Citadel wins bid to block ex-exec's start-up

Citadel Investment Group LLC, the Chicago-based hedge fund manager, won its bid for a court order temporarily blocking two former executives from working on their own securities trading firm.

Illinois state court Judge Mary Rochford granted the firm's injunction request yesterday in a ruling rendered after hearing seven days of testimony and argument.

"Allowing Citadel's former employees to escape their obligations would eviscerate the purpose of the agreements and cause great harm to Citadel's way of business," Rochford said in a 36-page ruling.

Citadel, which manages about $14 billion in assets, sued former executives Mikhail Malyshev and Jace Kohlmeier in July, alleging they broke agreements not to compete with their former firm when they started organizing a startup business, Teza Technologies LLC.

Malyshev had led Citadel's high-frequency trading unit, generating more than $1 billion last year by using computer programs to predict minuscule share-price changes, then executing split-second trades to profit from them.

Kohlmeier worked under Malyshev at Citadel. The two left that firm on consecutive days in February.

'Pleased to Have Prevailed'

"We are pleased to have prevailed in this matter," Citadel General Counsel Adam Cooper said in an e-mailed statement. "The court recognized that Malyshev and Kohlmeier breached their obligations to Citadel."

The agreements they signed prohibited them from competing with Citadel for nine months, during which time Malyshev was to receive $30,000 a month and Kohlmeier $21,000 monthly. A Citadel executive told the judge those payments were still being made.

Citadel lawyer Brian Sieve had asked the judge to find that the full nine-month non-competition period should begin on the date of her ruling and not in February, when Malyshev and Kohlmeier resigned.

While Rochford granted Citadel's injunction request, she said controlling state law barred her from extending the term of the noncompete agreements beyond their original duration.

"There is no basis to re-write the contract to extend that period or impose a brand-new nine-month period," she said. Malyshev's bar expires on Nov. 16. Kohlmeier's prohibition lapses the following day, as does her order preventing their company from competing with Citadel.

Lead defense attorney Chris Gair, in an e-mailed message, declined to immediately comment on the court's decision.

No Breach

Defense lawyers argued that there had been no breach of the Citadel non-compete contracts because the executives were merely setting up their business and hadn't developed the means to begin high-speed securities trading.

Rochford, who last month denied a request to dismiss the case on those grounds, again rejected that defense in her ruling yesterday.

"There is no question that Malyshev and Kohlmeier by forming, working for and owning Teza" could be found to have engaged in "competitive activities" as defined in the agreements, the judge said.

Rochford also barred the men from soliciting Citadel employees for 12-months and said she would fine Malyshev an unspecified sum for erasing potential evidence from his computers after she had issued a document preservation order in July.

The case is Citadel Investment Group LLC v. Teza Technologies LLC., 09CH22478, Chancery Division, Cook County Circuit Court (Chicago).