Two Sigma Analyst Accused Of Stealing Data

Feb 20 2014 | 11:18am ET

A former Two Sigma Investment analyst has been arrested and charged with stealing the hedge fund's proprietary models.

Kang Gao remains jailed following his arrest last week. The Manhattan district attorney's office alleges that the 28-year-old Chinese native used a decompiler to access models he was not permitted to view and sent those and other parts of Two Sigma's data to a personal e-mail account.

In a lawsuit filed after Gao's arrest that mirrors the criminal charges against the analyst, Two Sigma alleges that Gao planned to take its information "to a new employer, either one of Two Sigma's competitors in the United Kingdom, or to start his own business in China."

Two Sigma said it first became suspicious of Gao in June, when it learned he had used the decompiler. Gao told the firm that he looked at the restricted models only out of curiosity. But last month, the hedge fund said, he asked a research engineer for help using a decompiler. He then flew to the U.K. for an interview with GSA Capital.

Two Sigma said Gao also told U.S. immigration officials that he planned to return to China to start his own company.

"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," the hedge fund wrote.

The allegations against Gao are similar to those faced by former Goldman Sachs programmer Sergey Aleynikov, who allegedly stole the bank's proprietary trading software to take it to a new job at a controversial high-frequency trading firm founded by former Citadel Investment Group traders.

According to Two Sigma, Gao has retained its data "on insecure servers—even after he confirmed, in writing, that he had destroyed it." Prosecutors said Gao has admitted to a senior investigator in the D.A.'s office that he e-mailed himself the models.

Gao, who has been charged with computer trespass, unlawful duplication of computer-related material, criminal possession of computer-related material and unauthorized use of secret scientific material, remains in the Manhattan Detention Complex pending payment of $150,000 in cash or a $500,000 bond. He is due back in court on March 11.

Two Sigma said it fears that Gao will send its data to others if he is released from prison.

"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."

Gao has pleaded not guilty. His lawyer, Benjamin Yu, said he had "no nefarious purposes" in sending himself the data.

Gao worked at Two Sigma from August 2010 until his resignation on Feb. 5. The hedge fund said it paid him "several hundreds of thousands of dollars" over that period, including $547,000 last year alone.


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