Tuesday, July 28, 2009, 7/28/2009 09:50:00 AM

Former Citadel Employees Defend Claiming "Trade Secrets? What Trade Secrets?"

By Todd

Now The Wall Street Journal is reporting that three former employees of Citadel Investment Group have filed a motion to dismiss the hedge-fund company's complaint against them, claiming their formation of a new trading firm didn't violate agreements they made with Citadel upon leaving the firm.
Lawyers for Mikhail Malyshev, Jace Kohlmeier and Matthew Hinerfeld, who founded Teza Technologies LLC earlier this year, filed the motion last Friday in Cook County, Ill., Chancery Court.

Teza is the firm that hired Sergey Aleynikov, the ex-Goldman Sachs Group, Inc. computer programmer arrested on charges of stealing secret computer trading code from his former employer. Mr. Aleynikov and his lawyer have asserted that any violation was unintentional.

In Teza's court filings, it said that the formation of a firm doesn't violate non-compete agreements, because all it took were "preparatory steps" and it is not competing with Citadel.
"There is nothing in the complaint suggesting that Teza or any of the individual defendants is engaging in any trading activities, investment activities, or other business activities conducted by Citadel," says the complaint.

Citadel sued Teza and the three ex-employees earlier this month, claiming Mr. Malyshev and Mr. Kohlmeier -- the former No. 1 and No. 2 in Citadel's high-frequency trading funds -- violated non-compete and other agreements it made with Citadel. It also named Mr. Hinerfeld, a former Citadel in-house lawyer, for violating other types of agreements. The suit also claimed "actual or threatened" misappropriation of Citadel trade secrets, tortious interference with existing contracts and breach of fiduciary duty.

Citadel said in early July that it only learned about the formation of Teza after it found that Teza had hired Mr. Aleynikof. A spokeswoman for Chicago-based Citadel said the firm had no comment on Teza's motion for dismissal.

As far as the allegations about misappropriating trade secrets and breaching fiduciary duty and non-solicitation agreements, Teza says Citadel doesn't have any specific facts backing those claims up, and should also be dismissed.
NOW, this is an interesting report and even more interesting defense. Three presumably highly compensated hedge fund guys, and a fourth $400,000 per year code programmer, all assembled themselves as a group - and only prepared to compete? If true, that probably means that their attorneys have advised them "competing during that noncompete clause's term is a no-no so you guys had better sit tight and ride this one out." The inclusion of the Goldman Sachs programmer in the mix - the alleged code thief - is the fact in this fact pattern that might give the court pause regarding these defenses. We'll continue to track this one for you.

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