Wednesday, August 26, 2009

Goldman Quant Case Continues

The Goldman quant case that brought High Frequency Trading into the blogosphere keeps getting interesting. The ex-Goldman quant sure sounds guilty. Why hire a programmer who came to Goldman without financial experience, and worked there only a couple years, for $1.1MM? Whence did he get this alpha? He had several megabytes of code relating to a trading program explicitly referenced in his confidentiality agreement, and was going to implement a high frequency trading algorithm.

I did realize that Citadel used the Goldman criminal case as an opportunity to enforce a litigation noncompete on the firm the ex-Goldman worker was planning on working for, filing a motion days after the initial Goldman arrest, probably based in part on information revealed in that case.

But what I found most interesting is that the phrases used in the complaintseem cut and pasted from my 18 month Kafkaesque nightmare.

From the NYT Aug 23 story on the Goldman case:
As part of the suit, Citadel detailed the extraordinary steps it takes to protect its software.

From my ex-employer's argument for a temporary restraining order:
Telluride...uses multiple layers of security

From the Citadel case:
While Teza is not yet conducting any trading, Citadel claimed the former employees had violated a noncompete agreement with Citadel and might even be trying to steal Citadel’s code, causing “irreparable harm.”

From my ex-employer's Temporary Restraining Order brief against me:
Telluride will suffer irreparable harm unless the Court enjoins Falkenstein from disclosing and using the confidential and trade secret information that Telluride entrustsed to Falkenstein...

From the Goldman case:
the proprietary code lets the firm do “sophisticated, high-speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.

From my Dec 07 hearing:
The Court: How much is at stake in this litigation, in terms of assessing the potential cost?

Telluride Lawyer: Unknown at this point. It could be tremendous. As you know, hedge funds deal in multimillions, hundreds of millions of dollars

Legal briefs are stored in hard-to-access form that makes searching by case, let alone key words, extremely difficult. Thus it is not obvious how repetitive their arguments are, except when you actually read them. A good argument one year by the other side, often makes it into your side the next year if you are on a different case, because in law it's all about whatever works (aka 'justice'). Thus, a lawyer can cut and paste arguments from other cases, and his clients don't know he's getting paid $500/hour to have his secretary retype a similar case and then do a 'replace' on the party's names. 'Irreparable harm'. 'Millions of dollars'. 'Extraordinary steps to secure trade secrets'. Judges must feel like they are stuck in Groundhog Day, seeing the same cases, only with different people.

If you worked for a large firm and you have any files on any computer in your possession that has files, even deleted files, on your hard drive, it could cause irreparable harm.

How much money, exactly? Well, financial firms generally have millions of dollars in assets, transactions, or both, so you can say millions.

And the precautions taken prove that the allegation is precisely the kind of thing the company, and our system of laws, is concerned about.

As the intellectual property in question is undefined at this stage of litigation, the accuser has broad rights for a fishing expedition that could take years, because very few states require a complaint define such property at the outset. It could be anything. The firm could be trading based on the Bible Code, and so merely having the number "27182" in a txt file from your employment could, and I stress could, relate to the Equidistant Letter Sequence number one must move forward from in Genesis to predict future events. That's for experts and juries to decide, not judges at the initiation of litigation. In the meantime, the defendant is unhirable, because he cannot prove he is not using the strategy in dispute, which is undefined. It is costly for both parties, but that's the point of litigation in many cases. Cases rarely go to trial because it can take years, and expenses balloon along the way, making the endgame (ladies and gentlemen of the jury) almost irrelevant.

The nasty thing about intellectual property cases is that one can use it to start discovery on a broad scope of information, and then generate a post hoc definition of what is covered. The key is that overbreadth in technical matters is not obvious. For example, one can say, "he took the secret of mean-variance optimization", and by the time the court figures out such a claim is absurdly overbroad, a more tenable claim can be made, such as 'a specific application of mean-variance opitimization that will be defined after discovery'. To the defendant, both claims place all his activities as potentially poisoned, so the effect on the defendant's ability to work is unabated. But to the court, the latter works as long as he has some deleted files on his home computer related to his work, and 'related' can be rather boring stuff that the court does not recognize as well-known, such as a spreadsheet with S&P returns and Excel formulae.

The key is that for anyone who does not throw away all their old computers and meticulously make sure all his files are unrelated to his old employer, judges can not tell if it's The DaVinci Code or a boring statistical evaluation of public data. Claims are allowed to change or replaced entirely so the accuser is not stuck with original, deficient claims that might surely stop the process.

Basically, the law allows companies broad leeway to inflict a lot of damage via intellectual property litigation. But why would firms do this if they don't have a real concern? Signaling (eg, precedent setting) is a rational reason, paranoia an irrational one. They then take the case out of a cost-benefit calculus to the one being accused, making them a means to an end unrelated to anything they have done or could do; you can't simply appeal to their 'self-interest' because sometimes that primarily involves crushing you like a bug. If this happens to you and you are innocent you're pretty much screwed, so the best defense is to check out the legal history of who you might work for, read briefs, and look for a pattern.


ilene said...

Hi Eric,

Have you discussed more about what happened to you somewhere previously?

Thanks, Ilene


Eric Falkenstein said...

Ilene. Well, I have a bunch of legal documents linked at There's a little commentary there. There's a nifty article in over at on some of the action.

I've moved on, but it was definitely the worst experience of my life.