Long trade secrets case nears an end

Suit concerned algorithms, formulas that aid high-frequency investing

What do a Ukrainian mathematician and physicist, a Wisconsin securities lawyer nicknamed Emo, a secret meeting at a Greek Orthodox monastery in Arizona, the patron saint of St. Petersburg and a hugely successful — but underthe-radar — privately held Houston financial research firm have in common?

They are all part of a bizarre, decade-long legal battle that has taken place in the courts of Houston involving secret algorithms and mathematical formulas that aid high-frequency trading and result in tens of millions of dollars in revenues. Highfrequency trading uses powerful computers to rapidly trade large volumes of stock

The litigation started as a lawsuit in state court in Houston, was interrupted by an FBI investigation and then re-emerged in a federal court trial that resulted in a $12.2 million judgment.

Finally, the case appears at an end. On Thursday, the U.S. Court of Appeals for the Fifth Circuit upheld a 2015 Houston jury verdict that found that Ukrainian mathematician Andriy Kuharsky and Wisconsin securities lawyer and entrepreneur Emmanuel Mamalakis violated federal trade secret rights of Houston-based Quantlab Technologies. In a 14-page opinion, a threejudge panel affirmed the jury’s award of $12.2 million to Quantlab and said that objections by Kuharsky and Mamalakis “have no merit.”

Quantlab general counsel Tim McInturf, in an interview with The Texas Lawbook, said the appeals court decision is a huge victory for the Houston financial trading firm and a very important one to businesses in the world of high-

frequency trading.

“Our intellectual property and know-how are among our most valuable assets,” says McInturf. “The U.S. economy is based upon knowledge and innovation. The best thing we can do to protect high-wage jobs is to protect our IP.”

The case dates to 2004, when Quantlab hired Kuharsky and fellow Ukrainian Vitaliy Godlevsky, a physicist, to work on the financial research firm’sTheir job was to find trends and patterns in large amounts of data.

Both men signed confidentiality agreements that they would not disclose or use any of Qu ant lab’ s proprietary mathematical models, algorithms or formulas that the company employs as part of its trading strategy.

In 2007, Quantlab fired the duo due to “serious performance deficiencies.”

Quantlab claimed — and the jury agreed — that Kuharsky and Godlevsky “copied large amounts of Quantlab source code and other proprietary information over the internet on at least nine occasions, improperly using a Quantlab’s employee’s network credentials.”

The pair also made copies of the source code and thousands of pages of Quantlab’s confidential files, which they placed on CDs, DVDs and at least 13 different electronic storage devices, court documents show.

That same year, Godlevsky was visiting a Greek Orthodox monastery in Arizona where he just happened to meet Mamalakis, who was a former securities litigator from Milwaukee.

The two men decided to create their own highfrequency trading firm. They called the business SXP Analytics, which they named after Xenia, who was the patron saint of St. Petersburg, Russia, in the late 1700s. The men planned to give portions of their profits to the poor.

Kuharsky joined SXP as an employee for a short period. The company’s revenues and profits soared.

Quantlab officials noticed the extraordinary success of SXP and filed a lawsuit in Houston claiming that its former employees conspired to steal and misappropriate Quantlab’s trade secrets — allegations that SXP officials denied.

But the civil complaint was put on hold at the request of the U.S. Attorney’s Office in Houston when the FBI raided SXP’s offices and the homes of its employees. While federal prosecutors in Houston never brought criminal charges, court documents show that the FBI investigation unearthed evidence that Kuharsky downloaded code from Quantlab servers after he left the company.

In 2009, Quantlab filed a new lawsuit in federal court alleging that its trade secrets were taken and misappropriated. On the eve of trial in May 2015, God lev sky, SXP and other defendants reached an out-of-court settlement that reportedly paid $28 million to Quant lab.

Kuharsky and Mamalakis were not part of the settlement agreement. They took their case to trial and a Houston jury ruled for Quantlab and ordered the men to pay $12.2 million in damages.

The Fifth Circuit heard oral arguments in the case on June 6. Sixteen days later, it rejected the defendants’ appeal and gave Quantlab a complete victory.

Kuharsky and Mamalakis could not be reached for comment.