March 24, 2023

DealBook: Ex-Goldman Programmer Is Arrested Again

John Marshall Mantel for The New York TimesSergey Aleynikov, left, with his lawyer, Kevin Marino, leaving the Manhattan Criminal Court on Thursday.

The legal odyssey of a former Goldman Sachs programmer, Sergey Aleynikov, took a surprising turn on Thursday when the Manhattan district attorney charged him with state crimes.

Mr. Aleynikov was charged in state court less than six months after a federal appeals court overturned his conviction on federal criminal charges that he stole secret source code from Goldman’s computers.

While the case involved a relatively low-level ex-employee at a financial firm, the government has taken a particularly hard line. The district attorney, Cyrus R. Vance Jr., and Preet Bharara, the United States attorney in Manhattan, have made the prosecution of corporate espionage and high-tech theft a top priority.

“This code is so highly confidential that it is known in the industry as the firm’s ‘secret sauce,’ ” Mr. Vance said Thursday in a statement. “Employees who exploit their access to sensitive information should expect to face criminal prosecution in New York State.”

The district attorney charged Mr. Aleynikov with the unlawful use of secret scientific material and duplication of computer-related material, both felonies under New York State law. If convicted, he could serve one to four years in prison.

Federal authorities arrested Mr. Aleynikov three years ago after Goldman reported him to the United States attorney in Manhattan. He was accused of stealing the bank’s highly confidential code for its high-frequency trading operations when he left the bank to join a start-up. A federal jury found him guilty in 2010, but an appeals court reversed his conviction, ruling that prosecutors misapplied the federal corporate espionage laws against him.

It is unusual for federal and state prosecutors to bring criminal charges against a defendant connected to the same set of facts. The Fifth Amendment of the Constitution prohibits double jeopardy, or being tried twice for the same crime, but the “dual sovereignty doctrine” permits different jurisdictions — in this case, the United States and New York State — to pursue charges for the same conduct. For instance, after a state jury cleared a group of Los Angeles police officers of misconduct in the beating of Rodney King, federal prosecutors brought civil rights charges against the officers and secured two guilty verdicts.

Under rare circumstances, however, federal and state prosecutors can be deemed in violation of the Fifth Amendment. A federal appeals court in Manhattan has ruled that single prosecutions by separate sovereign entities may still be an unconstitutional instance of double jeopardy when the prosecutors are acting in concert.

Joshua Dressler, a criminal law professor at Ohio State University, said that it was highly unlikely that the separate federal and state prosecutions in the Aleynikov case would violate the Constitution.

“It’s very rare that double jeopardy would come into play in a case like this,” said Mr. Dressler. “The Supreme Court decided this in 1922 and it’s been settled law ever since.”

Kevin H. Marino, Mr. Aleynikov’s lawyer, emphasized the double jeopardy issue during the arraignment. He accused the Manhattan district attorney’s office of acting as a tool of the Justice Department, saying the new prosecution thus violated the double jeopardy clause. He told Judge Robert M. Mandelbaum that his client was preparing to file malicious prosecution lawsuits against Goldman Sachs and the federal government.

Mr. Marino has always acknowledged that his client made a mistake in violating Goldman’s confidentiality rules, but continues to maintain that he did not commit any crime and that Goldman had suitable remedies in civil court.

Mr. Aleynikov, 42, was arraigned on Thursday afternoon at state criminal court in Lower Manhattan. Wearing a T-shirt, shorts and handcuffs, the bearded Mr. Aleynikov stood silently. Mr. Marino said his client was not guilty and asked the judge to release him on bail pending further proceedings.

Judge Mandelbaum ordered Mr. Aleynikov to forfeit his passports and released him on a $35,000 bond.

“If you’re Sergey Aleynikov you have to be thinking, ‘Why did I ever leave Russia?’ ” Mr. Marino said standing on the courthouse steps on Thursday beside his client, who emigrated to the United States two decades ago.

“But be that as it may, we look forward to vigorously defending him against these charges,” Mr. Marino said.

Some lawyers on Thursday said that they were not surprised that a second set of charges was brought against Mr. Aleynikov. They cited the interest of both Mr. Bharara and Mr. Vance in the area of intellectual property crime. And, because the federal appeals court ruled that the facts in this case did not fit the federal computer theft statutes, it made sense that the state prosecutor would use his own tools to charge Mr. Aleynikov.

“This is an exceptionally justifiable reason for the state prosecutor to use a state law to bring a prosecution,” said Mr. Dressler, the Ohio State professor.

Mr. Marino called the prosecution “fishy.” Standing on the state courthouse steps on Thursday just a few hundred yards from the federal courthouse where Mr. Aleynikov had been tried before, he accused the two offices of colluding against his client.

“It’s hard to imagine that it’s come to this,” said Mr. Marino. “Things don’t work out for the government in the federal case so you go around the corner and charge him in state court.”

After his conviction on federal charges, Mr. Aleynikov served one year of an eight-year sentence in a federal prison in Fort Dix, N.J.

“In prison you learn to appreciate your life day by day,” Mr. Aleynikov said after being set free earlier this year. “Today is a victory, but tomorrow you never know.”

This post has been revised to reflect the following correction:

Correction: August 10, 2012

An earlier version of this article misstated the position of the lawyer for Sergey Aleynikov. The lawyer, Kevin H. Marino has maintained that his client did not commit any crime. (The word “not” had been omitted in error.)

The earlier version also referred incorrectly to the federal charges brought against a group of Los Angeles police officers stemming from the beating of Rodney King. They were civil rights charges, not civil charges.

A version of this article appeared in print on 08/10/2012, on page B1 of the NewYork edition with the headline: Ex-Goldman Programmer Again Faces Theft Charge.

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DealBook: MF Global Said to Be in Deal Talks With Interactive Brokers

11:01 p.m. | Updated
Jon S. Corzine, whose political ambitions came to a halt nearly two years ago when he was defeated for re-election as governor of New Jersey, is running out of time to prevent his revived Wall Street career from collapsing in failure.

His firm, MF Global — a powerhouse in the world of commodities and derivatives trading but little known outside Wall Street — was working frantically toward a potential sale late Sunday.

Those discussions, which narrowed to one bidder, Interactive Brokers, came after investors — worried that MF Global was too vulnerable to the fallout from Europe’s debt crisis — deserted the firm, making it the first American financial institution to fall victim to the sovereign debt woes.

If the firm is unable to sell itself, other options, including bankruptcy, await. MF Global has hired restructuring and bankruptcy law firms including Skadden, Arps, Slate, Meagher Flom, said people briefed on the matter but unauthorized to speak publicly. One option is for MF Global to follow a precedent set by Lehman Brothers in 2008 by seeking bankruptcy protection for the parent company while selling some assets to Interactive Brokers.

Other Wall Street firms have not been spared damage from the European debt crisis. Shares at firms as large as Morgan Stanley fell this month over concerns that they were exposed to Europe’s troubles. And investment banks and brokerage firms are still licking their wounds from market volatility that has hurt trading operations.

MF Global began buying the debt of European countries like Italy, Portugal, Spain and Ireland last year, in a bet that the discounted prices of those bonds would soon recover. Its gamble, though, went sour, suffering as Greece’s troubled economy spread woes across the Continent. Although European leaders appeared to make progress toward resolving those problems last week, and other firms rebounded, MF Global continued to suffer.

The last-ditch rescue effort is a major blow to the reputation of Mr. Corzine, 64, who formerly co-led Goldman Sachs and was also a United States senator. With a sale of MF Global, Mr. Corzine’s role at the firm will almost certainly end, though he is expected to receive a severance payment of nearly $12.1 million.

Still, the departure will be bitter for Mr. Corzine, whose first stint on Wall Street ended with his ouster from Goldman Sachs. Along with Henry M. Paulson, another Goldman co-chief executive, who would later become Treasury secretary, Mr. Corzine, a former trader, led the firm through the Asian financial crisis of 1998. But trading losses in the last quarter of that year, on top of ill will within the firm over the decision to go public, led to Mr. Corzine’s exit in January 1999.

He revived his career with a successful run for the Senate from New Jersey in 2000, and left the Senate in 2005 to run for governor of New Jersey. A weak economy and a corruption scandal helped Christopher J. Christie defeat him for re-election in 2009.

Mr. Corzine’s arrival at MF Global in March 2010 was meant to be a triumphant return to Wall Street and to bond trading after a long absence. Though it is has operations worldwide, MF Global has just 2,800 employees, making it a fraction of the size of Goldman or Lehman.

Throughout the weekend, regulators focused on completing a deal that would sell at least a portion of the firm, a move that would avert a messy bankruptcy. But given its relatively small size, the firm is unlikely to send shockwaves in the financial system.

Most of MF Global’s business involves executing and clearing trades in commodities and derivatives for clients like hedge funds. When Mr. Corzine joined, he sought to transform it into a full-fledged investment bank, in part by making riskier trades using the firm’s own capital.

A large part of that strategy backfired, as analysts and regulators worried about $6.3 billion in bonds issued by Italy, Spain, Belgium, Ireland and Portugal. By contrast, the much larger Morgan Stanley disclosed this month that it had just a $2.1 billion exposure to Europe.

Regulators were less confident in MF Global’s wager, asking it in August to raise the amount of money backing its bonds. The firm complied, though it argued that the bonds were trading at a few cents below par value.

Analysts appeared unimpressed. Late on Monday, Moody’s Investors Service downgraded the firm’s credit rating, citing both weak financial performance and its European bond holdings. The next day, the firm reported a $186 million loss, its fourth loss in six quarters.

Two days later, both Moody’s and another major agency, Fitch Ratings, downgraded MF Global to junk status. Such a move is disastrous for a financial firm, since it limits the number of trading parties willing to do business and raises borrowing costs.

Just as important, it can also scare customers, especially after the toppling of bigger firms during the financial crisis, like Bear Stearns and Lehman.

As of Friday, only a small percentage of customer money flowed out MF Global’s door, according to a person briefed on the matter. By the end of last week and through the weekend, Mr. Corzine and his advisers at Evercore Partners had called seemingly every major Wall Street firm, offering to sell MF Global, or at least some of its businesses or trading positions. While the firm had held talks with another potential buyer, Jefferies Company, by Sunday evening Interactive Brokers appeared to be in pole position.

Founded in 1977 by its chief executive, Thomas Peterffy, Interactive Brokers is a discount brokerage firm that places trades for customers on 90 exchanges.

The two firms share a deal history of sorts. In 2005, both competed for assets of Refco, which had filed for bankruptcy. MF Global emerged the victor, bidding $323 million for Refco’s assets.

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DealBook: Britain Backs Higher Capital Rules for Banks

LONDON – Britain’s government is supporting a proposal that would require banks to hold more capital and partly shield retail operations from investment banking.

George Osborne, the chancellor of the Exchequer, is expected to endorse the plan when he addresses several hundred bankers and other financial professionals at a speech in London on Wednesday evening, a government official said. The proposal, which would most likely increase operating costs for banks, was initially made in an interim report by the government-backed Independent Commission on Banking in April.

Mr. Osborne’s backing makes it more likely that the rules, which include a so-called ring-fencing of consumers’ deposits from potential losses at investment banking operations, will be made law. If the country adopts the regulation, it would put Britain ahead of the United States in pushing through changes to separate more clearly the traditional deposit-taking services from the riskier but more lucrative trading operations.

But questions remain about which parts of a bank’s operations should be included in the ring fence, a rule intended to limit the need for future bank bailouts by taxpayers. For example, it is unclear whether wealth management or derivatives to hedge currency movements would be inside or outside the shielded operation. The banking commission is expected to present its final report to the government on Sept. 12.

Since the interim report in April, British banks have lobbied to limit the parts of the bank that would be shielded from the rest of the business and would have to be financed separately. Stephen Hester, chief executive of Royal Bank of Scotland, which is majority-owned by the government, told a parliamentary committee last week that the proposed rules would actually have the opposite of the desired effect and increase risk in the banking system.

British “banks are focused on ensuring financial stability and supporting economic recovery,” the British Bankers’ Association said in a statement on Wednesday. “A significant part of this work is ensuring the right safeguards are in place for customers’ deposits.”

Shares in Britain’s biggest banks, including HSBC, Barclays and Royal Bank of Scotland, fell on Wednesday in London.

Mr. Osborne is also expected to support the commission’s proposal to require larger banks, like Barclays, to hold at least 10 percent of equity relative to their risk-weighted assets, more than the 7 percent detailed in the so-called Basel III agreement to overhaul international bank regulation.

But the commission also said that because investment banks operate globally, British banks should not be subject to different capital rules than those agreed to internationally.

The commission was created to find ways to strengthen the British banking system and avoid large losses for taxpayers in any future financial crises. It also had a mandate to improve competition in the British retail banking sector, which became more concentrated over the last three years.

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