Articles By Topic
By Topic: Trade Secrets
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From Vol. 5 No.46 (Dec. 6, 2012)
Measures Hedge Fund Managers Can Implement to Maximize Protection of Their Trade Secrets
Hedge fund managers have a well-documented interest in maintaining the confidentiality of client lists, investment strategies and other sensitive business information – information that courts are increasingly recognizing as trade secrets. But most of the caselaw relating to trade secrets arises in the technology industry and therefore has limited applicability to hedge fund managers. The facts of technology cases often bear little resemblance to the operations of hedge fund managers, and the lessons to be derived from such cases are often cost-prohibitive or structurally distinguishable. How can the lessons of trade secrets jurisprudence be analogized and adapted to the hedge fund industry? In a guest article, Ben Quarmby, a partner at litigation boutique MoloLamken LLP, does just that – examining relevant law and research, and extracting specific measures that hedge fund managers can implement to protect their trade secrets. Quarmby concludes that some of the cheapest and most easily implemented trade secret protections are among the most effective – a conclusion that may surprise some managers, but that should be welcome news in an environment of generally rising costs.
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From Vol. 5 No.44 (Nov. 21, 2012)
U.K. High Court of Justice Rules on Request by Hedge Fund Manager Affiliates to Search Computers of Two Former Employees
Most hedge fund management companies are built on a foundation of confidential and proprietary information – strategies, technologies, positions, plans, investor and prospect lists, etc. To add value, employees must be given access to some or all of that confidential information, which of course invites the prospect that employees will walk away with it. Managers take various steps to prevent theft of confidential information, including legal and technology precautions. See “Protecting Hedge Fund Trade Secrets: What a Difference a Year Makes,” The Hedge Fund Law Report, Vol. 5, No. 16 (Apr. 19, 2012). However, confidential information can be hard to secure absolutely and difficult to monitor. Thus, with some frequency, litigation over ownership of and access to confidential information follows the voluntary or involuntary departure of employees from hedge fund managers. See “Eight Measures That Hedge Fund Managers Can Take to Mitigate the Risk of Theft of Their Trade Secrets,” The Hedge Fund Law Report, Vol. 5, No. 21 (May 24, 2012). This article discusses a recent example of such litigation.
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From Vol. 5 No.32 (Aug. 16, 2012)
Real Estate Private Equity Adviser Sues Former Executives Alleging Theft of Trade Secrets
Like private equity advisers, hedge fund managers have increasingly faced the need to zealously guard their trade secrets in an era where technology is both fundamental to proprietary trading strategies and can abet the theft of them. See, e.g., “Eight Measures That Hedge Fund Managers Can Take to Mitigate the Risk of Theft of Their Trade Secrets,” The Hedge Fund Law Report, Vol. 5, No. 21 (May 24, 2012). A recently filed lawsuit is part of a flurry of recent high profile suits designed to redress – and in some cases criminalize – the theft and misuse of confidential information and proprietary trading strategies. See “Protecting Hedge Fund Trade Secrets: What a Difference a Year Makes,” The Hedge Fund Law Report, Vol. 5, No. 16 (Apr. 19, 2012). This article summarizes the factual allegations in the complaint in the matter, as well as the causes of action and relief requested.
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From Vol. 5 No.21 (May 24, 2012)
Eight Measures That Hedge Fund Managers Can Take to Mitigate the Risk of Theft of Their Trade Secrets
Technology has made it increasingly easy for firm personnel and unauthorized third parties to steal proprietary information from hedge fund managers. Managers that fail to adopt effective safeguards may face theft of their “secret sauce,” which could jeopardize their businesses. A spate of high-profile alleged trade secret thefts emphasizes the need for managers to take such protective steps. See “Protecting Hedge Fund Trade Secrets: What a Difference a Year Makes,” The Hedge Fund Law Report, Vol. 5, No. 16 (Apr. 19, 2012). On May 11, 2012, Yihao (Ben) Pu, a computer programmer, was indicted in the United States District Court for the Northern District of Illinois on 13 counts of theft of trade secrets and computer fraud in connection with the alleged misappropriation of proprietary software from two financial services firms, including hedge fund manager, Citadel LLC (Citadel). The indictment (Indictment) comes on the heels of a civil lawsuit filed by Citadel against Pu, alleging that Pu misappropriated Citadel trade secrets in breach of a non-disclosure agreement executed by Pu and in violation of the Illinois Trade Secrets Act. For a discussion of the civil action, see “Citadel Commences Action Against a Former Employee for Misappropriation of Confidential Information with the Intent to Aid a Competitor,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011). The Indictment is instructive in that it offers a glimpse into some of the measures that Citadel instituted to prevent theft of its trade secrets. This article summarizes the factual allegations and causes of action in the Indictment and recommends eight specific steps that hedge fund managers can take to mitigate the risk of trade secret theft.
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From Vol. 5 No.16 (Apr. 19, 2012)
Protecting Hedge Fund Trade Secrets: What a Difference a Year Makes
Hedge fund managers zealously guard their trade secrets from unauthorized access and use and seek to prosecute misappropriation or misuse of such trade secrets because they represent a significant asset of the firm. In December 2010, Sean R. O’Brien and Sara A. Welch, Managing Partner and Counsel, respectively, at O’Brien LLP, published in The Hedge Fund Law Report an article analyzing the government’s efforts to regulate and protect, through the aggressive enforcement of criminal laws, the trade secrets underlying proprietary hedge fund trading strategies. See “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies,” The Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010). At that time, the government had recently obtained the criminal convictions of two former employees of high-frequency trading firms who were alleged to have misappropriated computer code relating to high frequency trading systems. Two recent rulings by federal appellate courts have significantly reined in the government’s efforts in this area. The appellate courts have significantly narrowed the scope of criminal liability that may be imposed upon an employee who is alleged to have misappropriated elements of proprietary trading strategies, especially if the challenged conduct involves only the taking of “intangible” aspects of those strategies. The rulings are therefore of great interest to both hedge fund managers and their employees. This follow-up article by O’Brien and Welch discusses the rulings and the reasoning in the two federal appellate court decisions.
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From Vol. 4 No.31 (Sep. 8, 2011)
Citadel Commences Action Against a Former Employee for Misappropriation of Confidential Information with the Intent to Aid a Competitor
Useful proprietary trading technologies are expensive to develop, easy to copy and significantly undermined if obtained by a competitor. Not surprisingly, therefore, a significant body of civil and criminal case law, as well as commercial best practices, have developed around the protection of proprietary trading technology. On the civil side, for example, the allegations in a complaint filed on August 29, 2011, by Citadel LLC (Citadel) against former employee Yihao Ben Pu (Pu), echo legal allegations brought by Citadel in July 2009 against the founders of Teza Technologies (Teza), and allegations in unrelated complaints. See “Citadel Investment Group Sues Former Employees Alleging Violations of Non-Disclosure, Non-Solicitation and Non-Compete Agreements,” The Hedge Fund Law Report, Vol. 2, No. 28 (Jul. 16, 2009); “Opus Trading Fund Accuses Former Trader That Joined Competitor of Breach of Contract and Misappropriation of Proprietary Information,” The Hedge Fund Law Report, Vol. 4, No. 13 (April 21, 2011); “New York Trial Court Permits Action for Misappropriation of Hedge Fund Proprietary Software and Breach of Partnership Agreement To Proceed,” The Hedge Fund Law Report, Vol. 2, No. 6 (Feb. 12, 2009). On the criminal side, the most notable recent case was the DOJ’s action against Sergey Aleynikov, who joined Teza from Goldman Sachs. See “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies,” The Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010). Regarding commercial best practices for protection of trading technology in the hedge fund context, see “How Can Hedge Fund Managers Prevent Theft of Proprietary Trading Technology and Other Intellectual Property?,” The Hedge Fund Law Report, Vol. 2, No. 33 (Aug. 19, 2009). This article details the allegations in Citadel’s complaint against Pu, and concludes with a note on the procedural posture of the matter.
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From Vol. 4 No.22 (Jul. 1, 2011)
What Hedge Fund Managers Need to Know About Information and Data Security
While hedge fund executives are experts at identifying and managing the risks relating to their financial assets and portfolios, they generally do not have the time or expertise to focus on the security of their people and intellectual property assets. However, all organizations – especially financial institutions – must be prepared for the inherent risks and responsibilities associated with doing business in an online world through a sound digital risk management strategy. The appropriate approach to digital risk management varies from firm to firm based on unique business models and requirements. However, all hedge fund managers should take a risk-based approach to security and ensure that the approach is aligned with the way executives manage other business issues. While physical security and information security present different challenges, they are strongly related, are part of internal controls and should be managed using an integrated strategy. In a guest article, Edward Stroz, Co-President of Stroz Friedberg, a digital risk management and investigations firm, and Steven Garfinkel, Vice President of Stroz Friedberg’s Business Intelligence & Investigations Division – and both former FBI Special Agents – outline the most critical aspects involved in implementing a digital risk management program for hedge fund managers.
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From Vol. 4 No.15 (May 6, 2011)
New Jersey Appellate Court Holds that Limited Partnership Agreements Covering State Pension Fund Private Equity Investments are Exempt from Disclosure under New Jersey’s Open Public Records Act
The Appellate Division of the New Jersey Superior Court has handed down a ruling preventing the disclosure of private equity limited partnership agreements (LP agreements) to union representatives who sought copies of those agreements. Plaintiffs are two state employee unions whose pension funds were partly invested in private equity funds by New Jersey’s pension manager. The plaintiffs sought disclosure of the LP agreements both under New Jersey’s Open Public Records Act (OPRA) and under common law principles of public access to government documents. OPRA grants broad public access to “government records” but enumerates several exemptions from disclosure. Cf. “Repeal of Dodd-Frank Confidentiality Protection for SEC: What Investment Advisers Lost and What Remains,” The Hedge Fund Law Report, Vol. 3, No. 47 (Dec. 3, 2010). The New Jersey Treasurer argued that the LP agreements were exempt as both proprietary commercial/financial information and as trade secrets. The Treasurer also argued that the common law right to disclosure of the documents was outweighed by the State’s interest in preserving the confidentiality of the LP agreements. The Court agreed with the State and prevented disclosure. We summarize the Court’s reasoning. For a discussion of a North Carolina case in which a nonprofit corporation was permitted to pursue its claim for records pertaining to state hedge fund investments in the context of a “pay to play” investigation, see “North Carolina Supreme Court Rules that State Pension Fund May Have to Disclose Information about Pension Fund’s Hedge Fund Investments, Including Hedge Fund and Manager Names, Identity of Manager Principals, Positions, Returns and Fees,” The Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010). See generally “Delaware High Court Affirms Order Compelling Defunct Hedge Fund Parkcentral Global to Divulge Its List of Limited Partners to Another Limited Partner in Order to Facilitate Future Litigation Against the Fund and Its Affiliates,” The Hedge Fund Law Report, Vol. 3, No. 33 (Aug. 20, 2010).
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From Vol. 4 No.13 (Apr. 21, 2011)
Opus Trading Fund Accuses Former Trader That Joined Competitor of Breach of Contract and Misappropriation of Proprietary Information
In a complaint filed on March 28, 2011 in New York County Supreme Court, trading and investment firm Opus Trading Fund, LLC (plaintiff) accused a former Opus trader, David Kleinman (defendant), of violating the confidentiality and non-competition clauses of his employment agreement by accepting employment with a competitor that follows a similar trading strategy. For more on the legal and practical issues relating to confidentiality and non-competition clauses in employment agreements for hedge fund investment talent, see “Key Legal Considerations in Connection with the Movement of Talent from Proprietary Trading Desks to Start-Up or Existing Hedge Fund Managers: The Talent Perspective (Part One of Three),” Vol. 3, No. 49 (Dec. 17, 2010). In addition to illustrating the types of legal disputes that can arise when trading talent moves from one firm to another, this matter also illustrates the importance of protecting sensitive information with technology. This article summarizes the factual and legal allegations in the complaint, with emphasis on the security measures Opus implemented to protect its digital property. For discussions of other disputed talent moves and hedge fund employment disputes, see, e.g., “Broadly Defined Terms in a Term Sheet Covering Employment of a General Counsel May Render Hedge Fund Manager Principal Personally Liable for Unpaid Compensation,” The Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011); “Dispute between Structured Portfolio Management and Jeffrey Kong Offers a Rare Glimpse into the Compensation Arrangements between a Top-Performing Hedge Fund Management Company and a Star Portfolio Manager,” The Hedge Fund Law Report, Vol. 4, No. 8 (Mar. 4, 2011); “Hedge Fund Research and Advisory Firm Aksia LLC Sues Two Former Employees for Misappropriation and Destruction of Confidential Business Information,” The Hedge Fund Law Report, Vol. 3, No. 4 (Jan. 27, 2010); “New York Trial Court Permits Action for Misappropriation of Hedge Fund Proprietary Software and Breach of Partnership Agreement To Proceed,” The Hedge Fund Law Report, Vol. 2, No. 6 (Feb. 12, 2009); “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies,” The Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010).
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From Vol. 3 No.48 (Dec. 10, 2010)
Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies
On December 10, 2010, the trial of Sergey Aleynikov, a former Goldman, Sachs & Co. employee accused of stealing the computer code underlying Goldman’s high-frequency trading system, ended in a guilty verdict. The Aleynikov trial follows close on the heels of the trial of Samarth Agrawal, a former employee of Société Générale who was convicted last month of theft of trade secrets, also in connection with misappropriation of high frequency trading code. These cases reflect a new emphasis by the federal government on high-technology and intellectual property-related crimes, and should be of great interest to hedge funds, many of which rely upon trade secrets or proprietary trading strategies to some degree. In a guest article, Sean O’Brien and Sara Welch, Partner and Associate, respectively, at Arkin Kaplan Rice LLP, focus upon the key legal issues presented and resolved in the Aleynikov prosecution, and the implications of those issues for hedge fund managers.
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