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Hi-Frequency Trader's Conviction Overturned by the 7th Circuit

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By Jonathan R. Tung, Esq. on March 01, 2016 1:14 PM

An analyst who stole computer information related to the writing of algorithms used in High Frequency Trading ("HFT") caught the sympathetic ear of the Seventh Circuit which overturned three year prison sentence ordered by the lower court. The case has been remanded back to the trial court for a new sentence.

The Seventh Circuit Court determined that although definite crimes took place, there was a disconnect between the claimed intended damage of $12.7 million as the plaintiff company claimed; and his actual intent.

Yihao Pu: Wunder-Trader

Pu was a Quantitative Financial Analyst who held positions at two trading companies, one of which was Citadel Financial of Chicago. Both firms are engaged in High Frequency Trading, a type of trading that utilizes computer technology to execute inhumanly fast trades based on sudden market information. Execution of the trades is done through the use of algorithms which allow computer systems to make trades without any human intervention at all. Such program platforms requires much investment of time, research, and money.

Pu, using his access to company computers, illegally stole a computer code that formed the base of the company platforms. He used the algorithms in forming his own trading scheme and lost $40,000 in his brokerage account. Pu found himself in court soon afterward.

"Intended" a Loss of $12.7 Million

The trial court quickly found that Pu had definitely committed crimes, but the main drama of the story revolved around the issue of damages. At trial, the companies successfully convinced the court that the amount of money and time used to develop the files used to develop the trading platforms was the proper damages amount. That number totaled $12.7 million.

The Circuit Court disagreed with the District court and found that there was insufficient evidence to indicate that Pu operated with the intent to defraud the company of $12.7 million. Rather, the evidence indicated that he intended to enrich himself in his own account and that he had, ironically, suffered a loss of several tens of thousands of dollars.

Reduction of Sentence

The Seventh Circuit also found that the $12.7 million figure helped to make Pu's sentence harsher. It found that the $750,000 Pu was ordered to pay in restitution for Citadel's internal investigation was made in error.

The ruling is technically a win for Pu who wouldn't have seen the light of the sun until sometime in 2017 under his original sentence.

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