Prosecutors are getting tough on Wall Street and those committing crimes are finding their way into a jail cell. Well at least if you work on Wall Street and commit the crime of stealing computer code from a Wall Street firm, that is.

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Government prosecutors targeting HFT firm employees

As criminal punishment for destroying the economy in 2008 with acknowledged fraudulent derivatives products didn’t land protected bank executives in jail, and while recent polls show ongoing distrust for Wall Street, government prosecutors are targeting not Wall Street bankers who destroy the economy, but firm employees accused of violating Wall Street’s intellectual property rights.

Chinese native Kang Gao is among the latest to find himself in the cross hairs of prosecutors eager to protect financial firms from having their intellectual property stolen. Gao, accused to stealing computer code from the quantitative hedge firm which employed him, New York City-based Two Sigma Investments, and taking his skills to rival hedge fund Chicago-based Citadel.

The actions against Gao, and other like it, signals a willingness to criminalize financial industry disputes formerly relegated to contract litigation, according to a report in Bloomberg.

The Gao case is the first lawsuit elevating intellectual property theft to a criminal indictment, New York State Supreme Court Justice Jeffrey Oing told Bloomberg.

HFT concerns: Protecting financial firm’s quantitative formulas

Leading the charge is to protect financial firm’s quantitative formulas, many of them high frequency trading (HFT) concerns, is Manhattan District Attorney’s Office lead by Cyrus Vance Jr. Certain prosecutors have been  convinced prosecutors the financial services sector may otherwise be brought to a “crushing halt” if their computer code providing traders a millisecond advantage is not stopped, Joel Reidenberg, academic director of Fordham University’s Center on Law and Information Policy in New York, said in the report.

“The concern about HFT is that these are highly proprietary programs, Wall Street depends on them,” Reidenberg was quoted as saying. “If someone can jump ship and potentially corrupt the high-frequency program, it’s going to skew the market.”

Schneiderman and DoJ’s probes into HFT

While Vance has moved to actively protect the technological achievements of Wall Street, the report noted “other prosecutors are taking a more adversarial tack, looking into whether that intellectual property is being used to rig the market and fleece Main Street.”  The report cited New York Attorney General Schneiderman and the Department of Justice’s recent probes into HFT as examples of Wall Street being investigated for criminal behavior.

“We used to live in a day where, on Wall Street, things such as client lists or Rolodexes or other antiques were the tools of doing business,” Anthony Sabino, a law professor at St. John’s University’s Peter J. Tobin College of Business, was quoted as saying. “In our hyper-electronic world, so many of our business methodologies have been reduced to source code.”

This source code is the subject of multiple investigations.