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> Shades of the Nanosecond Buyout?, [NY Times] Arrest Over Software Illuminates Wall St. Secret
JongWK
post Aug 24 2009, 08:00 PM
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Seems we're headed that way. Page A1 of today's New York Times:

QUOTE
August 24, 2009

Arrest Over Software Illuminates Wall St. Secret

By ALEX BERENSON

Flying home to New Jersey from Chicago after the first two days at his new job, Sergey Aleynikov was prepared for the usual inconveniences: a bumpy ride, a late arrival.

He was not expecting Special Agent Michael G. McSwain of the F.B.I.

At 9:20 p.m. on July 3, Mr. McSwain arrested Mr. Aleynikov, 39, at Newark Liberty Airport, accusing him of stealing software code from Goldman Sachs, his old employer. At a bail hearing three days later, a federal prosecutor asked that Mr. Aleynikov be held without bond because the code could be used to “unfairly manipulate� stock prices.

This case is still in its earliest stages, and some lawyers question whether Mr. Aleynikov should be prosecuted criminally, or whether a civil suit may be more appropriate. But the charges, along with civil cases in Chicago and New York involving other Wall Street firms, offer a glimpse into the turbulent world of ultrafast computerized stock trading.

Little understood outside the securities industry, the business has suddenly become one of the most competitive and controversial on Wall Street. At its heart are computer programs that take years to develop and are treated as closely guarded secrets.

Mr. Aleynikov, who is free on $750,000 bond, is suspected of having taken pieces of Goldman software that enables the buying and selling of shares in milliseconds. Banks and hedge funds use such programs to profit from tiny price discrepancies among markets and in some instances leap in front of bigger orders.

Defenders of the programs say they make trading more efficient. Critics say they are little more than a tax on long-term investors and can even worsen market swings.

But no one disputes that high-frequency trading is highly profitable. The Tabb Group, a financial markets research firm, estimates that the programs will make $8 billion this year for Wall Street firms. Bernard S. Donefer, a distinguished lecturer at Baruch College and the former head of markets systems at Fidelity Investments, says profits are even higher.

“It is certainly growing,� said Larry Tabb, founder of the Tabb Group. “There’s more talent around, and the technology is getting cheaper.�

The profits have led to a gold rush, with hedge funds and investment banks dangling million-dollar salaries at software engineers. In one lawsuit, the Citadel Investment Group, a $12 billion hedge fund, revealed that it had paid tens of millions to two top programmers in the last seven years.

“A geek who writes code — those guys are now the valuable guys,� Mr. Donefer said.

The spate of lawsuits reflects the highly competitive nature of ultrafast trading, which is evolving quickly, largely because of broader changes in stock trading, securities industry experts say.

Until the late 1990s, big investors bought and sold large blocks of shares through securities firms like Morgan Stanley. But in the last decade, the profits from making big trades have vanished, so investment banks have become reluctant to take such risks.

Today, big investors divide large orders into smaller trades and parcel them to many exchanges, where traders compete to make a penny or two a share on each order. Ultrafast trading is an outgrowth of that strategy.

As Mr. Aleynikov and other programmers have discovered, investment banks do not take kindly to their leaving, especially if the banks believe that the programmers are taking code — the engine that drives trading — on their way out.

Mr. Aleynikov immigrated to the United States from Russia in 1991. In 1998, he joined IDT, a telecommunications company, where he wrote software to route calls and data more efficiently. In 2007, Goldman hired him as a vice president, paying him $400,000 a year, according to the federal complaint against him.

He lived in the central New Jersey suburbs with his wife and three young daughters. This year, the family moved to a $1.14 million mansion in North Caldwell, best known as Tony Soprano’s hometown.

A video on YouTube portrays Mr. Aleynikov as a disheveled workaholic who suffers through romantic misadventures before finding love when he rubs a lamp and a genie fulfills his wish by granting him a wife. A friend, Vladimir Itkin, says the Aleynikovs are devoted to their children and seem very close.

This spring, Mr. Aleynikov quit Goldman to join Teza Technologies, a new trading firm, tripling his salary to about $1.2 million, according to the complaint. He left Goldman on June 5. In the days before he left, he transferred code to a server in Germany that offers free data hosting.

At Mr. Aleynikov’s bail hearing, Joseph Facciponti, the assistant United States attorney prosecuting the case, said that Goldman discovered the transfer in late June. On July 1, the company told the government about the suspected theft. Two days later, agents arrested Mr. Aleynikov at Newark.

After his arrest, Mr. Aleynikov was taken for interrogation to F.B.I. offices in Manhattan. Mr. Aleynikov waived his rights against self-incrimination, and agreed to allow agents to search his house.

He said that he had inadvertently downloaded a portion of Goldman’s proprietary code while trying to take files of open source software — programs that are not proprietary and can be used freely by anyone. He said he had not used the Goldman code at his new job or distributed it to anyone else, and the criminal complaint offers no evidence that he has.

Why he downloaded the open source software from Goldman, rather than getting it elsewhere, and how he could at the same time have inadvertently downloaded some of the firm’s most confidential software, is not yet clear.

At Mr. Aleynikov’s bail hearing, Mr. Facciponti said that simply by sending the code to the German server, he had badly damaged Goldman.

“The bank itself stands to lose its entire investment in creating this software to begin with, which is millions upon millions of dollars,� Mr. Facciponti said.

Sabrina Shroff, a public defender who represents Mr. Aleynikov, responded that he had transferred less than 32 megabytes of Goldman proprietary code, a small fraction of the overall program, which is at least 1,224 megabytes. Kevin N. Fox, the magistrate judge, ordered Mr. Aleynikov released on bond.

The United States attorney’s office declined to comment and the F.B.I. did not return calls for comment.

Harvey A. Silverglate, a criminal defense lawyer in Boston not involved in the case, said he was troubled that the F.B.I. had arrested Mr. Aleynikov so quickly, without evidence that he had made any effort to use or sell the code. Such disputes are generally resolved civilly rather than criminally, Mr. Silverglate said.

“It is astonishing that the F.B.I. arrested this defendant at all,� he said. Other firms have also sued former employees recently over concern about high-frequency trading software, though two similar cases are the subject of civil suits rather than criminal prosecution.

Six days after Mr. Aleynikov’s arrest, Citadel, the hedge fund, sued Mr. Aleynikov’s new employer, Teza Technologies, which was founded in March by three former Citadel employees. While Teza is not yet conducting any trading, Citadel claimed the former employees had violated a noncompete agreement with Citadel and might even be trying to steal Citadel’s code, causing “irreparable harm.�

As part of the suit, Citadel detailed the extraordinary steps it takes to protect its software. Besides encrypting its programs, the firm discourages employees from writing down details about them. Its offices have cameras and guards, and there are secure rooms that require special codes to enter. The precautions are necessary because Citadel has spent hundreds of millions of dollars developing its software, the firm said.

In its response, Teza said that it had never stolen or tried to steal Citadel’s software, did not ask Mr. Aleynikov to take code from Goldman, and had never seen the code he took. A lawyer for Teza did not return calls for comment.

Meanwhile, in March, the giant Swiss bank UBS sued three former members of its high-speed trading group in New York state court. UBS contended that the defendants had lied to the bank about their plans to work for Jefferies, another firm. Also, one defendant sent some UBS code to a personal e-mail account.

Lance Gotko, a lawyer for the men, said that they had not used the code they took and that it might not be valuable to Jefferies in any case. A lawyer for UBS referred calls to a bank spokeswoman, who declined to comment. A spokesman for Jefferies declined to comment.



Fragging hacker didn't cover his datatrail... (IMG:style_emoticons/default/wobble.gif) (IMG:style_emoticons/default/cyber.gif)
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Ravor
post Aug 24 2009, 11:35 PM
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Nah, hes just the fall guy for the real Decker. (IMG:style_emoticons/default/cyber.gif)
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Snow_Fox
post Aug 28 2009, 02:43 AM
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I work in the industry so I'm not so surprised at this stuff. I can see how it's done. The thing that leapt out at me was in the first paragraph, this chuckle head was on the job for 2 frakking days when he was nabbed. it's like you see a piece of paper with the vault combination on it and at once decide to help yourself without bothering to look to see what the security lay out is. "Oh pretty, no one will notice!"

Even if not convicted this guy is done in the industry. No one is going to carry a licence for him. FINRA and the SEC don't need a preponderance of evidence or due process or anything. No company will be willing to take him on. Think of him as the neighborhood drunk at last call asking for someone to lend him their car keys. You don't care if no one say him take the drink tonight, you're not going to run the risk, let someone else do it.
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Rad
post Aug 29 2009, 09:42 AM
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Interesting. A few things that stuck out at me:

QUOTE (NY Times)
A video on YouTube portrays Mr. Aleynikov as a disheveled workaholic who suffers through romantic misadventures before finding love when he rubs a lamp and a genie fulfills his wish by granting him a wife. A friend, Vladimir Itkin, says the Aleynikovs are devoted to their children and seem very close.


How the frag is that relevant? That's like saying some guy on 4chan called him an asshole. Repeating random hearsay seems like slander to me, and certainly it serves no purpose other than to bias the reader. Bad journalist! No Pulitzer!

QUOTE (NY Times)
Sabrina Shroff, a public defender who represents Mr. Aleynikov, responded that he had transferred less than 32 megabytes of Goldman proprietary code, a small fraction of the overall program, which is at least 1,224 megabytes. Kevin N. Fox, the magistrate judge, ordered Mr. Aleynikov released on bond.


What the dreck? All that money and this guy has a public defender? Something 'aint right there. At least with a criminal case he's up against a government prosecutor, instead of a corporate lawyer--though with the state Goldman Sachs is reported to be in maybe they'd rather have the taxpayers cover the legal bill. (IMG:style_emoticons/default/biggrin.gif)
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Kliko
post Aug 29 2009, 11:34 AM
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Who cares about the specific code? How about if the respective technology isn't patented and I clone it?

In other words built it up from scratch, but better?
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Snow_Fox
post Aug 29 2009, 01:25 PM
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Rad, part of the problem of being accused of stelaing large maonuts of money or money laundering is if you can't show a valid source of income just hiring an expensive lawyer is another element of proof you did something wrong. How did you afford the top lfight atotrney if you didn't steal the money? and often in such cases assets are frozen as evidence.-a house could have been bought when you were doing better but now?

This is why many maioso have the cover of a day job, to justify an income. New York's Tephlon don, John Gotti, was a licenced plumber, though no one thinks he's been under a isnk in decades before his arrest. His son in law, Carmine Agnelo was a mechanic and surprised the heck out of everyone because he truly worked as a mechanic and was very good. When he came up for trial a large number of judges had to recuse themselves, not because of mob connections but because tey had used him as a mechanic not konwing he was mobbed up.
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nylanfs
post Aug 29 2009, 01:30 PM
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QUOTE (Snow_Fox @ Aug 29 2009, 08:25 AM) *
<snip>
Carmine Agnelo was a mechanic and surprised the heck out of everyone because he truly worked as a mechanic and was very good. When he came up for trial a large number of judges had to recuse themselves, not because of mob connections but because they had used him as a mechanic not knowing he was mobbed up.


You know that's an awesome strategy, be something like a mechanic (or something that everyone uses) and specialize in discounts to anyone in the legal branch of the law. (IMG:style_emoticons/default/smile.gif)
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Snow_Fox
post Aug 29 2009, 01:33 PM
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It was his (ex)wife and kids on the reality show 'growing up Gotti' think that's the lifestyle for a mechanic's family?
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