IP Law Daily, TRADE SECRETS—7th Cir.: Financial analyst’s sentence vacated; intended loss to victims of theft erroneously calculated, (Feb 25, 2016)

By Thomas Long, J.D.

Factual findings did not support a district court’s conclusion that a former analyst for two financial services companies intended to cause a loss of $12 million when he unlawfully copied proprietary computer files and used the data to conduct computerized stock market trades for himself. A 36-month prison sentence based on the erroneous intended loss calculation was vacated by the U.S. Court of Appeals in Chicago. The appellate court also held that the district court erred in ordering the analyst to pay over $750,000 in restitution without requiring the government to provide a complete accounting of the amount spent by victims in their investigation of the trade secrets theft (United States v. Pu, February 24, 2016, Williams, A.).

Theft of trade secrets. Defendant Yihao Pu worked as a quantitative finance (QF) analyst and engineer for two stock-trading companies—Citadel and a company referred to by the parties as “Company A” (“the victims”). The victims engaged in high frequency trading (HFT) and developed proprietary computer programs called HFT platforms to facilitate making trades at high speeds when certain market conditions occur.

While working at the victim companies, Pu illegally copied computer files—including HFT platform files and files containing numerical data generated by the software’s algorithms—that constituted trade secrets belonging to each company and transferred the files to personal storage devices. Pu then used the data to conduct stock market trades for himself and lost approximately $40,000.

After Citadel became suspicious of Pu and conducted an investigation, a grand jury charged Pu with nine counts of wire fraud, four counts of unlawful transmission of trade secrets, three counts of unauthorized access of a protected computer, and one count of obstruction of justice. Under a plea agreement, Pu pleaded guilty to two counts of unlawful possession of a trade secret.

Sentencing. At sentencing, the district court adopted the Presentence Investigation Report (PSR) and its findings. It was undisputed that the victims sustained no actual monetary loss. Pu objected to the PSR’s loss calculation, arguing that there was no intended loss. The court disagreed and used the total development costs of the algorithms or source code—approximately $12 million—as the metric to value the files stolen by Pu. Applying the federal sentencing guidelines, the court held that the intended loss warranted an increase in Pu’s offense level. Taking all factors into consideration, including Pu’s lack of prior criminal history, the court departed downward from the sentence indicated by the guidelines, sentencing Pu to 36 months in prison.

The district court also determined that Citadel incurred an actual loss for restitution purposes as a result of its expenditure of resources on investigating Pu’s wrongdoing. Pu was held liable for restitution to Citadel of nearly $760,000. Pu appealed, challenging the loss calculation and the restitution amount.

Intended loss calculation. The appellate court reviewed de novo the district court’s intended loss calculation and held that the calculation was clearly erroneous. The Seventh Circuit noted that the sentencing guidelines suggested that the cost of development of a trade secret was the metric to use to estimate loss in a trade secrets case; however, the government was required to prove by a preponderance of evidence that the development cost was the correct loss figure, and it had failed to do so. There was no direct evidence of how much of a loss Pu caused the victims to suffer, and there was no evidence from which an inference could be made as to how much of a loss Pu intended them to suffer. In particular, there was no evidence that Pu intended to cause a loss equal to the cost of developing the stolen information. Therefore, it was inappropriate to use the cost of development to determine the intended loss amount.

Moreover, the district court explicitly found that there was insufficient evidence that Pu was engaged in a grander scheme that had been interrupted. The intended loss calculation conflicted with this finding, the appellate court said. Pu’s misconduct was merely what was charged, not some ongoing criminal scheme. The district court did not explain how Pu intended to cause $12 million loss through his conduct.

Although the district court had made a downward departure in reaching its final sentence, it did appear that the erroneous loss calculation affected the sentence, in the Seventh Circuit’s view. The intended loss calculation had provided the basis for a 20-point offense level increase; without this increase, the district court might have sentenced Pu differently. Therefore, the sentence was vacated and the case was remanded for resentencing.

Restitution amount. The district court abused its discretion by failing to base its restitution order on a complete accounting of the losses sustained by Citadel in conducting its investigation, the Seventh Circuit held. Information provided by Citadel did not explain how any attorney’s time was spent on the investigation, and there was no information that provided an adequate indication that the hours were reasonable. Citadel reported that forensic analysts had logged over 1,800 hours of work, but it did not reveal what the analysts did or whether the costs expended were reasonable. By awarding a restitution amount without a complete accounting, the district court may have required Pu to pay more restitution than he owed. Therefore, the restitution order was vacated.

The case is No. 15-1180.

Attorneys: Patrick M. Otlewski, Office of the United States Attorney, for United States of America. William Flachsbart (Flachsbart & Greenspoon, LLC) for Yihao Pu a/k/a Ben Pu.

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