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Posted by: David Henry on July 06
Prediction: The case of the stolen Goldman Sachs trading software will leave more tarnish on Goldman reputation than take profits from its income statement. It will also provide lots of amusement for those of who don’t work there or own the company’s stock.
In case you haven’t seen the headlines, a former Goldman computer wiz and Russian immigrant was arrested by a team of FBI agents at Newark Airport on July 3. Sergey Aleynikov was charged with stealing and sending overseas secret computer code which the firm uses to automatically trade stocks and commodities. “The trades made…typically generate many millions of dollars of profits per year” for the firm, according to a criminal complaint filed in the case by Special Agent Michael G. McSwain of the Federal Bureau of Investigation. The firm believes, the complaint said, that if the programs end up in the hands of competitors that its ability to profit from the strategies would be “significantly diminished.”
Aleynikov told the FBI agent that he had not distributed the proprietary computer programs and that he had accidentally copied them while collecting “open source” software as he was leaving his job at the firm. One of Aleynikov’s supervisors said the immigrant had said he was quitting for a new company that was doing the same type of trading and that would allow him to earn him three times his $400,000 annual salary from Goldman, according to the complaint.
The arrest was first reported July 5 by Reuters columnist Matthew Goldstein. He asked, “Did someone try to steal Goldman Sach’s secret sauce?” His story is attracting a lot of interest on the Internet today, though it does not seem to have hurt the stock, which is up more than 1%. The story includes statements from the Aleynikov’s wife and lawyer that the jailed man is innocent. (Disclosure: Goldstein and I teamed-up to write a number of stories together before he left BusinessWeek for Reuters.)
A Goldman spokesman declined to comment on the arrest or say anything about how significant the stolen trading software has been to the firm’s bottom line.
Now you might think that a company with publicly-traded stock and investors around the world should be more forthcoming about a security breach involving one of its core businesses. That’s especially true after an FBI agent has said in a court document that “many millions of dollars of profits” are potentially at stake. But Goldman, at least for now, apparently doesn’t believe it has to answer to its public investors in this case.
Maybe Goldman isn’t talking because the theft is not big enough to be a “material” event that it must be disclosed under federal law. Technically, that could well be true. After all, the FBI agent was talking in “millions” whereas Goldman counts trading revenues in billions—specifically $6.6 billion trading bonds, currencies and commodities and another $1 billion trading stocks in the last quarter. The agent describes the programs as guiding “high-volume automated trading.” That sounds like the kind of trading that can only take place with electronically-traded stocks and commodities contracts as opposed to big-dollar, personally-negotiated deals for derivatives and large blocks of stocks and bonds. Those big deals are probably where Goldman makes most of its trading profits, but Goldman won’t confirm that.
If indeed the security breach was not material, then Goldman should just say so, flatly and convincingly. Then the story could move on to such logical follow-up topics as the risks people take when they download office computer files while changing jobs. But Goldman, by not saying anything, is leaving a fertile environment for speculation and hyperbole. Right or wrong, Goldman’s name will probably soon be coming to the top in Google searches on international espionage, Russian conspiracies and computer security threats.
BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.