classical economics
for analysis,  forecasting
and policy design

Goldman Codes
GOLDMAN SACHS OWNS MANIPULATIVE “CODES”
Justice Department Protects “Proprietary” Rights

By Wayne Jett
© July 7, 2009

    An important cat has just left the bag. A software programming expert formerly employed by Goldman Sachs, said to be the largest and most profitable financial firm in the world, is criminally accused by the U. S. Attorney for the Southern District of New York (Manhattan) of misappropriating and permitting dissemination of software programs Goldman Sachs developed and used to execute “sophisticated, high-speed and high-volume trades on various stock and commodities markets.”
    The defendant is 39-year-old Sergey Aleynikov, who holds dual citizenship in Russia and the U. S. What is known and unknown about Aleynikov makes him interesting. But even more interesting is information revealed about the software at the center of the case in a brief federal court hearing held July 4 to set bail for Aleynikov.
Codes May Be Used “Unfairly”
    On the one hand, the software “codes” downloaded by Aleynikov from Goldman’s computers to his own, via a server alleged to be located in Germany, are said by the U. S. Attorney to be very valuable proprietary property which gives Goldman important advantages in making “many millions of dollars” in financial markets. If others gain access to the software, they may take market share from Goldman, may design methods of forestalling and countering Goldman’s trading tactics, and may reduce Goldman’s trading profits. For these reasons, the U. S. Attorney acts to prevent, forestall and punish the theft, even though such disputes are more often left to civil lawsuits for sorting out merits of conflicting contentions.
    At the same time, the U. S. Attorney asserts that the Goldman software program poses grave dangers to financial markets around the world because “somebody who knew how to use this program could use it to manipulate markets in unfair ways.” This revelation obviously came from Goldman itself, since the U. S. Attorney has not examined the “codes” directly.
The Goldman Sachs Paradigm
    If Goldman Sachs knows its software “codes” can be used to manipulate trading in markets for stocks and commodities, then Goldman must know how to  manipulate markets by use of its codes. Goldman has told the U. S. Attorney the codes have been used to make “many millions” in financial markets. Were Goldman’s uses of the codes manipulative or non-manipulative, and on what basis is that distinction made?
    Goldman wishes the court (and the public) to believe its “proprietary,” secret codes are used by the firm only in non-manipulative, beneficent ways. Since those codes are said to give Goldman significant advantages over other participants in the markets, enabling Goldman to make “many millions” for itself, the codes ought to be examined to determine whether they violate federal securities laws.
     The same should be said of trading tactics and devices of every hedge fund in the markets. The SEC’s hands-off approach to such matters as “proprietary” trade secrets is far more “preposterous” than allegations made by the U. S. Attorney against Sergey Aleynikov.
Trust, But Verify
    This may be as close as the financial world ever comes to producing a real-life Perry Mason trial manuscript, wherein a culprit inadvertently makes blatantly self-incriminating admissions on the stand. The question now is whether Goldman’s revelation will be acknowledged for what it is. Will the existence of manipulative computer software be shoved back into obscurity or examined thoroughly to assure public interests are served?    
    The SEC can be expected to do precisely nothing except to assist Goldman in concealing its “proprietary” trading tactics, no matter how destructive those tactics may be to fair market operations. Will the Justice Department exercise leadership to put its SDNY office on the track of investigating Goldman Sachs for market manipulation? Or will the Attorney General of New York, Andrew Cuomo, investigate?
    As last resort, what will the Congress do? Party leaderships are pondering appointments to Congress’ “new Pecora commission,” said to be for special, deeper investigation into the destructive financial events of 2007-2009. Most likely, as with Pecora, Congress will attack political enemies and leave supporters alone. Upon last inspection, Goldman’s domination of Congress was bipartisan, particularly at leadership levels. ~