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,” 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,” 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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