A former hedge fund analyst has been charged with stealing confidential computer data from his previous employer, the latest crackdown by the Manhattan district attorney on suspected violations of cybersecurity.
The five felony charges against Kang Gao, who worked at the hedge fund Two Sigma Investments, include computer trespass and unlawful duplication of computer related material. A grand jury indicted Mr. Gao, a spokesman for the district attorney’s office said. Specific charges in the indictment are scheduled to be disclosed next month.
Mr. Gao was arrested on Feb. 11, and Two Sigma filed a civil lawsuit three days later, according to court documents. The hedge fund, which specializes in a computer-driven investment strategy called quantitative trading, contends that Mr. Gao planned to give confidential information on its models to a competitor or use it to start his own firm in China. Mr. Gao is a Chinese national.
Quantitative trading relies on mathematical modeling software that firms often develop on their own. In its suit, Two Sigma calls its models the “lifeblood of its business†and seeks to ban Mr. Gao from sharing any of its intellectual property while litigation is pending.
Mr. Gao did not appear at a hearing in the lawsuit on Thursday, when a judge ordered an injunction that bars him from using or transferring any of Two Sigma’s proprietary information.
“The distribution of Two Sigma’s intellectual property to current or potential competitors would cause it irreparable harm and grave hardships to the company (and its clients),†according to the company’s original complaint. Two Sigma wants the court to order Mr. Gao to hand over his phone and other hardware, among other demands.
Two Sigma also wants Mr. Gao to forfeit $384,000, his “compensation during his period of disloyalty,†which the firm contends began May 13. The judge ordered that $385,000 remain in Mr. Gao’s Bank of America account.
Two Sigma, which was founded in 2001, has $18.5 billion under management, according to Kelly Howard, Two Sigma’s senior vice president for marketing and communications. The company’s modeling teams “work with vast data sets - from corporate earnings to news and weather reports,†according to its website.
Mr. Gao, a 28-year-old graduate of the Massachusetts Institute of Technology, began working at Two Sigma in 2010 as a quantitative analyst. He resigned days before his arrest, according to the company’s lawsuit.
A lawyer for Mr. Gao in the criminal case, Benjamin Yu, said his client had pleaded not guilty to all five charges. It is unclear whether Mr. Gao has a lawyer representing him in the civil case.
Cybercrime has been a top priority for Cyrus R. Vance, the Manhattan district attorney. Mr. Vance has publicly advocated for strengthening the laws against identity and computer code theft, and his office has bolstered its cyberforensic activity and facilities in recent years.
The district attorney’s office pursuing charges against Sergey Aleynikov, a former Goldman Sachs programmer accused of stealing confidential source code from the bank’s computers. Mr. Vance decided to pursue Mr. Aleynikov after a federal appeals court overturned his federal conviction in essentially the same case in 2010.
But while Mr. Vance may want to crack down on white-collar cybercrime, legal experts point to a number of hurdles. For one, few precedents exist in state courts, and similar cases have met with mixed results in federal courts, where the definition of computer trespass and unauthorized access is less well defined.
“This is an increasingly common situation and the law here is pretty murky,†said Orin S. Kerr, a law professor at George Washington University. “The question is, if you violate an employee agreement about use of a computer, is that like hacking into the computer?â€
In its complaint, Two Sigma said that Mr. Gao breached his employment agreement by looking at confidential models he did not have a right to view. Mr. Gao admitted to Mr. Vance’s office that he emailed himself models he was not permitted to view, according to the criminal charges.
“Two Sigma takes the protection of our intellectual property very seriously,†Mr. Howard said, adding that the firm alerted Mr. Vance’s office once they began to suspect criminal activity.
Two Sigma also contends that before his arrest, Mr. Gao researched cases of people who stole intellectual property and trade secrets from their employers and tried to transfer $100,000 into what the firm believes was the account of his girlfriend, a research associate at Morgan Stanley.
In court documents, the firm pointed to the transfer as potential evidence that Mr. Gao was trying to start a new business using trade secrets.
