Copyright, Cyrus Vance, Goldman Sachs, Intellectual Property, Technology, Wall Street

Shouldn’t Somebody Be Suing Goldman Sachs Right Now?

I mean suing the bejeezus out of Goldman Sachs. And likely a number of other high-profile financial players.

Not over something mundane like the whole “taking part in collapsing the global economy” thing. That’s been discussed to death. I’m talking about something much more concrete and, apparently, easy to establish.

People sometimes derisively call bankers pirates, but it turns out they may be right. Software pirates, at least.

In this month’s issue of Vanity Fair, Michael Lewis looks at the prosecution of former Goldman Sachs programmer Sergey Aleynikov. In addition to detailing the outsized influence large banks have over the justice system and the ease with which the system can break down when the facts of a case are too complex for lay jurors, Lewis uncovers a small nugget that he doesn’t really pursue, but that could be trouble for Wall Street….

Lewis comes at this story through a recounting of the prosecution of Sergey Aleynikov, whom the FBI busted — on orders from Goldman Sachs — after Aleynikov left the company and took along with him a fragment of code he’d been working on.

Aleynikov had worked at Goldman trying to bring the firm into the then high-flying world of high-frequency trading, where Goldman was woefully behind. According to the story, Aleynikov never succeeded in getting Goldman to create a new, efficient trading system, spending his time instead patching holes in a leaky, jury-rigged system.

When Aleynikov told Goldman that he was leaving to join a new outfit committed to building a high-frequency trading system from scratch, he took some snippets of code with him. Goldman wanted him in prison for it. Experts in the field seem to agree that there was little to no value to the snippets Aleynikov took because the new outfit would never have the sort of ramshackle system that Goldman’s code was designed to run. As one expert explained to Lewis, the code was basically part of a scrapbook of Aleynikov’s time at Goldman.

Nonetheless, a clueless prosecution and an even more clueless jury placed Aleynikov in prison, sentenced to eight years, until the Second Circuit released him after only one year. This was embarrassingly followed by a publicity stunt prosecution by Manhattan DA Cyrus Vance.

But the nugget that Lewis merely teases is that all of these high-frequency trading platforms are constructed by modifying open source code:

Serge quickly discovered, to his surprise, that Goldman had a one-way relationship with open source. They took huge amounts of free software off the Web, but they did not return it after he had modified it, even when his modifications were very slight and of general rather than financial use. “Once I took some open-source components, repackaged them to come up with a component that was not even used at Goldman Sachs,” he says. “It was basically a way to make two computers look like one, so if one went down the other could jump in and perform the task.” He described the pleasure of his innovation this way: “It created something out of chaos. When you create something out of chaos, essentially, you reduce the entropy in the world.” He went to his boss, a fellow named Adam Schlesinger, and asked if he could release it back into open source, as was his inclination. “He said it was now Goldman’s property,” recalls Serge. “He was quite tense. When I mentioned it, it was very close to bonus time. And he didn’t want any disturbances.”

Open source was an idea that depended on collaboration and sharing, and Serge had a long history of contributing to it. He didn’t fully understand how Goldman could think it was O.K. to benefit so greatly from the work of others and then behave so selfishly toward them. “You don’t create intellectual property,” he said. “You create a program that does something.” But from then on, on instructions from Schlesinger, he treated everything on Goldman Sachs’s servers, even if it had just been transferred there from open source, as Goldman Sachs’s property. (At Serge’s trial Kevin Marino, his lawyer, flashed two pages of computer code: the original, with its open-source license on top, and a replica, with the open-source license stripped off and replaced by the Goldman Sachs license.)

Modifying open-source code… and then hoarding it, that is. While not all open-source code licenses make it a condition of use that all modified code be returned to the public as open source, most of them do. It’s kind of a big deal in the open-source community. When Aleynikov asked his boss for permission to release the code back to the public, he was likely acting in accordance with the software license.

But can these open-source hippie communists really sue somebody over breaching an open source license? Well, yes, actually. In Jaceobsen v. Katzer, the Federal Circuit affirmed that an open-source license could support a copyright claim, rather than simply allowing the licensor to seek damages for breach of contract from a licensee. The Federal Circuit held that an open-source license constitutes a limited license, and acting beyond the scope of the license can support an injunction as well as a claim for damages.

And based on this article, the rest of the financial world seems to think Goldman was not alone in building its systems off stolen open-source code.

The real mystery, to the insiders, wasn’t why Serge had done what he had done. It was why Goldman Sachs had done what it had done. Why on earth call the F.B.I.? Why coach your employees to say what they need to say on a witness stand to maximize the possibility of sending him to prison? Why exploit the ignorance of both the general public and the legal system about complex financial matters to punish this one little guy? Why must the spider always eat the fly?

They had no end of theories about this, but one was more intriguing than the others. It had to do with the nature of Goldman Sachs these days, and the way people who work for the firm get ahead. As one put it, “Every manager of a Wall Street tech group likes to have people believe that his guys are geniuses. Their whole persona among their peers is that what they and their team do can’t be replicated. When people find out that 95 percent of their code is open-source, it kills that perception. . . . So when the security people come to them and tell them about the downloads, they can’t say, ‘No big deal.’ And they can’t say, ‘I don’t know what he took.’”

Today, high-frequency trading is on the decline, but it’s still a highly lucrative business, and an aggrieved open-source programmer — armed with the proper license agreements — could mount a suit. Especially if discovery started turning up documents as damning as “the original, with its open-source license on top, and a replica, with the open-source license stripped off and replaced by the Goldman Sachs license,” the original author might be looking at a hefty settlement if he or she wanted to pursue a claim.

All I ask is a small but not insignificant cut, if this post inspires you to get in the business of representing open source programmers against banks.

A couple million would be a fine start.

Did Goldman Sachs Overstep in Criminally Charging Its Ex-Programmer? [Vanity Fair]
How the Robots Lost: High-Frequency Trading’s Rise and Fall [Bloomberg Businessweek]

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