Program can be used to manipulate markets: prosecutor
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(NEW YORK) Goldman Sachs Group Inc may lose its investment in a proprietary trading code and millions of dollars from increased competition if software allegedly stolen by a former employee gets into the wrong hands, a prosecutor said.
Sergey Aleynikov, an ex-Goldman Sachs computer programmer, was arrested July 3 after arriving at Liberty International Airport in Newark, New Jersey, US officials said. Aleynikov, 39, who has dual American and Russian citizenship, is charged in a criminal complaint with stealing the trading software.
At a court appearance on July 4 in Manhattan, Assistant US Attorney Joseph Facciponti told a federal judge that Aleynikov's alleged theft poses a risk to US markets.
Aleynikov transferred the code, which is worth millions of dollars, to a computer server in Germany, and others may have had access to it, Mr Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated.
'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,' Mr Facciponti said, according to a recording of the hearing made public yesterday.
'The copy in Germany is still out there, and we at this time do not know who else has access to it.' The prosecutor added: 'Once it is out there, anybody will be able to use this, and their market share will be adversely affected.'
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The proprietary code lets the firm do 'sophisticated, high-speed and high- volume trades on various stock and commodities markets', prosecutors said in court papers. The trades generate 'many millions of dollars' each year.
Defence attorney Sabrina Shroff said in court that the government's allegations are 'preposterous'. The firm was aware that Aleynikov, who is the father of three young girls, was downloading programs to his personal computer to do work at home and that he has not disseminated the code, the lawyer said.
'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 every other breach,' she said.
Michael DuVally, a spokesman for Goldman Sachs in New York, declined to comment.
US Magistrate Judge Mark Fox ordered Aleynikov, who earned US$400,000 a year, to be held on US$750,000 bail, after prosecutors claimed that he posed a threat to the community. Aleynikov planned to earn three times his salary by joining a start-up company and engaging in high-volume automated trading, prosecutors said. He posted bail on Monday and was released.
He did not speak at the hearing, except to say that he understood the conditions of his bail.
'Someone stealing that code is basically stealing the way that Goldman Sachs makes money in the equity marketplace,' said Larry Tabb, founder of Tabb Group, a financial market research and advisory firm.
'The more sophisticated market makers - and Goldman is one of them - spend significant amounts of money developing software that's extremely fast and can analyse different execution strategies so they can be the first one to make a decision.' Someone could use the code 'to implement the same strategies and maybe on certain stocks they can be faster and, in effect, take away money that would normally be Goldman's', Mr Tabb said in a phone interview.
'The second thing that they can do is actually analyse the code so that they know what Goldman's going to do before Goldman does it and kind of reverse engineer Goldman's strategies and make money basically at the expense of Goldman.'
Aleynikov spent four hours with a Federal Bureau of Investigation agent after his July 3 arrest, Ms Shroff said. He told the agent that he had done nothing wrong, authorised prosecutors to seize his personal computers, and said that he did not know that the server he was using was in Germany, she said. -- Bloomberg
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