No Foolish Consistency in Agrawal and Aleynikov But One Hell of A Stunning Reversal

February 21, 2012

As Ralph Waldo Emerson so sagely noted " A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines."  Using that as a yardstick, it appears that our federal district courts - particularly the Southern District of New York - are under the control of great minds.


In 2009, Samarth Agrawal was a trader within Societe Generale's High Frequency Trading Group but when he decided to accept a higher-paying slot at Tower Capital Research LLC ("Tower"), a proprietary trading group and hedge fund, he claimed he had a complete understanding of SocGen's trading system and represented that he could assist in building a copy of the same trading system at Tower. It appears that Agrawal sort of oversold himself because he was criminally charged with helping himself to SocGen's sophisticated, high-speed trading code, which enabled the firm's trading programs to generate millions of dollars in profits.

After an eight-day trial before in the Southern District of New York before Judge Jed S. Rakoff, a federal jury found Agrawal guilty of theft of trade secrets and interstate transportation of stolen property for stealing the proprietary computer code used in SocGen's high-frequency trading system. Agrawal faced a maximum sentence of 10 years in prison on each of the counts.  On February 28, 2011, Agrawal was sentenced to 36 months in prison followed by 2 years of supervised release.

SIDE BAR: For more details on Agrawal, read:Former SocGen Trader Socked in Criminal Code Case ("Street Sweeper" Novmember 22, 2010)


Around the same time as Agrawal's shenanigans, Goldman Sachs computer programmer Sergey Aleynikov was responsible for developing computer programs supporting the firm's high-frequency trading on various commodities and equities markets. In April 2009, Aleynikov resigned from Goldman Sachs and accepted a job at Teza Technologies ("Teza"), which hired him to help develop that firm's own version of a computer platform that would allow Teza to engage in high-frequency trading.

Alas, poor Aleynikov allegedly engaged in the same short-cut to programming that Agrawal was charged with because on February 11, 2010, the United States Attorney for the Southern District of New York announced a three-count indictment of Aleynikov (the counts carried a 25-year maximum sentence): theft of trade secrets, transportation of stolen property in foreign commerce, and unauthorized computer access.

After a two-week trial before Judge Denise L. Cote, on December 10, 2010, Aleynikov was found guilty by a federal jury of one count of theft of trade secrets and one count of transportation of stolen property in interstate and foreign commerce. Aleynikov faced a maximum of 15 years in prison.  On March 18, 2011, Aleynikov was sentenced to 97 months in prison, ordered to serve three-years of supervised release following his prison sentence, and ordered to pay a $12,500 fine.  On February 16, 2012, the United States Court of Appeals for the Second Circuit ruled that Aleynikov's convictions was:

REVERSED on both counts and the matter is remanded to the district court for entry of a judgment of acquittal. An opinion shall follow in due course.

SIDE BAR: For more details on Aleynikov, read:UPDATE: Federal Appeals Court Reverses Conviction of Goldman Sachs Programmer Aleynikov

Bill Singer's Comment

Although the 2nd Circuit did not fully set forth its rationale in its ruling to reverse and acquit Aleynikov, the forthcoming Opinion is much anticipated and the provided rationale will likely prove of an historic nature.  Given the bases for appeal and the issues disputed at trial, it is likely that the Circuit Court will have determined that there was no interstate commerce component to Aleynikov's alleged misconduct - thus finding that the federal jurisdiction over his case did not exist and further destroying the jurisdictional basis for any wire/mail fraud allegations; or, the Court may have also (or in the alternative) determined that Aleynikov's alleged misconduct did not reach to the level of criminal fraud (which would not necessarily rule out future lawsuits alleging civil fraud).

Regardless of the Court's rationale, this reversal could prove devastating to future criminal cases against those engaged in the perceived theft/conversion of electronic trade secrets or proprietary data.  If nothing else, this may prove a bit of an embarrassment and black eye for federal prosecutors.

When Agrawal was sentenced, the government's February 28, 2011, press release noted:

Manhattan U.S. Attorney PREET BHARARA said: "Aggressive protection of intellectual property is essential to America's current economic prosperity and future success. Today's sentence confirms that theft of intellectual property by people like Agrawal is a serious, federal offense that can lead to substantial jail time."

Similarly, when Aleynikov was sentenced, the government's March 18, 2011, press release noted:

Manhattan U.S. Attorney PREET BHARARA said: "Protecting the proprietary information of America's companies is critically important. Today's sentence sends a clear message that professionals like Sergey Aleynikov who abuse their positions of trust to steal confidential business information from their employers will be prosecuted and punished."

Ah yes, in 2011 the messages of Agrawal and Aleynikov seemed quite clear.Aggressive prosecution. Theft of intellectural propery was confirmed as a serious crime,  A clear message of prosecution and punishment.

Funny how what was once so clear a message last year about serious crime can so quickly evaporate into the mists of uncertainty.

A key aspect of the 2nd Circuit's ruling in Aleynikov was the Court's apparent haste to release the wrongly convicted defendant - apparently so compelling a motivation that the ruling not only reversed the finding of guilty but declined to pursue the more leisurely route of a remand to the lower district court and , instead, opted for the more aggressive outcome of a dismissal.  Whether we will soon see a similar disposition of Agrawalremains uncertain.

Candidly, based solely upon the allegations in Agrawal and Aleynikov, I'm not sure that I do or will appreciate any nuance proposed in the awaited Circuit Court's Opinion that would find the alleged acts as mere civil frauds or conversions rather than criminal frauds or thefts.  Notwithstanding that reservation, I will approach the appellate opinion with an open mind and carefully read it.

Given the ardor of the prosecutions and the stunning nature of the Aleynikov dismissal, one must wonder whether we will soon see future cases involving these alleged source code thefts. Whether new prosecutions are now stopped dead in their tracks (or merely hesitating until the US Supreme Court may weigh in), the remedy now seems limited to the allegedly victimized firms civilly pursuing their former employees.

With the lower burden of proof in civil court (a mere preponderance of the evidence versus beyond a reasonable doubt), the substantial financial resources of many Wall Street financial services firms, and the often impressive array of talent at the white-shoe law firms that service those firms, future defendants may wish that the 2nd Circuit had kept out of this. While having a US Attorney hot on your case is frightening enough, I suspect that the resources brought against a defendant by the likes of Merill Lynch, UBS, Wells Fargo, Citibank, Morgan Stanley, JP Morgan, and that ilk will likely bury many individual defendants under a flood of paperwork and mushrooming legal costs.

On a final note, I'm still puzzled today, as I was at the time of the sentencings, as to why Agrawal was given 36 months in prison for what appeared to be largely the same acts as Aleynikov, who got hit with 97 months. For the life of me, I can't explain that discrepancy.  Either one of the defendants was under-sentenced or one was over-sentenced - I can't rationalize the differences. If nothing else, at least Ralph Waldo Emerson would have been pleased by the lack of consistency.