman Sachs should be investigated for having software that unfairly manipulate markets.

Clearly AUSA Facciponti has substantial information regarding Goldman Sachs' illegal trading activities.  Perhaps you should remove AUSA Facciponti from the malicious prosecution of Aleynikov, and instead have him focus on the real criminals inside Goldman Sachs.

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.