High Frequency Trading Can Be a High Risk Endeavor — Another Trade Secrets Prosecution

By: Sara Kropf

The latest entrant into the Cover-Up Is Worse Than the Crime Hall of Fame is Sahil “Sonny” Uppal, a 26 year old former employee of Citadel LLC. He pleaded guilty to one count of obstruction of justice for hiding his unauthorized sharing of proprietary information related to Citadel’s high-frequency trading practice.

Mr. Uppal worked at Citadel, a Chicago-based financial institution, as a quantitative analyst, writing code for Citadel’s equity trading platform. But Mr. Uppal apparently decided to do more than programming. Instead, he made unauthorized copies of Citadel’s confidential and proprietary information related to high frequency trading, and then covered it up.

Now, the former analyst faces some serious prison time.

High Frequency Trading and Citadel Confidentiality

One of the services Citadel provides is high frequency trading. High frequency trading consists of the rapid buying and selling of publicly traded stocks in order to profit from the minute changes in an equity’s price. Firms like Citadel use computer algorithms to both predict the tiny price variations and execute the trades in the fractions of a second necessary for high frequency trading.

To protect its high frequency trading platform, Citadel has strict policies regarding how its employees may handle the company’s confidential information and intellectual property. Citadel has both a company handbook and a non-disclosure agreement to ensure that its employees are aware of these policies.

Before beginning work at Citadel, Mr. Uppal signed both the handbook acknowledgment form and the non-disclosure agreement. These documents prohibited copying, sharing, or using Citadel confidential and proprietary information except in connection with duties in the scope of his employment.

File Sharing and The Cover-Up

Mr. Uppal wrote three programs for Citadel, which the indictment calls “File 7,” “File 8,” and “File 9” (creative, huh?). These files were programs that would ultimately be used to develop quantitative trading models for the Citadel high frequency trading platform and were consequently Citadel’s intellectual property.

Despite that fact, on July 26, 2011, Mr. Uppal allegedly transferred all three files to a computer jointly accessible to both himself a coworker, Yiaho “Ben” Pu.

Unfortunately for Mr. Uppal, Citadel learned of the transfer. Later in the afternoon on July 26, Mr. Uppal went to Mr. Pu’s apartment where he met with Mr. Pu and another person, referred to only as “Individual A”.

At that meeting, Mr. Pu told Mr. Uppal that Citadel had confronted Mr. Pu, telling him that it knew that Mr. Pu had possession of its proprietary information.

Mr. Uppal and Individual A then tried to cover up Mr. Pu’s conduct. Before they left the apartment, they boxed up Mr. Pu’s personal computers, cables, hard drives, and monitors, along with the proprietary Citadel data stored there.

The alleged cover-up did not end there. At the end of August, 2011, Citadel representatives came to speak with Mr. Uppal. They asked him how Mr. Pu obtained confidential business information from Citadel. Mr. Uppal gave the Citadel representatives a portion of the story, but intentionally omitted both the fact that he had transferred Files 7 through 9 to a jointly accessible computer and that he had helped Mr. Pu transport and hide his computers and hardware.

The Prosecution and Guilty Plea

Mr. Uppal’s subterfuge was of little use. Mr. Pu was arrested shortly afterwards in 2011 and charged with ten counts of trade secrets theft and three counts of computer fraud. Two years later, the government filed a superseding indictment in 2013, which added Mr. Uppal as a defendant and added additional charges.

In early August, Mr. Uppal pleaded guilty to one count of obstruction of justice, in violation of 18 U.S.C. § 1519. Mr. Pu pleaded guilty to unlawful transmission of a trade secret belonging to Citadel and unlawful possession of a trade secret belonging to another employer.

Mr. Uppal must execute a financial statement and provide it to the government, as part of the plea agreement. He faces a maximum sentence of 20 years in prison, a $250,000 fine and three years of supervised release. However, the plea agreement notes that the government believes the sentence is likely between 12 and 18 months.

The Trade Secrets Trend

There have been several trade secrets prosecutions recently, demonstrating that private companies and the federal government take these crimes seriously or they are occurring more often (or, perhaps, both). Certainly, many companies’ most valuable assets are now wholly in electronic form and thus shared or stolen more easily.

The plus side for the companies and the government is that it’s nearly impossible to steal those assets without leaving some sort of electronic trail of bread crumbs.

What’s interesting at this case is that there was no clear motive, at least from the plea agreement. It is far from clear what Mr. Uppal and Mr. Pu intended to do with the stolen files. After all, the trade secrets were neither shared with a competitor nor shared outside of Citadel. Mr. Uppal does not appear to have benefitted financially from the unauthorized sharing at all.

There is one vague allegation in the complaint that the two defendants sent an email suggested that they intended to start their own “fund,” but it does not appear from any of the court documents that they took any other steps to set up this other “fund” or that this crime was necessarily part of that effort.

Let’s just hope that the judge all of these facts into account at sentencing on December 4, 2014.

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