Telluride Asset Management LLC v. Eric FalkensteinAll documents listed are unsealed, public documents, available atHennepin County, Minnesota website, Civil Case No. 27-CV-07-4832 |
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Peter Hajas hand delivers letter on March 19, 2007 informing me (Eric Falkenstein) that: "...anything that you invented since September 1, 2006 that relates to the profitability, accruals, volatility, and capital issuance of equities cannot be anything but derivative of your work at Telluride...The fact that 'mean-variance optimization' is well known concept that is in the public domain does not change the fact that Telluride told you to add it to a specific model involving profits and accruals of equities. That fact is not generally know nor readily ascertainable by proper means...There is simply no way that you can erase from your mind what you did for Telluride ... If we have not heard from you by the end of the day tomorrow, Telluride will be filing suit seeking injunctive relief and damages". This was very problematic. A previous Telluride employee, Stanley Zheng, was sued a year before after leaving Telluride. His wife did not want to move to Minneapolis, so he left for New York, hoping he and his wife could perhaps start a family (he in late 30s). Hajas objected, asserting that Zheng had abridged his confidentiality agreement (he traded pairs, perhaps the most common hedge fund strading strategy worldwide, at Telluride for less than a year). Zheng had limited means to fight a lawsuit, and signed a consent degree (see here), that had as one of its conditions:
Now, if Hajas is trying to protect Telluride from the transporting some undefined special aspect of pairs trading, and is successful, and then claims in my case anything related to profitability or mean variance optimization as his property, acceding to his demands would cover any potential strategy conceivable, making me unhirable as a portfolio manager. Stanley Zheng went back to China after signing his consent decree. Unfortunately, I don't speak Chinese.
"Falkenstein again admitted that he was using used [sic] profitability, accruals, volatility, and capital issuance as factors for estimating the return of equities but did not reveal the manner in which he was intending to implement these factors...He optimizes those factors using the same type of optimization: mean-variance optimization"
"He further admitted using 'mean-variance optimization' as he did at Telluride but claims he wrote a new algorithm from scratch using public domain information"
"Telluride effectively seeks to prevent Falkenstein from working as an equity portfolio manager by claiming in vague and broad terms that any securities trading practice that utilizes the same general factors that were used in Telluride's trading madel (factors that were widely known and discussed throughout the industry and in academic literature) somehow involves a misuse of its confidential and proprietary information."
Telluride alleges that Falkenstein misappropriated its trade secrets when he applied factors like 'accruals, profitability, volatility, and capital issuance' to his trading model after he was no longer employed at Telluride. Telluride also contends that 'mean-variance optimizatian' is a trade secret"...the application of general factors identified by Telluride has been the subject of considerable public discourse by top researchers in the field of academic finance. Similarly, the use of 'mean-variance optimization' cannot be Telluride's trade secret because Harry Markowitz won the Nobel Prize in 1990 for his development of that technique"
Falkenstein Lawyer: There is no way that Mr. Falkenstein can go to a new employer and say, well, see, here's the specific things that I'm precluded from using. So if we just steer of this, you know, I'll be in the clear. But because of the broad, vague allegations that are set forth he can't do anything. Basically, he is on the sidelines until this is done. And that is why he is here today. He didn't have to take off work to come here today, he sits at home every day, no one will hire him. So -- THE COURT (Judge Schellhas): Doesn't he golf? [laughter in courtroom] The fact was, at this time the allegation pertained to some undefined strategy that used accruals, profitability, volatility, capital issuance, or mean-variance optimization in some particular way. They did not define what the specific strategy was, and over time, whatever they did disclose was incomplete (to them), and sealed. Thus, I could not demonstrate to any employer or partner I was not using a disputed strategy. I was unemployable in asset management for the remainder of litigation.
"Mr. Hajas' March 19 2007 letter which states, 'That anything that Mr. Falkenstein has done relating to certain equity factors since leaving Telluride, cannot be anything but derivative of what Mr. Falkenstein did at Telluride.' That statement put the nail in the coffin of Mr. Falkenstein's deal with Mr. Kessler... the evidence demonstrates that Mr. Hajas statement was utterly baseless, knowingly over broad, and calculated to drive Mr. Falkenstein out of the industry."...
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