Where Two Bank Employees Steal Proprietary Trading Code, Could One Stay in Jail Merely Because He Printed it out First?

This past April, the Second Circuit narrowed federal prosecutors’ ability to charge former employees for stealing proprietary information from their companies. United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012) (overturning Aleynikov’s conviction for violating the National Stolen Property Act and the Economic Espionage Act after misappropriating trading code from Goldman Sachs). Now, the Second Circuit is primed to consider a question left open by Aleynikov: whether a defendant can be convicted of violating the National Stolen Property Act by taking intangible property, such as proprietary source code, in a tangible form, such as on a compact disc, a thumb drive, or on good old-fashioned paper. It remains to be seen whether such an arbitrary distinction could make a difference.

In March 2011, a New York jury convicted Samarth Agrawal of violating the National Stolen Property Act (NSPA) and the Economic Espionage Act (EEA) after allegedly misappropriating Société Générales’ high frequency trading code to help him develop a similar trading system with his new employer. Agrawal appealed his conviction while beginning to serve out his 36-month prison sentence. After the appellate briefing was complete, but before oral argument in Agrawal, the Second Circuit considered the appeal of Sergey Aleynikov, who was convicted of violating the same federal criminal statutes after misappropriating Goldman Sachs’ high frequency trading code.

In United States v. Aleynikov, the Second Circuit held that the NSPA did not cover theft of intangible property, and that the EEA did not prohibit misappropriation of trade secrets unless the secret was designed to enter or pass in commerce. United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012).

Two months later, on June 21, 2012, the Second Circuit heard oral argument in United States v. Agrawal, and not surprisingly, defense counsel for Agrawal urged the court to overturn Agrawal’s conviction based on the holdings set forth in Aleynikov. See article here. Such a conclusion seems to be a no-brainer regarding Agrawal’s EEA conviction: Soc Gen’s high frequency trading code was no more intended to “enter or pass in commerce” as Goldman Sachs’ was. As for Agrawal’s NSPA conviction, however, there is one critical factual distinction: Agrawal printed Soc Gen’s trading code on paper (tangible property) before misappropriating it, rather than simply uploading the code to the clouds as Aleynikov did with Goldman Sachs’ code. Although the Second Circuit punted on that precise issue in Aleynikov because “there was no allegation that he physically seized anything tangible from Goldman,” 676 F.3d at 78, the distinction will likely provide the foundation for affirming Agrawal’s otherwise identical NSPA conviction. With such arbitrary results sending people to jail, one has to hope that either Congress will sit up and take notice, or federal prosecutors will refrain from wielding their power to charge NSPA cases in the future.