(Corrects to show Malyshev and Kohlmeier worked in Citadel's
proprietary trading unit, not capital markets, removing
previous paragraph 15 and adding to paragraph 16)
* Court enjoins Teza and its founders through mid-November
* Grants sanctions for evidence destruction
* Next stop arbitration, where Citadel is seeking $600 mln
By James B. Kelleher
CHICAGO, Oct 16 An Illinois court on Friday
ordered Teza Technologies LLC, a high-frequency trading
start-up founded by two former employees of Citadel Investment
Group, to temporarily stop operations.
The Chicago hedge fund sued Teza and Mikhail Malyshev and
Jace Kohlmeier, two former limited partners at Citadel, in
July, claiming they breached nine-month non-compete agreements
when they formed Teza in March 2009, just six weeks after
resigning from Citadel.
Citadel asked the court to reset the clock and impose fresh
nine-month non-competes on the two men. It also wanted the
court to enjoin Teza from doing any business for nine months
and order the company to destroy all work performed to date.
In her ruling on Friday, Cook County Circuit Court Judge
Mary Rochford agreed that Malyshev and Kohlmeier had violated
their non-compete agreements. But she declined to reset the
clock, saying Citadel's own contracts "do not provide for an
extension of the restricted period."
That means Teza and its founders, and their dozen or so
employees, could be back in business before Thanksgiving --
though Malyshev and Kohlmeier face a continued fight against
their former employer in front of an arbitrator.
Judge Rochford did grant Citadel's motion for sanctions
against Malyshev, who erased files from a personal computer
after the parties agreed to a document preservation order and
then lied about it in court.
In addition to making Malyshev pay for the extra forensic
work Citadel incurred as a result of the destruction, the judge
said she might impose a separate fine.
Adam Cooper, Citadel's general counsel, characterized the
ruling as a big win for the hedge fund, which had argued that
the entire financial community was watching what happened in
the case to see whether non-competes had any meaning.
"We are pleased to have prevailed in this matter," Cooper
said in a statement.
"The court recognized that Malyshev and Kohlmeier breached
their obligations to Citadel. Moreover, Judge Rochford agreed
that Malyshev's egregious conduct in the destruction of
evidence and lying under oath prejudiced Citadel."
Attorney Chris Gair, who represented Malyshev and
Kohlmeier, declined to comment, saying he had not seen the
ruling and had not talked with his clients.
During the trial, Gair denied Malyshev was trying to
destroy evidence related to the case when he erased the
computer files. He said Malyshev was addicted to hard-core
pornography and had erased the files -- and then initially lied
about it on the stand -- to avoid embarrassment.
The major action in the case now moves to arbitration,
where Citadel is seeking $300 million in damages from both
Malyshev and Kohlmeier.
The trial, which took place just a few blocks from
Citadel's imposing headquarters at 131 S. Dearborn Street in
Chicago, garnered wide attention because of the small window it
opened on the secretive, lucrative and fast-growing world of
high-frequency trading and the math-savvy programmers who are
its key players
Citadel alleged Teza was a competitive enterprise that
engaged in the same high-frequency, algorithmic trading that
Malyshev and Kohlmeier had performed when they worked in the
hedge fund's proprietary trading unit.
It is a business based on the idea that properly programmed
computers can predict the price of a financial instrument one
second in the future and automatically trade on that
information. It is a business where computer code is king and
milliseconds are the difference between profit and loss.
Lawyers for Teza said the startup's actions to date had
been legal and had not injured Citadel in any way.
They said Teza had not begun working on what they
maintained was the core of the business: developing the
analytics -- or so-called "alpha signals" -- that would allow
programmers to write algorithms that turn computers into super
traders of financial instruments.
Teza burst into the news this summer when one of its hires,
a former Goldman Sachs Group (GS.N) computer programmer named
Sergey Aleynikov, was arrested and charged with stealing
secrets from the investment bank. Aleynikov denied the charges
but Teza fired him.
(Editing by Carol Bishopric, Gary Hill)