Spoliation Instruction But No Terminating Sanctions in Coding Trade Secrets Case

The United States District Court for the Southern District of Texas declined to impose litigation ending discovery sanctions for several claims of spoliation, but does plan to issue a spoliation instruction in Quantlab Technologies Ltd. v. Godlevsky, No. 4:09-cv-4039, 2014 U.S. Dist. LEXIS 20305, filed February 19, 2014.

Plaintiff, Quantlab Technologies Ltd. (“Quantlab”), is a quantitative financial research firm that employed two of the defendants, Dr. Godlevsky and Dr. Kuharsky (“the defendants”), in its research and technology departments.  The defendants wrote algorithms and code that transformed Quantlab from a company on the verge of bankruptcy into a profitable stock trading company.  The defendants were fired from Quantlab in 2007 after they had inquired about the legality of Quantlab’s trading practices.  The defendants then joined a new trading start-up, SXP Analytics, where they also wrote high-frequency trading strategy code to analyze the stock market.  Litigation over whether the defendants were using Quantlab’s trade secrets began in 2007.  The FBI raided SXP Analytics in 2008, seizing hundreds of thousands of files that may have come from Quantlab.  Following the raid, the defendants left SXP Analytics, which was eventually dissolved in 2012. The defendants then attempted to form a new high-frequency trading start-up called Singletick.

The Quantlab trade secret litigation followed the defendants throughout their subsequent career.  Because Quantlab claimed that the defendants relied on its code to develop their own code, Quantlab argued that “each iteration of code written by Defendants since Dr. Kuharsky and Dr. Godlevsky departed from Quantlab’s employ is relevant to determining whether that code was impermissibly based upon Quantlab’s version.”  Id. at *39.  Since litigation had begun as soon as the defendants were terminated and the instant suit was filed in 2009, Quantlab argued that the defendants had had a duty to preserve their computers ever since 2007 and definitely since 2009.

The court took time to set forth the legal standards that apply to issuing discovery sanctions, and then analyzed each claim of spoliation against each defendant individually, reasoning that whether a party has a duty to preserve evidence is a fact specific inquiry.

The first spoliation claim was against SXP Analytics founder, Emmanuel Mamalakis, for wiping and/or giving away 23 computers used by his developers.  The work stations were wiped or given away in 2012 as part of winding up SXP Analytics.  The court found that Mr. Mamalakis had a duty to preserve the work stations even though they had not yet been the subject of a specific discovery request.  Before Mr. Mamalakis got rid of the work stations, he had been served with many Requests for Production.  In light of those, “Mr. Mamalakis should have known that significantly altering or disposing of computers used by SXP employees was unwise.” Id. at *42.  The court rejected Mr. Mamalakis’s arguments that he did not have the requisite state of mind for spoliation because part of his decision to wipe computers was to inexpensively wind up SXP Analytics and that he believed any relevant evidence from the work stations could also be found on the servers, which he kept.  The court found Mr. Mamalakis acted in bad faith “because Mr. Mamalakis intentionally wiped and gave away numerous computers nearly three years after initiation of this lawsuit and concealed it from the court.”  Id. at *48.  The evidence on the workstations was relevant and prejudiced Quantlab because information on the servers would only show the code a developer uploaded to the server and would not contain detailed information about what the developer was looking at when he wrote the code or what versions of the code the developer went through before uploading it to the server.  But the court refused to impose terminating sanctions finding that whether Quantlab would have used evidence from the work stations was still “somewhat speculative” so the evidence was only “moderately relevant” and its loss was only “moderately prejudicial.”  Id. at *53.

The second spoliation claim was against Dr. Godlevsky because when Quantlab requested all computers Dr. Godlevsky had used since 2007, he only provided one laptop.  Quantlab did not allege specific acts of spoliation, but brought a spoliation claim on the theory that “there must be more.”  Id. at *54 [emphasis omitted].  Dr. Godlevsky admitted that he had another personal laptop, which he never used for coding, that he had disposed of after the hard drive had failed and that he had used many USB drives over the years that he did not keep track of.  The court found that Dr. Godlevsky should have known in 2007 that litigation was likely so that he could not be careless with evidence and that he definitely had a duty to preserve since 2011.  Even if Dr. Godlevsky intended to argue that the evidence was not relevant, he still had a duty to preserve it.  The court found that Dr. Godlevsky’s carelessness with his electronic devises constituted bad faith, but not “the most culpable state-of-mind possible.” Id. at *61.  The evidence was likely relevant, especially evidence on devices that had been seized by the FBI and had been connected to computers containing Quantlab code.  But the court declined to impose litigation-ending sanctions because the bad faith was not strong enough.

The third spoliation claim was against Dr. Kuharsky regarding a few specific devices, including one that Dr. Kuharsky had plugged into his computer approximately 50 times.  Dr. Kuharsky admitted that he had a duty to preserve evidence ever since 2007 and the court found bad faith for losing the specific devices.  But like the claims against the other defendants, while the evidence was likely relevant, it was not certain that it would have been used in Quantlab’s case, so prejudice to Quantlab could not be readily determined.  The court determined that loss of the specific devices warranted a spoliation instruction against Dr. Kuharsky, but that there was not a strong enough showing of culpability or prejudice to warrant litigation ending sanctions.

This case serves as a reminder to institute appropriate litigation hold procedures when litigation becomes reasonably likely.

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2 comments on “Spoliation Instruction But No Terminating Sanctions in Coding Trade Secrets Case
  1. Ashley Nevins says:

    Thank you, reporter Gorham for the analysis of this issue.

    There is more to this story than meets the eyes. There has been reporting on the principles who formed SXP met at St. Anthony’s Greek Orthodox Monastery in Florence, Az. This a monastery of the Greek Orthodox Church of America (GOA) under the authority of the S.F Diocese where Metropolitan Gerasimos is the hierarch. This monastery represents the most controversial issue in the GOA.

    Michael Jaharis who is the Co-Chairman of the GOA Clergy/Laity Archdiocene Council and he shares leadership responsibility of the council with Co-Chairman Archbishop. In an October 2012 speech to the council Jaharis called the monastery a ‘Disease’. Jaharis is a billionaire on the Forbes list.

    A laity committee made up of members of this council tried to conduct its own internal investigation of the monastery and develop a report on it to the council. Bill Stotis a Chicago attorney led the committee effort. The committee has been stone walled by the monastery and the hierarchy has not supported their effort to bring transparency to this monastery.

    Mamalakis is the attorney who represents the monastery on legal matters. No one to my knowledge has reported on that.

    The question that must be asked is, Is there any illegal collusion that has taken place between Mamalakis and the monastery?

    The controversy around this monastery and its relationship with Mamalakis and SXP has captured the attention of internal advocates in the GOA who are concerned about matters of church and monastery corruption. The following is articles and comments made about this monastery, the SXP issue and what the hierarchy of the GOA is not doing to address the issues of this monastery:

    They are provocative in approach but they are not over reaching, exaggerating or sensationalizing the issues around this monastery. It is what they say it is.

    Most of the advocates against the lack of transparency and other issues surrounding this monastery believe it to be a cult. The lack of transparency of the GOA hierarchy is another major concern they continue to address.

    A leading Greek new organization, The National Herald, has been reporting on issues surrounding this monastery since 1992. The reporting has been very revealing in critical reporting on the mind set, attitude and behaviors of this monastery.

    In 2006 KVOA 3 TV News in Tucson conducted an investigation and made a news report on this monastery. In the news report a Tucson priest representing the monastery was interviewed and he exposed how the monastery views financial transparency. This priest later settled out of court with female member of his parish over an issue of inappropriate behavior.

    Is there a character issue around those who represent the monastery?

    Are their patterns here in this way and other ways that raise a concern that needs deeper investigation?

    Do financial news reporters and law enforcement need to probe deeper into this monastery and its relationship with Mamalakis and SXP?

    As any attorney knows what appears on the surface is not always what is taking place below the surface.

    Ashley Nevins

  2. Ashley Nevins says:

    My mistake. I did not put the advocacy comments being made about this monastery in the body of the previous post.

    They are:




    Ashley Nevins

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