Former Two Sigma Analyst Gao Pleads Guilty to Software Theft

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A former analyst at the quantitative hedge fund Two Sigma pleaded guilty to taking the firm’s data, the second of five men charged in a crackdown on the theft of intellectual property from financial firms to resolve his case.

Kang Gao, 29, a native of China, admitted to a single count of unlawful duplication of computer-related material in a hearing before New York State Supreme Court Justice Jill Konviser in Manhattan today in exchange for a 10-month sentence.

The former analyst was arrested in February 2013 and accused of taking confidential trading models and strategies and other information from Two Sigma. He faced a maximum of four years in prison if convicted of each charge, although prosecutors sought a sentence of no more than three years.

Gao is one of five people to be charged by Manhattan District Attorney Cyrus Vance Jr. in the intellectual-property theft crackdown. Wall Street is increasingly protective of software used for strategies such as high-speed trading, which have become more valuable as firms seek advantages over rivals that can be measured in milliseconds.

“Computer source codes and proprietary trading methods are often the lifeblood of a company’s business model, and stealing them is a crime,” Vance said in a statement. “Kang Gao admitted to copying highly confidential material from his employer before heading to China to meet with investors in the company he hoped to launch.”

Earlier Outcome

Gao’s plea came a day after Jason Vuu, 24, of San Jose, California, was sentenced in the same court to five years’ probation for stealing computer source code and strategies from Flow Traders, an Amsterdam-based trading house.

Vuu, along with another ex-Flow Traders employee, Glen Cressman, 28, of Fort Lauderdale, Florida, and Vuu’s former roommate, Simon Lu, 26, of Pittsburgh, were charged in August 2013 with copying and taking proprietary trading strategy files and computer source code.

All four were charged with the same crimes as Sergey Aleynikov, the former Goldman Sachs Group Inc. programmer accused of stealing software code from his old firm who was an inspiration for Michael Lewis’s best-seller “Flash Boys.”

Aleynikov was freed from federal prison in New Jersey in 2012 after an appeals court overturned his conviction. He was charged for the same conduct by Vance’s office six months later under a state law and is scheduled to go to trial in April.

Defense Lawyer

Gao’s attorney, Marc Agnifilo, said he doesn’t expect his client to serve any additional time as he already spent eight months in detention following his arrest. The lawyer said he anticipates Gao will be deported after sentencing, scheduled for April 28. He is in the U.S. on a work visa and hasn’t been employed, making it likely his immigration status would change if he went to trial, Agnifilo said.

“It’s a reasonable plea,” Agnifilo said after Tuesday’s hearing. “We still maintain it’s an issue of first impression. There are sound reasons to take the plea given his immigration status. It’s a reasonable and practical solution to this very difficult legal matter.”

Two Sigma, which also sued Gao over the alleged theft, uses complex mathematical models to decide when to buy and sell securities. The New York-based firm was founded in 2001 by David Siegel, a former chief technology officer at Tudor Investment Corp., and John Overdeck, a former managing director at D.E. Shaw & Co. Gao was a financial research analyst for the firm from about August 2010 until he resigned in February.

Company Statement

“Earlier today Kang Gao pleaded guilty and admitted under oath that he committed the felony of unlawful duplication of computer related material in the first degree in connection with Two Sigma’s intellectual property,” Two Sigma said in a statement. “The intellectual property is integral to our support for our investors, which include some of the world’s largest public and corporate pension plans, educational endowments and foundations, among many others.”

Gao attended Peking University before transferring to the Massachusetts Institute of Technology, where he graduated in 2009 with degrees in physics and electrical science and engineering. He worked as a summer intern at Merrill Lynch & Co. in New York and, after graduation, at DRW Holdings LLC in Chicago before taking an analyst position in 2010 with Two Sigma.

Prosecutors said Gao used a remote access device to view the firm’s confidential trading models and e-mailed documents to himself that included trading strategies, models and a marketing presentation from August 2013 to February 2014. All of the firm’s employees are forbidden from taking, disclosing or distributing its modeling information.

New Company

Gao flew to China in December 2013 after duplicating some of the information and met in Beijing with a wealthy potential investor for a company he wished to start, prosecutors said.

According to its lawsuit, which is pending, Two Sigma confronted Gao after learning he had viewed code unrelated to trading models he had worked on. Gao said he looked at the code “out of curiosity,” according to the complaint.

He continued to view information he wasn’t allowed to see on his home computer and repeatedly e-mailed confidential information to his personal Gmail account, including research on trading in China and a new method to improve models, the hedge fund said in its suit.

In January 2014, Two Sigma said, Gao flew to the U.K. for a job interview with GSA Capital Partners LLP, a competing hedge fund.

Change Planned

Upon his return, he continued viewing models that he wasn’t authorized to access, wrote a letter to U.S. immigration officials indicating his intention to resign from his job and start a company in China, and researched cases involving employee theft of trade secrets and other intellectual property, Two Sigma alleged.

On Feb. 5, after winning a job at Citadel LCC in Chicago, Gao resigned from Two Sigma. Six days later, he was arrested during his exit interview and taken to jail. Citadel rescinded its job offer a week later.

Konviser last year denied a request by Gao’s attorneys to throw out the charges. His lawyers argued that the information Gao was accused of taking was written by Gao himself and wasn’t proprietary to Two Sigma.

The criminal case is People of New York v. Gao, 00640-2014, New York State Supreme Court, New York County (Manhattan).