Two Sigma Ex-Analyst Charged With Confidential Data Theft

Feb 20, 2014 3:39 pm ET

(Updates with court order in 13th paragraph.)

Feb. 20 (Bloomberg) -- An employee of Two Sigma Investments LLC, an $18 billion quantitative hedge fund, was charged by New York prosecutors with stealing computer data from the company, the latest in a growing number of proprietary financial firm theft cases brought by the Manhattan district attorney.

Two Sigma sued Kang Gao, 28, this month in New York state court in Manhattan after he resigned, stating in the complaint that he had been arrested. Gao was charged Feb. 11 in Manhattan criminal court by District Attorney Cyrus R. Vance Jr., a person familiar with the case said.

Two Sigma claimed Gao quit after the fund learned he had “misappropriated confidential information as part of an apparent plan to take that information to a new employer, either one of Two Sigma’s competitors in the U.K. or to start his own business in China.”

Vance filed similar charges last year against three employees of Flow Traders for allegedly stealing that firm’s electronic trading software by e-mailing it to themselves. Sergey Aleynikov, a former Goldman Sachs Group Inc. programmer, was charged in 2012 by Vance with stealing proprietary software code from that firm. All four men have pleaded not guilty.

Computer Files

According to Two Sigma, Gao allegedly accessed computer files created by its employees, used “decompiler” programs to view models hidden from some employees, and sent confidential information to his personal e-mail account. Gao “maintained that information on insecure servers -- even after he confirmed, in writing, that he had destroyed it,” Two Sigma alleged.

Gao is charged with two counts of computer trespass, one count of unlawful duplication of computer-related material, one count of criminal possession of computer-related material and one count of unauthorized use of secret scientific material, according to the criminal complaint.

He is being held in the Manhattan Detention Complex in lieu of $150,000 cash bail or a $500,000 bond pending his next court appearance March 11, according to the New York City Department of Corrections.

Gao’s Attorney

Benjamin Yu, an attorney who said he represented Gao at his arraignment, declined to comment on the charges. Stephen L. Ascher, an attorney with Jenner & Block LLP representing Two Sigma in the lawsuit, declined to comment.

The New York-based firm was started in 2001 by David Siegel, a former chief technology officer at Tudor Investment Corp., and John Overdeck, a former managing director at D.E. Shaw & Co. The firm, which started its analyst survey program in 2008, uses complex mathematical models to decide when to buy and sell securities.

Gao was hired in August 2010 and has been paid “several hundreds of thousands of dollars” over the last four years, according to Two Sigma.

Two Sigma said in its complaint it’s afraid that Gao will attempt to capitalize on the information he allegedly stole if he is released from jail, including sending it to others outside of the firm.

“Because the dissemination and misuse of Two Sigma’s trade secrets would cause irreparable harm to its business, and Two Sigma has the right to retrieve both that information and the compensation it has paid Gao, plaintiff respectfully requests that this court temporarily restrain Gao from further illegal activity until a hearing is held,” the firm said in the complaint.

Court Order

New York State Supreme Court Justice Jeffrey K. Oing today granted Two Sigma’s request for an order blocking Gao from using “using, copying, transferring, sharing, viewing, modifying, selling, leasing” the firm’s intellectual property, trade secrets, confidential information, software and hardware, according to a court filing.

Oing also issued an order freezing Gao’s assets up to $385,000, representing the full amount of his compensation from May 2013 through his resignation. Two Sigma had asked for the order to prevent Gao from disposing or hiding his property in an effort to frustrate enforcement of a possible judgment in the case.

“Two Sigma takes its intellectual property very seriously,” Kelly Howard, a spokesman for the firm, said in an interview outside the courtroom following today’s hearing. “We discovered what we thought was potentially felony criminal behavior. We notified the Manhattan district attorney and we terminated his employment.”

‘Curiosity’

According to the hedge fund’s lawsuit, the firm learned in June that Gao had allegedly reviewed code that didn’t relate to any of the models he had worked on, or was authorized to access. Gao, confronted by his manager the following month, said he viewed the models “out of curiosity,” the firm said. He was ordered to stop and delete the program and the models from his computer, according to the complaint.

In September, Gao again opened another program he wasn’t authorized to view, an “optimizer” that helps search for opportunities to buy or sell assets, according to the firm.

Gao allegedly accessed Two Sigma’s confidential information from home on an unsecured network and sent information to his personal Gmail account, including a presentation outlining research and market overviews used as a guide for analysts developing models for trading in China, the firm said in its court filing.

Last month, Gao contacted a firm engineer for help with the decompiler program and was told it no longer worked because of a scheme the firm had implemented due to concerns with employees using it for “improper purposes,” according to the complaint.

GSA Capital

A few days later, Gao allegedly flew to the U.K. for a job interview with GSA Capital, a competitor of Two Sigma, and earlier this month he wrote a letter to U.S. immigration officials indicating his intention to start a new company in China, according to the lawsuit.

During the next two days, Two Sigma alleged, Gao researched cases involving employee theft of trade secrets and intellectual property.

The criminal case is People of New York v. Gao, 00640-2014; The lawsuit is Two Sigma Investments LLC v. Gao, 650506/2014, New York State Supreme Court, New York County (Manhattan).

--Editors: David E. Rovella, Andrew Dunn