Why corporations break butterflies on wheels

02 Sep, 2013

Inevitably, most industry coverage has in the last week focused on the developments at SAC Capital. The September issue of Vanity Fair includes an article by Michael Lewis which throws an oblique but illuminating light on the rising tide of legal and regulatory threats to the fund management industry. The article concerns the strange case of Sergey Aleynikov, the computer programmer sentenced to eight years in prison (though later released, he is now being prosecuted a second time) for allegedly stealing from Goldman Sachs computer code used in high frequency trading systems.

The text contains a number of thought-provoking observations. First, the article alleges that the Federal Bureau of Investigation is happy to take instruction from Goldman Sachs without corroboration by a third party. If so, this is a worrying insight into not just the enormous power wielded by the firm across an enormous range of interests and jurisdictions, but of the carelessness of confession-hungry prosecuting authorities. Aleynikov advises anyone in his position to say nothing to government officials. “If you do,” he told Lewis, “they can place an agent on a witness stand, and he can say anything.”

Secondly, Aleynikov was convicted by a jury that most people naturally assume has a strong preference for the little guy over the large and wealthy corporation, even when the issues are too technical to be comprehensible to a lay person, and for a crime a higher court eventually decided he did not commit. That is a sobering reflection at a time when fund managers are feeling persecuted by the authorities. Indeed, it is a reminder, if one were needed, that any financial services employee who finds himself or herself in the dock will need more than a good lawyer to stay out of jail.

Thirdly, Lewis alleges in the article that Goldman Sachs has “a one-way relationship” with open source software, in which the firm takes code but does not give it back, preferring to deem all code proprietary. According to Lewis, it was open source code which he had worked with and modified that Aleynikov was accused of stealing, while Goldman – in its response to the article – points out that it satisfied the court the files contained as proprietary as well as open source code. Whatever the facts, this is, for the long term health of our civilization as a whole, the most worrying aspect of the story told by Michael Lewis, for it is yet another symptom of the accelerating encroachment and enforcement of “intellectual property rights” by large corporations.

These developments are not unfairly characterised as a process in which large, well-established and richly funded corporations use lobbying of the legislature, the law of copyright and patent, the funding of universities, and the police and law courts to protect economic rents in perpetuity. “You don’t create intellectual property,” as Aleynikov told Lewis. “You create a programme that does something.” Since the entire history of humanity proves that progress and innovation depend on small companies rather than large ones – think of what hedge funds have done for the asset management industry – it is hard to believe that the creeping corporatisation of developed economies is adding to prosperity, and it is definitely subtracting from liberty.

Dominic Hobson


SAC CapitalGoldman SachsFBIhigh-frequency trading