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Ken Griffin

Misha Malysev and Teza Technologies Sued By Citadel Investment Group

On July 9th 2009, another legal shoe dropped in the case of Sergey Aleynikov and his would be new employer Teza Technologies. Ken Griffin's Citadel Investment Group is now suing its former head of high-frequency trading Misha Malysev and two other former employees, Jace Kohlmeier and Matthew Hinerfeld, alleging that their formation of a new trading firm violated a non-compete agreement they had with Citadel.

As The Wall Street Journal reports, "The identity of Malyshev's new firm, Teza Technologies LLC, became very public this week, when it said it hired and subsequently suspended former Goldman Sachs computer programmer Sergey Aleynikov. Aleynikov has been charged by the U.S. with stealing computer code from Goldman's high-frequency trading business. Aleynikov and his lawyer have asserted that any violation was unintentional, and that he didn't distribute any codes obtained from Goldman."

The Citadel complaint was filed in the Chancery Division of Cook County, Illinois Circuit Court. The complaint asks the court for an expedited hearing in the case, saying that Teza could cause "irreparable" harm to Citadel. It also mentions the Aleynikov affair, stating, "Teza's decision to hire Aleynikov, an accused software thief, creates a substantial risk that they have stolen, or may be planning to steal, Citadel's proprietary code."

As part of the complaint, Citadel attached copies of the non-compete agreements and resignation acceptance letters of the former employees. Malyshev's agreement states that for nine months following his February 2009 departure, he cannot start working for a "competitive enterprise" or use "quantitative analytics which are based on information that is proprietary to Citadel and which I either utilized or developed when I was employed by Citadel." The WSJ notes that Citadel's non-compete agreements are widely considered to be among the more stringent in the hedge-fund business.

Citadel Investment Group To Try To Raise $500 Million

The weekend edition of the Wall Street Journal on Saturday, December 6th contains a small article about how Citadel Investment Group Seeks to Raise $500 Million. The funds supposedly are going to be added to the $2 billion Citadel Tactical Trading fund, which is up more than 40% this year. This is a smaller fund to the much larger Kensington and Wellington funds and now includes Citadel's profitable market-making business.

The larger Kensington and Wellington funds have performed miserably this year. Supposedly they are down approximately 47% through the end of November 2008 and lost approximately 13% during the month of November alone. CEO Ken Griffin's plan apparently is to use the funds raised for the Citadel Tactical Trading fund to purchase approximately half of the combined equity portfolio from both of the larger multi-strategy funds.

According to the letter sent out from Citadel Investment Group about this limited offer, “Citadel Kensington and Citadel Wellington will experience reduction in the risk associated with their portfolios and enhanced liquidity from the transfer of a substantial portion of the Global Equities portfolio." Apparently, Citadel’s stock-picking team, with about 80 employees, has made money this year and will manage the equity positions of the Tactical Trading fund, the letter said.

Toomre Capital Markets LLC ("TCM") wonders though whether in this case Citadel Investment Group and Ken Griffin are talking out of both sides of their mouth. The two multi-strategy funds will be losing a substantial portion of the Global Equities portfolio, one that was supposedly profitable for 2008. Does that not mean that existing investors in the two funds will have more concentration in other strategies that contributed such miserable return numbers?