* Suit alleges 3 ex-employees violated non-compete clauses
* Teza had hired former Goldman Sachs computer programmer
* Teza spokesman says firm turned over computers to FBI
(Adds details from the complaint, court details)
By Svea Herbst-Bayliss
BOSTON, July 9 Citadel Investment Group, one of
the world's most successful hedge fund firms, sued a former top
executive in its highly successful quantitative trading unit
and two others for setting up their own firm.
Chicago-based Citadel, founded by 40-year-old billionaire
Kenneth Griffin, said in a lawsuit filed on Thursday that
Mikhail Malyshev, 40, and two other former employees had
violated their non-compete clauses by starting their own firm,
Teza Technologies LLC. The lawsuit was filed in the the circuit
court of Cook County, Illinois.
Teza Technologies made headlines this week when it was
identified as the firm that had hired Sergey Aleynikov, a
former Goldman Sachs Group Inc (GS.N) computer programmer whom
federal prosecutors had accused of stealing trade secrets from
the Wall Street investment bank.
Malyshev, a Russian emigre with a doctorate in astrophysics
from Princeton, left Citadel's quantitative trading unit in
February after the funds he helped run returned about 40
percent last year. Their performance stood out at a time when
most hedge funds lost money and Citadel's flagship portfolios
tumbled 50 percent.
Citadel, which manages $11 billion and one of whose
flagship hedge funds returned an average 20 percent per year
between 1998 and 2006, said it zealously guards the secrecy of
its own computer codes. The hedge fund firm said it spent
hundreds of millions of dollars to develop strategies, software
and hardware, or what is sometimes referred to as the "secret
sauce" of the high frequency business, court papers show.
If the information were obtained by someone else, the
company, which has often been compared with Goldman Sachs for
its trading prowess, said it would suffer irreparable
"Defendants' activities, particularly Teza's decision to
hire Aleynikov, an accused software thief, create a substantial
risk that they have stolen, or may be planning to steal,
Citadel's proprietary code," the hedge fund firm said in court
A spokesman for Teza told Reuters columnist Matthew
Goldstein that the firm had voluntarily turned over some of its
computers to the Federal Bureau of Investigations.
Like all employees who leave Citadel, Malyshev faced a
9-month non-compete clause and was being paid $30,000 a month
to sit out the period to at least November 2009, court papers
show. Citadel found out about Malyshev's new firm only this
week after Aleynikov was arrested, the firm said.
Former Citadel employees Jace Kohlmeier and Matthew
Hinerfeld are also listed on the civil complaint.
A spokesman for Teza called the suit "frivolous" and said
it "appears to be timed to harass Teza executives."
"We knew nothing about the theft of Goldman's software
until it hit the press in connection with the arrest," said
Chris Gair, Teza's lawyer. "We immediately started working with
the FBI. We are not going to compromise anyone's proprietary
(Reporting by Svea Herbst-Bayliss; Additional reporting by
Steve Eder, Christian Plumb, and Matthew Goldstein in New York;
Editing by Lisa Von Ahn, Gerald E. McCormick and Richard