Trade Secret Case Straddles Domains of Civil and Criminal Law

The incarceration of a financial analyst accused of stealing company trade secrets—and what that arrest means for future cases of its kind—has prompted one state Supreme Court judge to question whether the Manhattan District Attorney’s actions have been “over the top.”

The remarks by Justice Jeffrey Oing, who sits in the Commercial Division, came during an order of attachment hearing last month against Kang Gao, a former quantitative analyst at the hedge fund Two Sigma Investments who is caught between simultaneous criminal and civil proceedings arising from the same allegations.

Gao, 29, is accused of illegally accessing and sending to his personal email account trading strategies, models, a presentation and scientific white paper from the investment management firm, whose sophisticated data models manage nearly $20 billion in financial trading.

Within a few days of Gao’s Feb. 11 arrest, Two Sigma served him with a summons and complaint for claims including misappropriation of trade secrets, breach of fiduciary duty and an order of attachment.

Exactly one month later, District Attorney Cyrus Vance Jr. announced an indictment charging Gao with the unauthorized use of secret scientific material, unlawful duplication of computer-related material in the first degree and criminal possession of computer-related material, Class E felonies carrying prison sentences of 15 months to four years each in prison.

Gao’s civil defense attorney, Derrelle Janey of Gottlieb & Gordon, has asked for a stay of the civil action while the criminal action is pending—a motion that has gone unopposed by Two Sigma counsel Brian Fischer of Jenner & Block.

Still, two months after his arrest, Gao, a Chinese national, remains jailed at Rikers Island, unable to make his $500,000 bond, which is half the amount that prosecutors initially sought.

The series of events has effectively left the parties in a type of holding pattern, with any possibility of a settlement or opportunity for Two Sigma to learn more from Gao diminished due to his right to remain silent as the result of the criminal case.

Janey said Two Sigma’s referral of this case, therefore, is “counterproductive.”

“The hedge fund is trying to ensure that their technology isn’t going to be handed to a competitor. The only way to do that is to speak to the employee,” he said.

In turn, Gao’s criminal defense attorney, Robert Gottlieb, the managing partner at Gottlieb & Gordon, has been focused on getting his client bonded out of jail before he can reach the merits.

“We’re not aware of any case that’s similar to this,” said Gottlieb, a former assistant district attorney under Robert Morgenthau. Gottlieb said there has been a “bizarre undercurrent” dominant in the criminal proceedings thus far where the government keeps “raising the specter of China.”

“There is no justification,” he said.

Indeed, Oing, during the order for attachment hearing in the civil case, told Two Sigma counsel that the government “perhaps may now be opening the door for all employers to think, you know what, ‘We are going to put these guys in jail now.’ ”

“That is going to be really something,” the judge said.

An ‘Example’?

In March, Oing granted Two Sigma’s request for a preliminary injunction against Gao and an order to attach $385,000 of his assets. But he told parties at the hearing that the facts of the case appeared to be a “garden variety situation.”

“I have had a lot of employers suing former employees for trade secrets and/or using or at least allegedly taking trade secrets or client lists and all of that. And none, none of them have ever risen to a level of a criminal indictment,” Oing said, according to a transcript of the hearing.

“Aren’t you guys going over the top…to put someone in jail for a breach of a duty, for breach of a convenant?” he asked. “Why is it that this case is so unique that you had to go, in a sense…in making an example of him?”

Two Sigma and the D.A.’s office argue that Gao’s case is anything but ordinary.

In court appearances and in briefs, they have portrayed Gao, a graduate of Peking University who came to the United States in 2006 to enroll at the Massachusetts Institute of Technology, as a “brilliant” individual who engaged in “off the charts” attempts to steal the “lifeblood” of the fund’s business with intentions to take such trade secrets to China.

“We take the protection of intellectual property very seriously,” Kelly Howard, Two Sigma’s spokesman, told CLI. “We saw what we thought was potential criminal activity. We brought it to the D.A. and at that point, that’s the D.A.’s call. In this instance, they apparently saw what they believed was criminal behavior as well.”

“This wasn’t a foot foul,” he added.

Where ‘Few Employees Voluntarily Resign’

Two Sigma was founded in 2001 as a Delaware-incorporated company. Headquartered in New York with offices in Houston, London and Hong Kong, the fund employs nearly 600 employees who come from 50 different countries.

The fund, which embraces the use of technology and data to create market strategies, boasts of a compensation package so generous, “few employees voluntarily resign,” according to its civil complaint against Gao.

At Two Sigma, Gao’s primary role was expanding the fund’s reach in China. He was involved in the launch of Two Sigma’s China equities trading platform and other Asia-Pacific markets outside China.

Gao, who graduated from M.I.T. with a bachelor’s degree in physics and electrical engineering, was hired by Two Sigma in August 2010 after working as a trader assistant at DRW Holdings in Chicago.

His offer letter shows he received a $20,000 relocation bonus, a base annual salary of $130,000 and a guaranteed year-end bonus of at least $95,000, conditioned upon his signing non-disclosure and non-compete agreements.

Whatever concerns the firm had with Gao developed over time and it was many months before management’s suspicions first arose that it took outside action by contacting the D.A.

Two Sigma’s complaint alleges the firm learned in June 2013 that Gao used a program to “decompile and view code that did not relate to any of the models” that he was authorized to access.

The complaint further states that despite being issued warnings, Gao continued to view “scores of individual financial models” that were off-limits from September 2013 up until his arrest in February this year.

Gao is also accused of emailing to his personal Gmail account a confidential presentation allegedly used as a guide to develop models for training in China, a scientific research paper that allegedly describes the application of a “complex mathematical idea” and confidential research papers covering formulas related to trading.

The complaint states that these financial models “constitute Two Sigma’s valuable intellectual property and form an integral part of Two Sigma’s business.”

While Gao’s attorneys say there is “no question” he emailed himself documents, they also say there is no evidence he shared this information with anyone.

“It’s arguable that he violated company policy by emailing [materials] to himself and even assuming that’s true, that’s not a criminal offense,” Janey said.

Two Sigma’s complaint cites a succession of events in which Gao flew to London on January 19 to interview with GSA Capital, a Two Sigma competitor; tendered his resignation on February 5; and the next day, attempted to “divert funds” by transferring $100,000 from his personal account to his girlfriend, a researcher at Morgan Stanley. The complaint also alleges that Gao researched cases involving employees’ theft of trade secrets.

Two Sigma contends this is all evidence Gao wanted to jump to a competitor or move overseas and start a business.

“Everyone in New York who is in finance thinks about doing something on their own,” Janey said. “Every guy at Goldman Sachs and Morgan Stanley is thinking along those lines.”

There is no denying that Gao planned to leave the fund and that he had entrepreneurial ambitions. In the immediate future, he planned to head to Citadal, the global asset management fund based in Chicago, although under his non-compete he could not accept employment for one year.

In the interim he had aspirations to obtain an associate’s degree in business at ASA College in New York. In a Feb. 4 letter to a U.S. immigration officer to apply for an F1 visa, Gao indicated he wants to start his own company in China one day.

“My entrepreneurial ideas and determination to go back to China are shaped by my past working experience and future studies at ASA College,” he wrote.

But those entrepreneurial ambitions, Two Sigma contends, crossed the line.

Five hard drives were confiscated from Gao’s apartment during the course of the D.A.’s investigation. Two Sigma employees wore wires when meeting with Gao prior to his arrest. He has surrendered his passport to authorities.

This is not the first time Two Sigma has taken action against an employee for allegedly misappropriating trade secrets.

In 2007, the company, then represented by the now-dissolved Arkin Kaplan Rice, sued software developer Jianjun Qiu, alleging that he downloaded trade secrets to his home network then left for China after being confronted and terminated from his role.

The case, Two Sigma Investments v. Jianjun Qiu, 604029/2006, settled in January 2007. Qiu’s attorney at the time told CLI there was no parallel criminal proceeding.

In 2009, Two Sigma referred another case of alleged employee misconduct to the D.A.’s Office. The employee was accused of improperly accessing trading algorithms and pleaded guilty to the misdemeanor count of unauthorized use of a computer, according to Howard, Two Sigma’s spokesman. There was no corresponding civil suit.

Vance’s Cybercrime Unit

Compared with those past cases, Gao is unique in finding himself the center of both a civil action, Two Sigma Investments v. Kang Gao, 650506/2014, and a parallel criminal case, People v. Kang Gao, No. 00640/2014.

His criminal defense attorney says the prosecution is “overblown” and demonstrates an abuse of discretion.

“This case does not justify a D.A. exercising enormous power in prosecuting this in criminal court when [Gao] did nothing with this information,” Gottlieb said. “The D.A. has taken this nothing case and so exaggerated and overblown it, for no conceivable reason other than to justify that [cybercrime] unit.”

Erin Duggan Kramer, spokeswoman for Vance’s office, said she could not comment on an open case but said Vance’s Cybercrime and Identity Theft bureau is “robust” and targets one of the “fastest growing” areas of crime.

The division was formed in 2013, shortly following a report issued by Vance’s White Collar Crime Task Force, which concluded that “serious computer and other high-tech crimes are not treated according to the gravity and breadth of the harm they cause,” according to one press release from the D.A.’s office.

In 2012, the Manhattan D.A. brought similar trade secret-related charges against Sergey Aleynikov, a former computer programmer at Goldman Sachs accused of stealing code for high-frequency trading software prior to joining a start-up. Aleynikov’s federal conviction and eight-year sentence were overturned by the U.S. Court of Appeals for the Second Circuit for the misapplication of federal statutes.

Bail for the Russia-born Aleynikov, who is charged with the same Class E felony offenses as Gao, was set at $35,000.

Stephen Kramarsky, a partner at Dewey Pegno Kramarsky, who is not involved in either case, said he has seen “hundreds” of trade secret-related civil cases during his years of practice, but very few where a company seeks criminal prosecution against the party.

“Is it unheard of? No. Is it more common now? Yes,” he said. “In my experience, it’s typically very hard to sell these cases to a prosecutor.”

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