SXP Settles Quantlab Code-Theft Claim as Founders Go On Trial

(Bloomberg) —SXPAnalytics LLC and a group of its programmers avoided trial with a last-minute settlement of claims that they used Quantlab Technologies Ltd.s high- frequency trading computer code to start the company. TwoSXPfounders pressed ahead with proceedings that started Monday.

The civil trial in Houston follows Fridays criminal conviction in New York of Sergey Aleynikov, whom a jury found guilty of illegal use of secret scientific material after he downloaded computer code from Goldman Sachs Group Inc.

Wall Street firms are increasingly protective of software code and trading models that may give them an edge over rivals through strategies that include high-speed trading — filing criminal and civil complaints against former employees suspected of having illegally taken computer codes to competitors.

Ukrainian quantitative research scientist Vitaliy Godlevsky settled allegations he used Quantlabs family recipe to co- foundSXPin Houston in 2007, U.S. District Judge Keith Ellison said just before jury selection began. Two software engineers accused of taking part in the scheme agreed to have judgments entered against them over the weekend, Ellison said.

SXPagreed to pay $28.5 million to resolve complaints about its role in the alleged conspiracy, according to court papers filed Sunday.

Andriy Kuharsky, 46, a quantitative research scientist who partly developed the computer code, went on trial Monday. His lawyer asked prospective jurors not to make the scientist pay any of the $64 million damages Quantlab claims the conspiracy caused.

More Files

Were not going to deny Mr. Kuharsky had more of these files than he should have, David Holmes, Kuharskys lawyer, told jurors.

Holmes said the files werent used to createSXPtrading code and Kuharsky never made any money off the strategy.

Theyre asking you to award $90 million in damages, for nothing, Holmes said.

Emmanuel Mamalakis, 39, a Wisconsin entrepreneur who recruited the two former Quantlab researchers and bankrolledSXP, also went on trial Monday.

Acting as his own attorney, Mamalakis asked potential jurors not to confuse Quantlabs allegations against him with those against his former business partner, as there have been findings of liability on one that have not been found on the other.

Ellison ruled on April 27 that Kuharsky and Godlevsky were liable for misappropriating trade secrets as punishment for having destroyed so much computer evidence that the judge said it may be impossible to ever learn what happened with the code.

Evidence Lost

A staggering amount of evidence potentially relevant to this case has been lost, Ellison said in one of several sanctions rulings. And while the loss of any one device or computer or document may seem relatively inconsequential, viewed as a whole, the intentional destruction of key evidence warranted a severe penalty on some allegations.

Ellison ruled last year that Mamalakis was liable for copyright infringement and said jurors would be allowed to factor in the missing evidence – destroyed when Mamalakis ordered SXPs computer workstations wiped clean in 2012 – that Quantlab claims wouldve proven its conspiracy case.

Criminal Charges

The U.S. Justice Department declined to bring charges against the alleged conspirators after a 3 1/2-year FBI investigation failed to turn up enough evidence of criminal wrongdoing. Agents raided homes and businesses belonging to four former employees in March 2008, confiscating every conceivable electronic storage device including cameras and a childs video game system.

Kuharsky and Godlevsky maintained through seven years of litigation that they never intentionally used stolen code in formulating new strategies forSXP. They said any electronic files or fragments of Quantlab code found on their personal computers after they were fired in 2007 were accidentally transferred while the researchers reused thumb drives belonging to friends or lovers who still worked at the company. They said the code also could have been downloaded when they let former colleagues borrow their laptops.

From Scratch

The accused programmers claim they built SXPs new code from scratch, in record time, because they built on their general knowledge of high-frequency trading strategies available on the Internet.

Apparently, Quantlab wants the court to find that because they are a high-frequency trading company, any other high- frequency trading companies that exist after them must have stolen their trade secrets, Mamalakis said in a filing last month.

Quantlab told prospective jurors the alleged conspirators saved millions of dollars in development costs because they got a head start without having to spend six to seven years developing the strategies.

Theyd already gone through the trial and error of false starts, said Lee Kaplan, Quantlabs attorney. They used the stolen code to start a competing company that made a lot of money based on information it should not have had.

The case is Quantlab Technologies Ltd. v. Godlevsky, 4:09-4039, U.S. District Court, Southern District of Texas (Houston).