A third-party forensic firm that both sides agreed to hire rooted through their computers and mobile phones. The review didn't find evidence of data transfer or any communication that would suggest intent to steal data, according to an April 4 report seen by Bloomberg.

Weeks later, Goldman fired the two vice presidents. It then levied an unusual accusation in a database maintained by the Financial Industry Regulatory Authority that they improperly accessed systems and that Lashgari took steps to cover his tracks. Their attorney said those disclosures are unfairly hurting their reputations.

“Goldman’s actions were defamatory and unlawful,” said the lawyer, Lou Pechman. He said his clients cooperated with the review. “We are keeping open all of our litigation options.”

Big Opportunity
The rise of passive investing over the past few decades has created a big opportunity for sophisticated trading firms like Goldman. Indexes publicly lay out their methodology for picking which stocks to add or bump out of their rosters, known as index rebalancing. Once they make their decisions, the tweaks trigger a wave of buying and selling by passive funds, which have to rebalance portfolios that collectively command trillions of dollars.

If a bank like Goldman or hedge fund such as Millennium Management can develop systems that predict which stocks are ripe for inclusion, they can position themselves to profit. That’s the program-trading desk’s key remit. Other events, like mergers, can also create similar opportunities. In either case, the earlier the firm guesses right, the better chance it has of capitalizing. Over the years, Goldman has assigned traders and coders to work together and help develop mathematical models and software tools.

Goldman doesn’t break out how much it earns from anticipating changes to indexes, and Paul and Lashgari wouldn’t discuss it. But the prowess of its franchise is an open secret on Wall Street. According to conservative estimates from rival traders and industry observers, it pulled in at least $700 million in each of the past two years, trouncing banking peers. Senior traders point out that the strategy has gotten crowded and the opportunity to make easy money from the niche has waned. This year may be lean for many.

Goldman sees the hedge funds in this space as its direct competition. The firm has poured talent and resources into the strategy and made capital available as needed. Notable names have called the desk home over the years. Joe Montesano established himself there before rising to head US equity trading for Goldman. Anne-Victoire Auriault, one of the firm’s youngest partners, is part of the current team.

Inside Goldman’s equities business, the group is a bastion that still deploys the bank’s own money without waiting for clients to submit orders. After the 2008 financial crisis, big banks were broadly banished from wagering their own capital to hunt for profits. But it's still de rigueur in fixed income, where banks match sellers with buyers in less-liquid markets. The rules allow for such risk-taking if there is “reasonably expected near-term demand.” Goldman leans on that same logic in the index-rebalancing business, knowing that when indexes change, the demand from passive funds surges.

Despite all the interest attracted by the strategy, it’s a corner of Wall Street where relatively few people understand how to succeed, making Goldman particularly protective of its group. Last year, the bank even extended non-compete clauses for the junior members of its team to six months on top of a notice period when they want to leave.

Lashgari described himself as his group’s most senior coder aside from its leader and said he routinely monitored and tweaked its library.