The Back Alley Archives

By Matthew Goldstein

NEW YORK, July 5 (Reuters) - Did someone try to steal Goldman Sachs' secret sauce?

While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution.

Authorities did not identify the firm, but sources say the institution is none other than Goldman Sachs (GS.N).

The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman's automated stock and commodities trading business.

Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.

The platform is one of the things that gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades.

The criminal case has the potential to shed a light on the inner workings of an important profit center for Goldman and other Wall Street firms. The charges also raise serious questions about the safeguards that Wall Street firms deploy to protect these costly-to-build proprietary trading systems.

The criminal case began to unfold on the evening of July 3, when Aleynikov was arrested by FBI agents at Newark Airport after returning from Chicago.

Aleynikov apparently had just started a job with another big firm in Chicago after leaving his previous employer in New York in early June. It appears that the financial institution allegedly victimized by Aleynikov had alerted federal authorities that its former employee might be up to no good.

On July 4, Aleynikov was processed on a "theft of trade secrets charge" in a criminal complaint. As of Sunday morning, he was still being held at the Metropolitan Correction Center in Brooklyn.

A Goldman spokesman declined to comment on the incident. A spokeswoman for the United States Attorney's Office in Manhattan did not comment.

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The biographical information for Aleynikov on LinkedIn says he joined Goldman in May 2007 and was vice president for equity strategy. The bio says he was responsible for "development of a distributed real-time co-located high-frequency trading platform."

The case against Aleynikov may explain why the New York Stock Exchange moved quickly last week to stop reporting program stock trading for its most active firms.

Goldman was often at the top of the chart -- far ahead of its competitors. It's possible Goldman had asked the NYSE to stop reporting the number after it discovered that someone may have infiltrated the proprietary computer codes it uses.

“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,” Facciponti said, according to a recording of the hearing made public today. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”