LAKE TREASURE HOLDINGS, LTD., KAJEER YAR, and WATERCOLOR VENTURES, LLC, Plaintiffs,
FOUNDRY HILL GP LLC, FOUNDRY HILL ELECTRONIC TRADING LLC, FOUNDRY HILL CAPITAL LLC, FOUNDRY HILL TRADING LLC, CP-1 LLC, ULRIC TAYLOR, CHRISTOPHER KLEE, PROGRESSIVE PACKAGING CORP., MILTON R. SMITH III, BUTTONWOOD GROUP TRADING LLC, THREE ZERO THREE CAPITAL PARTNERS, LLC, and TRIPLE LINE TRADING, LLC, Defendants, and FOUNDRY HILL HOLDINGS, LP and CP-1 LLC, Nominal Defendants.
Date Submitted: July 24, 2014
Philip Trainer, Jr., Toni-Ann Platia, ASHBY & GEDDES, Wilmington, Delaware; Robert A. Chapman, Peter M. Spingola, Shannon T. Smith, CHAPMAN SPINGOLA, LLP, Chicago, Illinois; Attorneys for Plaintiff Lake Treasure Holdings, Ltd., Kajeer Yar, and Watercolor Ventures, LLC.
Evan O. Williford, THE WILLIFORD FIRM LLC, Wilmington, Delaware; Norman J. Lerum, NORMAN J. LERUM P.C., Chicago, Illinois; Attorneys for Defendants Foundry Hill GP, LLC, Foundry Hill Electronic Trading, LLC, Foundry Hill Capital LLC, Foundry Hill Trading LLC, CP-1 LLC, Triple Line Trading, LLC, and Ulric Taylor.
David E. Wilks, Thad J. Bracegirdle, Douglas J. Cummings, Jr., WILKS, LUKOFF & BRACEGIRDLE, LLC, Wilmington, Delaware; Attorneys for Defendants Christopher Klee and Progressive Packaging Corp.
LASTER, Vice Chancellor.
The plaintiffs invested in a software-based trading business that defendant Ulric Taylor proposed to develop. When the startup failed, they sued. During discovery, they learned that the firm had developed seemingly valuable trading software. Later in discovery, they learned that Taylor had transferred the software covertly to an entity controlled by his longtime friend, defendant Christopher Klee.
From then on, the plaintiffs focused on the software. At trial, they contended that Taylor breached his duty of loyalty by granting Klee a security interest in the software in return for loan proceeds representing a fraction of what Taylor thought the software was worth, followed by an amicable surrender of the software to Klee. They contended that Klee aided and abetted Taylor's breach of duty. They argued that the same facts supported remedies under the Delaware Uniform Fraudulent Transfer Act ("DUFTA"). Premised on an order restoring ownership of the software to the firm, they sought additional remedies under the Delaware Uniform Trade Secrets Act ("DUTSA").
The plaintiffs proved that Taylor breached his duty of loyalty by transferring the software and that Klee aided and abetted the breach. Yet the defendants convinced me at trial that the ostensibly valuable trading software actually was a simplistic arrangement of public domain components and concepts. Given that Taylor and Klee acted as if the software had substantial value, I approached trial skeptical of their strategy. Nevertheless, their expert cogently explained how anyone with moderate skill with computers and basic knowledge of trading could reproduce the software using retail programs and sources freely available on the internet. Despite Taylor and Klee's earlier belief to the contrary, the software did not have any value as intellectual property. The software had not generated any trading profits for the defendants, so there was nothing to disgorge, and the evidence convinced me that the software was not likely to produce trading profits in the future. Consequently, this decision awards nominal damages of $1.00 on the claims for breach of fiduciary duty and aiding and abetting.
Analyzed under DUFTA, Taylor and Klee's conduct constituted a fraudulent transfer. As a remedy, the defendants shall return the software to the firm. Given what trial showed about the software, it is not clear why the plaintiffs want it, but they do, and the firm is entitled to it.
The plaintiffs cannot obtain any relief under DUTSA. The defendants proved at trial that the software was not a trade secret, rendering DUTSA inapplicable.
I. FACTUAL BACKGROUND
The parties tried the case over three days. The following facts were proven by a preponderance of the evidence.
A. The Foundry Hill Startup
Plaintiff Kajeer Yar and Taylor were friends from college. Years later, Yar found himself working for the Hille Foundation (the "Foundation"), a private, family foundation with approximately $60 million in assets. Yar served as in-house legal counsel and an investment consultant. The Foundation's two trustees were Maggie Hille Yar and Mary Ann Hille. As their names suggest, Maggie was Yar's wife, and Mary Ann was Yar's mother-in-law.
In 2008, Yar and Taylor discussed having the Foundation back Taylor in starting a new firm under the name "Foundry Hill." They contemplated that its first venture would be to develop algorithmic trading strategies and deploy them in electronic trading. Yar convinced his wife and mother-in-law to invest.
A lengthy series of entity formations and substitutions ensued. The results were (i) Foundry Hill Capital, LLC, a Delaware limited liability company, which served as Taylor's management company; (ii) Lake Treasure Holdings, Ltd. ("Lake Treasure"), a Cayman Islands limited liability company, which served as the Foundation's investment vehicle for projects with Taylor; and (iii) Foundry Hill Holdings LP (the "Partnership"), a Delaware limited partnership, that served as the holding company for interests in business-specific Foundry Hill entities. For simplicity, this decision refers to the final entities rather than any of their predecessors.
Taylor ended up with control over the Partnership and a majority of its equity. He controlled the Partnership through his control over Foundry Hill GP LLC (the "General Partner"), a Delaware limited liability company, which was the Partnership's sole general partner. The members of the General Partner were Taylor himself, with a 99% member interest, and the Ulric Taylor Descendants Trust, with a 1% member interest.
The Partnership's limited partner interest was divided into two classes of units: Class A units for the principals, and Class B units for employees. Lake Treasure made a capital contribution of $2 million and received 32% of the Class A units. Yar personally made a capital contribution of $40, 000 and received 2% of the Class A units. Taylor held the remaining 66% of the Class A units. Employees who subsequently left the business briefly owned Class B units; for purposes of this litigation, they can be ignored.
To pursue the algorithmic trading business, Taylor and Yar formed Foundry Hill Trading LLC ("Trading LLC"). The Partnership received a 66 2/3% member interest in Trading LLC. Lake Treasure received the remaining 33 1/3% member interest in return for a capital contribution of $300, 000. Taylor controlled Trading LLC through his control over the Partnership.
Taylor and Yar created an additional entity CP-1, LLC ("CP-1"), a Delaware limited liability company, to hold the intellectual property that they expected the Partnership to develop. CP-1 was a wholly owned subsidiary of the Partnership. CP-1 entered into an Intellectual Property Assignment and License Agreement with Foundry Hill Capital, dated July 14, 2008, which licensed Foundry Hill to use CP-1's intellectual property.
B. The Initial Efforts at Algorithmic Trading
As planned, Taylor tried to develop an algorithmic trading business. Taylor hired Chris Preston, who developed various computer trading models, including programs called Axon, Chi, and Oboe.
In August 2008, Trading LLC engaged in production trading with Axon. Taylor pulled Axon after it failed to produce positive results. The other programs did not fare any better.
During this period, Yar was closely involved with the business. He consulted frequently with Taylor and received regular reports on his progress. He gave Taylor advice and served as counsel to the Partnership for specific purposes, such as negotiations with current or prospective employees, business partners, and vendors.
C. The High Frequency Trading Business
In April 2009, Taylor met Adam Krauszer, a high frequency trader employed at a major hedge fund. Krauszer gave Taylor a business plan for a high frequency trading business. Taylor discussed the plan with Yar, and they became excited about it. On June 17, 2009, Taylor and Yar met with Maggie, Mary Ann, and Frank McDonald, a Hille family advisor, at the Foundation's offices. Maggie and Mary Ann decided to support the high frequency business.
In October 2009, Taylor formed Foundry Hill Electronic Trading LLC (the "High Frequency LLC"), a Delaware limited liability company, to as the entity for conducting the high frequency trading business. The Partnership was its sole member. Foundry Hill Capital served as its manager, giving Taylor control. The operating agreement specified that the Foundation would invest up to $2.25 million if High Frequency LLC met certain funding milestones, such as executing live trades using a custom-made order management system that Taylor planned to develop.
D. Taylor Takes On Overhead
In October 2009, after the Foundation committed to support the high frequency trading business, Taylor signed a five-year lease for 3, 760 square feet of Class-A office space on the 55th floor of 300 North LaSalle in Chicago. The lease required a $100, 000 security deposit and minimum monthly payments of $9, 500 in rent, plus other expenses.
On December 11, 2009, Taylor certified to the Foundation that High Frequency LLC's customized order management system was exceeding expectations, satisfying the first funding milestone. The Foundation wired the initial $1.5 million of its $2.25 million commitment. Disputes later arose about Taylor's certification.
On January 18, 2010, Taylor leased an additional 4, 407 square feet of office space, bringing the total monthly rent to almost $20, 000, plus other expenses. At the time, Foundry Hill had three employees.
In April 2010, after months of negotiation, Taylor hired Krauszer. As part of his compensation package, Taylor gave Krauszer a 30% member interest in High Frequency LLC. The Partnership retained the remaining 70%. Krauszer began developing a high-frequency trading model called Bumblebee and later worked on a model called Afterburner.
In June 2010, Bumblebee began live trading. In July 2010, Taylor entered into a contract with GuavaTech, Inc. for a low-latency line running between Chicago and NASDAQ's co-location facility in New Jersey to be used in the high-frequency business. The GuavaTech line cost $75, 000 per month for the first three months, $125, 000 per month for the next three months, and $250, 000 per month during the final six months of the one year contract. Adding in fees and initial charges, the total cost of the contract was $2, 375, 000, for an average charge of $197, 917 per month.
As with the algorithmic trading business, Yar was closely involved with the high frequency business. He consulted frequently with Taylor, provided advice, and served as counsel for specific purposes.
In September 2010, the Foundation decided to provide Taylor with $1 million in trading capital to deploy in high-frequency trading. The Foundation formed WaterColor Ventures, LLC ("WaterColor") as its vehicle for providing the $1 million. Yar served as manager of WaterColor. Pursuant to a subscription agreement dated September 1, 2010, WaterColor purchased Class A interests in High Frequency LLC, the terms of which were governed by a certificate of designation. Among other things, the certificate of designations stated that WaterColor's trading capital could be traded only using the "Class A Strategy, " meaning high-frequency trading. The certificate of designation authorized Taylor to allocate a portion of High Frequency LLC's overhead expenses to Watercolor's capital account.
In October 2010, Krauszer launched Afterburner in live trading. That same month, Taylor pulled Bumblebee from live trading because of poor performance.
In December 2010, Taylor signed yet another lease with 300 North LaSalle for an additional 3, 923 square feet of office space. By the end of 2010, Foundry Hill's rent was running more than $35, 000 per month. At the time, it had eight employees.
In late December 2010, Taylor told Yar that Afterburner had been pulled from live trading because of poor performance.
E. The Chess Champions
Meanwhile, in September 2010, Taylor hired Milton R. Smith, III, as a quantitative trader. Between September 2010 and March 2012, Smith developed a series of trading algorithms known as the Chess Champions. Each algorithm was named for a chess grandmaster: Karpov, Capablanca, Tal, Marshall, Lasker, and Smyslov. The Chess Champions were not high-frequency trading programs. They were computer programs that executed trades according to pre-determined rules:
• Karpov used classic trend-following techniques supplemented by indicators about whether a security was overbought or oversold.
• Tal was a trend-following, day-trading model for stock index futures.
• Capablanca was a general-purpose trend-following model for stock index futures.
• Lasker was a selective trend-following system that used basic elements like a trailing stop loss and a profit target.
• Smyslov traded based on the twice-daily price fixes in the London gold market.
• Marshall resembled the other models but added features to prevent the premature ...