New US Laws Criminalize Theft of Quantitative Trading and Investment Models and Other Trade Secrets

February 04, 2013

The U.S. Congress recently passed two laws that raise the stakes dramatically for employees of financial services firms and anyone else who misappropriates trade secrets, including source code and other confidential information associated with quantitative trading or investment models. Such misappropriation now may result in criminal convictions, years in jail, and multi-million dollar fines payable to the U. S. government. These remedies under criminal law are in addition to the other methods that most financial services firms already use, and should continue to use, to protect their confidential and proprietary information. Those methods include, for example, contractual provisions, internal controls limiting access to information, and civil lawsuits by the firms themselves seeking injunctions and damages.

The Trade Secret Clarification Act of 2012, signed into law on December 28, 2012, is designed primarily to close the loophole in the Economic Espionage Act that last year caused a federal appeals court to reverse the widely reported conviction of Sergey Aleynikov, a Goldman Sachs computer programmer. Mr. Aleynikov had downloaded the source code for Goldman Sachs’ proprietary high frequency trading platform for potential use by his new employer, a competitor to Goldman. A U. S. District Court convicted him for the theft, but an appeals court reversed on the grounds that, among other things, Goldman used the source code only internally and did not sell it. As a result of this new law, the Economic Espionage Act now covers trade secrets related to products and services that an organization develops and uses only internally, including quantitative trading and investment models.

In addition, on January 14, 2013, President Obama signed into law another statute, the Foreign and Economic Espionage Penalty Enhancement Act. This law dramatically increases the maximum fines for organizations and individuals who misappropriate trade secrets of domestic companies in order to benefit a non-U.S. entity, including non-U.S. fund managers.

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