Criminal Charges Filed Against Employees of Financial Services Firm
The financial crisis has resulted in a greater reliance on revenues from sales and trading desks at many financial services firms. With that, increased employee mobility has become a reality as firms struggle to attract the most successful trading teams and individuals who can contribute to improved profits. With that increased mobility there is a far greater risk that proprietary trading programs and methods will move with those individuals.
Financial services firms have a number of potential civil remedies against employees who misappropriate their trade secrets or confidential and proprietary information. There also are a number of federal and state statutes that make the theft of trade secrets a crime and that provide for severe penalties for such activities. Although criminal charges act as a powerful deterrent against the theft of trade secrets, federal and state law enforcement officials historically have not filed many criminal cases against employees for misappropriating trade secrets. However, this may be changing.
In two recent cases, the United States Attorney’s Office for the Southern District of New York filed criminal charges against financial services industry employees for the theft of their employers’ trade secrets. On April 19, 2010, the United States Attorney’s Office filed a criminal complaint against a former Société Générale employee, charging the former employee with one count of theft of trade secrets in violation of the Economic Espionage Act. According to the complaint, shortly before resigning from his position as a trader in Société Générale’s High Frequency Trading Group, the former employee printed out and took copies of Société Générale’s proprietary high frequency trading computer code, which is used to run the firm’s high speed trading operations in various securities markets. The Complaint alleges that the computer code had taken several years and millions of dollars to develop and that Société Générale had taken significant steps to ensure the confidentiality of the computer code. Following the denial of his bail application, the former employee remains in custody today.
On February 11, 2010, the United States Attorney’s Office filed an indictment against a former Goldman Sachs computer programmer, charging the former employee with one count of theft of Goldman Sachs’ high frequency trading computer code in violation of the Economic Espionage Act, one count of the transportation of stolen property in foreign commerce and one count of unauthorized computer access in violation of the Computer Fraud and Abuse Act. According to the Indictment, on his last day working at Goldman Sachs, the former employee transferred substantial portions of Goldman Sachs’ proprietary computer code for its trading platform to an outside computer server in Germany. After transferring the files, the former employee deleted the computer’s "bash history," which records the most recent commands executed on the computer. The Indictment also alleges that the former employee had transferred thousands of computer code files related to the firm's proprietary trading program from the firm's computers to his home computers, without the knowledge or authorization of Goldman Sachs. The former employee was arrested after he brought copies of Goldman Sachs’ proprietary computer code to his new employer, a newly formed company that had hired him to develop a high frequency computer trading program.
These cases may signal an increased willingness by the United States Attorney’s Office and the Federal Bureau of Investigation to pursue cases involving the theft of intellectual property. When confronted with a situation involving an employee’s theft of confidential and proprietary information, employers should consider whether the matter should be referred to law enforcement authorities in addition to, or in lieu of, seeking traditional civil remedies against the employees.
Second Circuit Clarifies Standard for Preliminary Injunction in Trade Secrets Cases
Injunctive relief is sought in the majority of cases involving the misappropriation of trade secrets and violations of post-employment restrictive covenants. For several decades, the Second Circuit has applied the same standard when determining whether to grant a motion for a preliminary injunction. Under this standard, a party seeking injunctive relief must show (a) irreparable harm; and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief. Other Circuits have refused to include the more flexible "serious question" alternative test as part of their preliminary injunction standard. In addition, three decisions of the Supreme Court in 2008 and 2009 arguably called into question the Second Circuit’s continued use of the "serious question" standard.
However, on March 10, 2010, the Second Circuit rejected the argument that its "serious question" standard had been rejected by the Supreme Court and reaffirmed the use of the "serious question" standard. See Citigroup Global Markets, Inc. v. VCG Special Opportunities Master Funds Ltd., 08-6060- cv (2d Cir. March 10, 2010). The defendant in the Citigroup case argued that the Supreme Court’s omission of the "serious question" standard in three recent cases involving preliminary injunctions precluded the use of the "serious question" standard as an alternative to demonstrating a likelihood of success on the merits. The Second Circuit rejected this argument, noting that the "serious question" standard was as rigorous as the "likelihood of success" standard and that the Supreme Court had not abrogated the "serious question" standard.
The Second Circuit’s continued use of the more flexible "serious question" standard differs from the standards applied by other Circuits and state courts, including New York state courts. It is important for employers to consider these and other differences when drafting forum selection clauses for postemployment restrictive covenants and when selecting the forum in which to file an action for misappropriation of trade secrets.
California Supreme Court Rules That Forfeiture Provision in Deferred Compensation Plan Did Not Violate the California Labor Code
In Schachter v. Citigroup, 218 P.3d 262 (Cal. 2009), the California Supreme Court held that the forfeiture provision contained in Citigroup’s incentive compensation plan did not violate the wage payment requirements under the California Labor Code. According to the terms of Citigroup’s incentive compensation plan, eligible employees could elect to purchase shares of restricted stock at a reduced price in lieu of receiving a portion of their cash compensation. Pursuant to the plan, the restricted shares fully vested after two years, provided the employee remained employed by Citigroup during that period. The plan provided that, if an employee resigned or was terminated for cause during the two-year period, the employee would forfeit both the portion of cash compensation the employee had allocated to purchase the shares of restricted stock, as well as the restricted stock.
The plaintiff in Schachter, David Schachter, elected to receive a percentage of his annual compensation in shares of restricted stock that would vest in two years. Schachter later forfeited these shares and the amount of his compensation used to purchase these shares of restricted stock when he resigned from Citigroup before the shares had fully vested. Schachter then filed a putative class action against Citigroup arguing that the company’s failure to pay him an amount equal to the portion of his cash compensation he had chosen to receive in the form of restricted stock violated Sections 201, 202 and 221 of the California Labor Code, which require the payment of earned wages when an employee’s employment is terminated. The California Supreme Court rejected this argument, explaining that Schachter had agreed that remaining employed by Citigroup for the two-year vesting period was required and that, because Schachter had not remained employed by Citigroup for two years, he did not earn the restricted stock and had no right to receive it or the cash compensation that was used to purchase it. Thus, the California Supreme Court found that the forfeiture provision did not violate the California Labor Code.