October 17, 2009 / 12:49 AM / 10 years ago

CORRECTED - UPDATE 1-Citadel wins injunction against Teza

(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 (Reuters) - 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.

HIGH-FREQUENCY FLAP

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)

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