Faith Gay, with Selendy & Gay.

Correction: An earlier version of this story mistakenly referred to Bridgewater Associates as Bridgewater Advocates.

A series of filings in New York state court are shedding some light on the often hush-hush world of hedge funds and the lengths that Bridgewater Associates, the world's largest hedge fund with $160 billion under management, has gone to in attempts to keep former employees from using allegedly proprietary trading strategies to form competing funds.  

Lawyers at New York's Zeisler PLLC earlier this month filed a petition to confirm a panel decision from arbitrators at the American Arbitration Association in favor of two former Bridgewater employees, Lawrence Minicone and Zachary Squire. According to the panel decision, which has become public in subsequent court filings and captured the attention of the financial press, Minicone and Squire had both left Bridgewater back in 2013. After riding out the two-year non-compete provisions in their Bridgewater employment contracts with separate employers, the pair came back together to help found another fund called Tekmerion. 

The new venture quickly caught Bridgewater's attention. Just two days after Tekmerion's founding, according to an email quoted in the panel decision, Bridgewater officials had gotten a copy of Tekmerion's pitch deck to investors and about a month later they were reaching out to their former employees to inquire about their trading strategy. After negotiations between the two funds went nowhere, Bridgewater with counsel from Wilmer Cutler Pickering Hale and Dorr filed a demand for arbitration in November 2017 claiming that the employees had violated Connecticut's trade secrets and unfair competition laws and failing to live up to the terms of their prior employment contracts. Bridgewater has since supplemented its legal team with trade secret expert James Pooley and a team from Selendy & Gay.

After two years of discovery and 18 days of evidentiary hearings, a three-arbitrator panel heard Bridgewater's claims over eight hearing days before the panel spread across last summer and fall in Wilmer's New York offices. In a final decision, rendered July 1, the panel majority not only found that Bridgewater hadn't shown that the strategies it accused Minicone and Squire of pilfering were actually protectable trade secrets, but went on to award the fund's former employees nearly $2 million in attorneys fees and costs finding that the fund had pursued its claims in bad faith. 

One central finding by the majority, was that if Bridgwater had evidence of its former employees stealing trade secrets, they hadn't come forward with it. "As is widely-recognized, Bridgewater's offices are extremely secure facilities, requiring employees such as Squire and Minicone to place their cell-phones into signal-proof lockers upon entry, recording all employee movements by video, recording phone calls and internet communication, logging all computer access, requiring any files or attachments sent externally via email to be explicitly approved on a case-by-case basis, and maintaining restricted zones within Bridgewater's offices," the panel majority wrote. "In short, if Squire or Minicone had actually 'misappropriated' any trade secrets, Bridgewater would have evidence of it." 

The panel majority also found that despite the detailed protective order in effect for the case, Bridgewater "never produced documents providing the degree of specificity that was required to define the trade secrets allegedly misappropriated." 

What they did produce, according to the panel majority, were expert reports that relied on Bridgewater's counsel at Wilmer to reach "factual" conclusions. In particular, the panel majority cites a "withering" cross examination of expert Lawrence Leibowitz, where Zeisler name partner Aaron Zeisler asked if the expert had cut and pasted materials produced by Wilmer. According to the decision, Leibowitz responded, "Absolutely not." Zeisler then pointed out Leibowitz's report had a section titled "Background: Relevant Law and Facts" that was identical to a section in a report by another Bridgewater expert. 

Ouch.

Wilmer's Robert Gunther Jr., according to the panel decision, interjected at the time to say that his firm provided the legal sections for the experts to apply. The panel majority, however, found that Bridgewaters's "experts relied on [Bridgewater's] outside counsel to reach at least some 'factual' conclusions on the basis of law and facts provided by" Wilmer, some of which were not supported by the evidence. 

Gunther, in a phone interview Monday, said that the panel majority's conclusion about the identical paragraphs in the two expert reports was "flat wrong" and that the sections included direct citations to deposition testimony outlining the underlying facts. As part of his back up, Gunther pointed to the conclusion of the third member of the AAA panel, Thomas Brewer, who in his partial dissent from the AAA panel majority wrote that "it is routine for counsel presenting an expert witness to instruct the witness to make specified factual and/or legal assumptions provided by counsel in order to set the context for the witness to offer his or her opinion evidence." Brewer wrote that nothing about what happened in with Bridewater's experts warranted the majority's conclusion that their neutrality had been "undermined."

Now does all this add up to bad faith?

Zeisler says that in his experience representing small funds, "the overhang of a pending litigation alleging theft of trade secrets or intellectual property—which must be disclosed to prospective investors in due diligence—hampers efforts to attract capital." 

He pointed out that the final AAA award found that Bridgewater "pursued the arbitration knowing that applicable securities rules and regulations would require [Tekmerion] to disclose the pending dispute to prospective investors, and that such disclosure was likely to make prospective investors more wary of investing in the new competitor's fund."

According to a team at Selendy & Gay led by name partner Faith Gay now representing Bridgewater in opposing the fee award, there was clearly no bad faith. Gay, who clarifed that her client is challenging just the attorneys fee award despite the fact Bridgewater "strongly disagrees" with the panel majority's fact-finding, called the attorney fee decision an "extreme result." 

Bridgewater's lawyers quoted liberally in their filing from Brewer's partial dissent. Brewer concluded that his colleagues on the panel, Micalyn Harris and William Mentlik, failed to make "a reasonable allowance" for Bridgewater's desire to prosecute its claims based on plain English descriptions of the underlying concepts in hopes to prevent disclosure of sensitive evidence such as source code. "The majority ascribes bad motives to conduct that more likely was animated by caution and a desire to be careful to avoid further perceived breaches of valuable trade secrets and intellectual property while the case was in progress," wrote Brewer, who agreed with the panel's conclusion on Bridgewater's trade secrets claims, but on the narrower grounds that the fund hadn't established that there'd been any misappropriation. 

Gay and company summed up Bridgewater's conundrum this way: "Prosecuting trade secret claims while maintaining those secrets' confidentiality is notoriously difficult."