‘Flash Boys’ Programmer Gets Some Evidence Thrown Out

The former Goldman Sachs Group Inc. programmer twice charged with stealing the company’s high-speed trading code on his last day of work scored a pre-trial victory as a New York judge ruled his arrest was illegal and threw out some of the evidence against him.

Sergey Aleynikov, 44, a naturalized U.S. citizen born in Russia, whose case was the inspiration for Michael Lewis’s best-seller “Flash Boys,” is fighting charges in state court after his federal conviction was overturned.

Physical evidence seized after Aleynikov’s arrest, including computer hardware containing the allegedly stolen code, can’t be used at his trial, New York State Supreme Court Justice Ronald Zweibel in Manhattan ruled yesterday. He also barred prosecutors from using Aleynikov’s statements to FBI agents after his July 3, 2009, arrest at Newark Liberty International Airport in New Jersey.

“I think the D.A. has to confront the possibility that this case has fallen to pieces and it’s going to be very difficult to bring it based on upon whatever evidence remains,” Anthony Sabino, a law professor at the Peter J. Tobin College of Business at St. John’s University in Queens, New York, said in a phone interview.

Prosecutors will still be able to use one Aleynikov statement in which he said he downloaded files from Goldman Sachs. While that violated Goldman Sachs’s security policy, the files he was accused of taking contained open-source code that he wrote while at the company and weren’t proprietary, Aleynikov’s lawyers have said.

Arrest, Search

Aleynikov’s arrest and a subsequent search of his home were “presumptively unreasonable,” Zweibel said in his ruling. The judge said the Federal Bureau of Investigation didn’t get warrants and that Special Agent Michael McSwain made a “mistake of law” in charging Aleynikov with two federal crimes.

Zweibel denied Aleynikov’s request to exclude subsequent statements made at FBI headquarters in New York, saying they were made voluntarily and that he was advised of his rights.

“While defendant was illegally arrested because of a mistake of law, agent McSwain did not deliberately act in bad faith,” Zweibel said in his ruling. “This is not a case where Agent McSwain resorted to mental, physical or emotional coercion to obtain defendant’s confession.”

Kevin Marino, Aleynikov’s lawyer, said in a statement that the ruling guts the case against his client and is “another important step on Sergey Aleynikov’s long journey to complete vindication.”

‘Damning Indictment’

The decision “represents a damning indictment of those assistant U.S. attorneys, assistant district attorneys and FBI agents who have now twice pursued an unlawful prosecution of an innocent man at the behest of Wall Street giant Goldman Sachs -- and indeed, of Goldman itself, which not only provoked but has been an active co-conspirator in the government’s case against Mr. Aleynikov,” Marino said.

Benjamin Petok, a spokesman for the Manhattan District Attorney’s Office, declined to comment on the ruling. David Wells, a spokesman for New York-based Goldman Sachs, declined to comment on the ruling or Marino’s statement.

Federal agents arrested Aleynikov shortly after he stepped off a plane at the Newark airport after returning from a trip to Chicago, where he had taken a job with Teza Technologies LLC, the firm founded by former Citadel Investment Group LLC high-frequency trading chief Mikhail Misha Malyshev. Teza suspended Aleynikov after his arrest and later fired him.

Aleynikov would have made $1.2 million a year at Teza, more than double his annual pay at Goldman Sachs, according to the ruling.

Conviction Reversed

Aleynikov was found guilty of stealing code by a federal jury in Manhattan in December 2010 and was sentenced in March 2011 to eight years and one month in prison, serving about a year before a U.S. appeals court reversed his conviction and ordered him freed in February 2012. He was charged by Manhattan District Attorney Cyrus Vance’s office six months later. He has pleaded not guilty.

Zweibel in April denied a bid by Aleynikov to have the state charges thrown out on double-jeopardy grounds, saying the elements of the counts he faces are different from those he faced in federal court.

Aleynikov’s story was recounted by Lewis in Vanity Fair and later became the foundation for his book “Flash Boys,” which argues that high-speed traders, exchanges and broker-dealers have rigged the stock market. The book has brought increased scrutiny of the practice in the U.S.

Zweibel said McSwain made a mistake of law when he determined he had probable cause to charge him with a violation of the National Stolen Property Act because source code is intangible and the statute only refers to tangible property.

Espionage Act

The judge also said McSwain mistakenly concluded that Aleynikov had violated the Economic Espionage Act, which applies to products made specifically for use in interstate or foreign commerce such as manufactured goods. Goldman Sachs had no intention of selling its high-frequency trading system or licensing it to anyone, according to the ruling.

The law was expanded after Aleynikov’s release from federal prison to cover products or services not intended for use in commerce, including computer code.

Zweibel said that while Aleynikov agreed to a search of his home, his consent was obtained after he was arrested at the airport and handcuffed and before he was advised of his rights and was therefore “unknowing and involuntary.”

Search Reasonable

The judge said that while the search of Aleynikov’s home was reasonable because his wife had agreed to it, the property seized should have been returned after his acquittal. The items seized included five desktop computers, a laptop and an external hard drive. A thumb drive and a laptop computer taken from him at the time of his arrest also should have been returned, Zweibel said.

“There was no independent basis for the government’s retention of defendant’s property after defendant was acquitted in his federal case,” the judge said. “The property should have been returned to defendant.”

In a signed statement that can still be used as evidence, Aleynikov told McSwain at FBI headquarters that he created a “tarball” that copied several thousand files, sent them to a server in Germany and then downloaded them to his home computer. Aleynikov told McSwain he transferred about five megabytes on his last day of work, and sent data from his work desktop to his home computer about five times, according to Zweibel’s ruling.

Wife’s Computer

Aleynikov said the data was on his laptop taken at the airport and also may have been on his wife’s home computer and an external hard drive, according to the ruling. He said he was trying to collect 10 open-source files from Goldman Sachs.

He told the agent that the files weren’t blocked by the company and that’s why he chose to send them to the German server, according to the ruling. He said that he wanted to review the files “much like a person in college would want to review their papers,” although he knew that his actions violated Goldman Sachs security policy, according to the opinion.

The case is New York v. Aleynikov, 04447-2012, New York State Supreme Court (Manhattan).

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