Chicago Hedge Fund Enters Espionage Fray

Former execs accused

In a case described by the New York Times as an "espionage potboiler," the Chicago-based Citadel Investment Group, led by 40-year-old billionaire Kenneth Griffin and one of the world's most successful hedge funds, has sued a former top executive already accused by Goldman Sachs of "stealing secret codes the bank uses to make lucrative, rapid-fire trades in the financial markets."

“This is a case of industrial espionage,” Citadel said court papers it filed on Thursday.

The Citadel lawsuit alleges that the former executive, Mikhail Malyshev, and two others violated their non-compete clauses when they started their own company here in Chicago named Teza Technologies. Teza is a river in Russia.

Teza reportedly hired former Sachs programmer Sergey Aleynikov, who was arrested by federal agents last week at Liberty International Airport "for allegedly stealing proprietary, 'black box' computer programs that allowed Goldman to 'engage in sophisticated high-speed and high-volume trades on various stock and commodities markets'," the New York Times reports. "He has pleaded not guilty to charges of theft of trade secrets and transporting them abroad."

In court papers, Citadel said “Defendants’ activities, particularly Teza’s decision to hire Aleynikov, an accused software thief, create a substantial risk that they have stolen, or may be planning to steal, Citadel’s proprietary code."

Teza has issued a statement calling the complaint "frivolous" and accusing Citadel of harassing its executives.

A Reuters story published in The Moscow Times under the headline "2 Russian Emigres, One Spying Mess," says that "Mikhail Malyshev may now regret having crossed paths with countryman Sergey Aleynikov, a computer programmer he hired for his start-up firm who is now embroiled in one of the highest-profile U.S. corporate espionage cases in years."

Reuters reports that "Teza has an office in Chicago, but when a reporter visited on Tuesday it was void of furniture and had no receptionist."

As noted by the blog An Investment Banker's Take On Life, "Anyone can possibly read any sort of plot in this story (the blogosphere, for example, is abuzz with speculations about international espionage and other conspiracy theories)."

Bear Market Investments writes that "The gloves are now completely off in the escalating program trading fiasco that was started by Goldman’s former Sergey Aleynikov. Oddly, while Zero Hedge was fully expecting the Teza injunction to come from Goldman, it seems Griffin was more than happy to burden himself with that task. Hopefully Citadel is not faced with a case of reverse discovery and forced to document the 40% returns that it generated compliments of Malyshev when all its other groups on average lost around 50% in 2008."

Yes, the gloves are off - and this is just round one.

Steve Rhodes is the proprietor of The Beachwood Reporter, a Chicago-based news and culture review.

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