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Analyst Charged With Stealing Quant Trading Models From Major Hedge Fund

This article is more than 10 years old.

Manhattan District Attorney Cyrus Vance Jr., has accused a former hedge fund analyst of stealing documents that detailed the methods and application of two trading models from a major New York hedge fund firm that specializes in quantitative trading.

Kang Gao, a 28-year-old who until recently worked as a quantitative analyst at Two Sigma Investments, was arrested last week and charged by the Manhattan District Attorney of felony offenses, including computer trespass, criminal possession of computer related material and unauthorized use of secret scientific material. Gao admitted to Matthew Winters, a senior investigator of the New York County District Attorney’s Office, that he had emailed himself models that he was not permitted to view, according to a felony complaint filed in New York state court in Manhattan. Gao emailed to his personal email account copies of documents describing the trading models in late January and emailed a confidential presentation outlining research and market overviews in August, the court document says.

Gao pleaded not guilty to the charges, according to his lawyer, Benjamin Yu. "My client indicated he is innocent of all charges and any incidents had no nefarious purposes," Yu said.

Two Sigma, which manages some $14 billion, was founded in 2001 by John Overdeck and David Siegel, former high-level employees of hedge fund firm D.E. Shaw & Co. Gao, a Chinese national who came to the U.S. in 2006 to study at the Massachusetts Institute of Technology, started working for Two Sigma in 2010 as a computer system analyst. He was paid $547,000 in base salary and bonuses last year, according to a court document filed by Two Sigma. Gao resigned from Two Sigma on February 5. Two days later, Two Sigma notified the Manhattan District Attorney’s Office of “unlawful actions,” according to a civil complaint Two Sigma filed against Gao that says Two Sigma’s trading models “are the lifeblood of its business.”

Quantitative trading is a secretive and potentially lucrative corner of the rich hedge fund world, producing some of the industry’s most successful firms, like Renaissance Technologies and D.E. Shaw. Two Sigma has emerged as one of the relatively newer successful quant funds. Firms like these go to extraordinary lengths to guard their trading secrets and Two Sigma says in a court document that it employs sophisticated masking programs and firewalls, and closely monitors its employees’ computer usage.

But the overwhelming efforts by financial firms and government prosecutors to protect mathematical trading models has at times appeared overzealous to some, an issue with which Vance is sometimes associated. Vance is currently prosecuting Sergey Aleynikov, a computer programmer whose federal conviction for stealing code from Goldman Sachs was overturned by a federal appeals court in 2012. Vance then arrested Aleynikov again and charged him with two felonies, a criminal prosecution that has survived Aleynikov’s efforts to get the case dismissed.

According to the 21-page civil complaint filed by Two Sigma against Gao in New York state court, the hedge fund learned in early February that Gao 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 United Kingdom, or to start his own business in China." Gao accessed computer files created by other Two Sigma employees and used “decompiler” programs to view models that had been carefully hidden from employees, the complaint filed by Two Sigma says. “Two Sigma gathered such powerful evidence of Gao’s pervasive misconduct that he has been arrested, and he has admitted to improperly accessing and using its intellectual property,” Two Sigma says.

Two Sigma claims it first became suspicious of Gao in June 2013, when a senior managing director at the hedge fund firm confronted Gao about his use of a decompiler program to view code that did not relate to any of his models and that he had no authorization to access. Two Sigma claims Gao admitted to viewing the models and indicated he was only motivated by curiosity. But Two Sigma claims Gao continued viewing the mathematical models for hours and emailed data to his personal email account. Two things made Two Sigma suspicious about Gao in January, the hedge fund firm's complaint against him says. First, Gao contacted a Two Sigma research engineer and asked for help using a decompiler program. Second, Gao flew to the U.K. for a job interview with GSA Capital, a competing hedge fund. Two Sigma also obtained a copy of a letter Gao wrote to U.S. immigration officials, concerning his intention to start a new company in China.

Gao is currently being held in the Manhattan Detention Complex and a New York state judge has set bail at $500,000 with a $150,000 cash alternative. Gao was also ordered to surrender his passport and shut down his gmail account, a court document says.