March 11, 2014 / 9:02 PM / 6 years ago

Former hedge fund analyst indicted in NY for trading model theft

(Reuters) - A former analyst for hedge fund Two Sigma Investments LLC was indicted in New York on Tuesday on state charges he stole information about the fund’s confidential computer trading models.

Kang Gao, a Chinese national who worked as an analyst for the fund, was indicted on 11 felony counts related to the theft and copying of secret information about the hedge fund’s trading methods, according to an indictment released by Manhattan District Attorney Cyrus Vance.

Gao has pleaded not guilty. His attorney, Benjamin Yu, did not return a request for comment.

“The protection of trade secrets, such as computer source codes and trading methods, is critical to building and maintaining financial expertise,” Vance said in a statement.

Gao, 29, was hired in 2010 as a quantitative analyst for Two Sigma, prosecutors said. Between August and January, Gao remotely accessed computers at Two Sigma Investments and emailed himself documents describing the fund’s computer trading models, according to the indictment.

Gao’s employment contract prohibited him from viewing the trading models, prosecutors said.

Gao also is facing a civil lawsuit brought by Two Sigma, in which the hedge fund claims he planned to sell the allegedly stolen data or use it to start his own trading firm. The suit, which was brought in Manhattan state court, claims Gao made nearly $550,000, including bonuses, working for the firm in 2013.

Two Sigma says in the lawsuit it fired Gao in February when it learned that he had accessed confidential trading models.

Two Sigma Investments was formed in 2001 and manages about $14 billion, according to the lawsuit. It specializes in quantitative trading, in which firms use sophisticated and highly confidential modeling programs to find patterns within financial data.

Fund spokeswoman Kelly Howard said: “Two Sigma takes the protection of our intellectual property very seriously. We became aware of potential felony criminal activity of an employee, promptly informed the Manhattan District Attorney and terminated his employment.”

Gao’s case is the latest bid by Vance to crack down on high-tech white-collar crime. He has called existing laws outdated, saying the penalties for cybercrimes do not match the harm.

In 2012, a federal appeals court overturned the conviction of Sergey Aleynikov, a computer programmer who was charged by federal prosecutors with stealing computer code from Goldman Sachs. The court found that computer code was not a “stolen good” under federal law. Months later, Vance’s office charged Aleynikov under state law with the same crimes for which Gao was indicted on Tuesday. Aleynikov has pleaded not guilty.

Reporting by Daniel Wiessner; Editing by Noeleen Walder, Phil Berlowitz and Andre Grenon

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