Shortly after leaving Goldman Sachs Group, Inc. (NYSE:GS) to build a new trading platform for the hedge fund Teza Technologies, Sergey Aleynikov was arrested by the FBI and later sentenced to eight years in prison by a prosecution and jury who didn’t understand his supposed crime. Michael Lewis published the first of his two-part investigation into the trial on Vanity Fair today (the second part is due tomorrow), focusing on Sergey Aleynikov’s background and his role at Goldman Sachs.

Sergey Aleynikov

Sergey Aleynikov makes a name for himself

Sergey Aleynikov, who immigrated to the US from Russia at 19, initially struggled to learn English and find work, but found work as a computer operator and worked his way up until he eventually became the star programmer at New Jersey telecom IDT, designing switching programs that automatically route phone calls along the cheapest available lines.

At the same time, Wall Street traders were just starting to get heavily involved in high speed algorithmic trading (algo), the idea being that if you can anticipate other people’s trades before they happen you can buy and sell that stock for a tiny profit. Done at incredibly rapid speeds, those tiny profits add up to an industry worth tens of billions of dollars.

Winning at algo trading has two components, having good algorithms that predict what other traders will do, and being able to communicate faster than anyone else. Goldman Sachs Group, Inc. (NYSE:GS) was failing at the latter and decided that Sergey Aleynikov was the right man to turn things around. They recruited him away from IDT with the promise of a more challenging, and far more lucrative, career.

Patching up Goldman Sachs’ system

Once he got to Goldman Sachs Group, Inc. (NYSE:GS) and has some time to learn about their system, Sergey Aleynikov wanted to start over and build a new platform for trading that would be faster than anything Goldman had access to. The problem was that it would take more time than any of the executives care to commit.

“The business model of Goldman Sachs Group, Inc. (NYSE:GS) was if there is an opportunity to make money right away, let’s do that,” Sergey Aleynikov told Lewis. “But if there was something long-term, they weren’t that interested… if you think about it, it’s just patching the existing system, constantly. The existing code base becomes an elephant that’s difficult to maintain.”

After a few years of running around patching a broken system, Sergey Aleynikov was given the opportunity to build an entirely new algo platform with fellow Russian immigrant Misha Mayshev. His salary was going to increase almost five-fold, but that wasn’t really the point for Aleynikov. He wanted to be able to create a system that worked to his specifications, something that he could really be proud of.

“Finance is just who gets money. Does it wind up in the right pocket or the left pocket? It just so happens that the companies that make money are the companies like Goldman Sachs. You can’t really win in that game unless you are one of these people who is receiving the hints,” said Sergey Aleynikov.

Sergey Aleynikov using open source software

Sergey Aleynikov had used open source software extensively while he was at Goldman Sachs Group, Inc. (NYSE:GS), but the company had the policy that any software on their servers was proprietary and couldn’t be released to the public. That meant they even considered open source software with minor changes to be their intellectual property. When he left, Sergey Aleynikov took a segment of code with him that was based on open source, but had some alterations that technically made it proprietary Goldman Sachs software.

According to Sergey Aleynikov, the software was of no consequence to his job at Teza Technologies, but once they realized he had taken a segment of code from their servers Goldman Sachs contacted the FBI and within 48 hours Aleynikov was in custody.

The rest of the story quickly descends into farce as people with little to no understanding of IT interrogate, try, and then convict Sergey Aleynikov of economic espionage. “They would bring my computer into the courtroom,” says Aleynikov. “They would pull out the hard drive and show it to the jury. As evidence!”

Check out Lewis’s article on Vanity Fair for the more in-depth version, and the second half coming out tomorrow.