They guy on the left took the jewelry box, left the jewels behind.

Photographer: Jin Lee/Bloomberg

Why Goldman Sachs Keeps Losing in Court

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Time to dust off the old juris doctor sheepskin, and wonder aloud about the legal advice that Goldman Sachs has gotten over the past few years. It's a question worth asking as I review the firm's recent history of unforced errors in the courtroom. The most recent case in point: the collapsing prosecution of former Goldman computer coder Sergey Aleynikov.

There's a pattern here, and we can discern its outlines by starting with the “Fabulous Fab” Tourre-Abacus case. This was a simple fraud case involving Securities and Exchange Commission rule 10B-5 governing "manipulative and deceptive practices." Any rookie lawyer could have looked at the facts concerning the sale of a monumentally complex security and recommended a quick settlement involving a modest fine. Instead, Goldman received what I can only surmise was some fairly awful advice, leading it to fight the allegations tooth and nail. I don’t know if it was a new legal team or simple exhaustion that led to an about-face, but Goldman settled in 2010 for a whopping $550 million fine and a lot of embarrassment.

The good news for Goldman is the Aleynikov case seems to be one of the final remnants of that misguided legal regime. The bad news is some more embarrassment from that era may well follow.

A quick review of the Aleynikov case:  The Russian immigrant left Goldman in 2009 to take a job with Teza Technologies, a high-frequency trading outfit. He was accused of taking what was mostly open-source software code. He downloaded some small snippets of what was arguably proprietary code. I am with my Bloomberg View colleague Matt Levine, who wrote that “Aleynikov believed -- probably correctly -- that the code that he took was open-source and so not Goldman's property at all.”

If you want to cause an Internet breakdown, you can do one of two things: publish revealing photos of Kim Kardashian, or admit that Goldman owns code that can be used to manipulate financial markets. The prosecutor in this case brilliantly did the latter. Consider this part of Assistant U.S. Attorney Joseph Facciponti's statement during a court appearance:

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 . . . .The copy in Germany is still out there, and we at this time do not know who else has access to it.

The reactions were as predictable as they were hilarious: "Goldman Sachs Loses Grip on Its Doomsday Machine" was the headline on a column by a Bloomberg columnist. Michael Lewis had a field day, writing in Vanity Fair magazine that “Goldman Sachs presumably used it to manipulate markets in fair ways.” The Aleynikov situation ultimately led Lewis to write the best seller "The Flash Boys," which did little to burnish Goldman's reputation for legal smarts.

Aleynikov was eventually convicted on charges of theft of trade secrets and transporting stolen goods. He was sentenced to eight years in federal prison. He appealed, and what followed was rather unusual: Only hours after the U.S. Court of Appeals for the Second Circuit heard his case in February 2012, the three-judge panel overturned the conviction and ordered the trial court to enter a judgment of acquittal. This episode probably points to deeper problems with the case.

Whether the facts are weak or the law was misapplied is hard to tell. What's perhaps more bizarre is that even after the federal court threw out the conviction, New York state went ahead and in August 2012 filed new charges against Aleynikov, double jeopardy be damned.

Now consider some of what Lewis found when he dug into the case. At one point, he convened a panel of expert Wall Street programmers to review the evidence. They pointed out that the criminal prosecution was absurd in light of industry standard operating practices that include:

-- Wall Street programmers routinely take code they work on when they leave for new jobs; from the day he arrived at Goldman, Aleynikov had been sending Goldman’s source code to himself weekly.

-- Aleynikov left behind Goldman’s trading strategies, noting “I wasn’t interested in the strats”; other programmers compared that to “stealing the jewelry box without the jewels.”

-- Aleynikov had not behaved like a man trying to cover his tracks.

-- Goldman proprietary code was written specifically for Goldman’s platform; it would have been of little use in any new system Aleynikov tried to build.

-- Regardless, Goldman was in violation of the original free licenses, refusing to release the altered code back to the public.

Perhaps these reasons are why the federal appeals court tossed out the case with prejudice. A federal judge has since ruled that Goldman must advance Aleynikov the costs of his legal defense against New York's charges. Aleynikov's defense also won its bid to have a majority of the evidence tossed out in the state case, including the results of an unlawful Federal Bureau of Investigation search, arrest and detention. Perhaps in a move that signals confidence, Aleynikov's defense rested after calling just two witnesses. Aleynikov has even sued the FBI agents who arrested him. A jury is expected to soon begin deliberations.

The entire situation -- from Goldman’s role to the federal prosecution to the subsequent state case -- looks like a colossal snafu at every level. It also suggests that this may be a legacy case from an era of poor legal advice that Goldman probably would like to forget.

Goldman has a reputation for being the smartest outfit on the Street. Let's see if it has learned anything from its run of legal reversals. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at

To contact the editor on this story:
James Greiff at