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Court Rules on Hedge Fund Non Compete Agreement

The recent outcome of a legal battle between a hedge fund company and two of its former executives illustrates the workings of a non compete agreement and how requested sanctions pursuant to its provisions are construed by a court.

The facts are clear enough. The executives left the firm, Citadel LLC, to establish a competing company. Citadel brought the matter to a Chicago court, alleging that the move violated the terms of the agreement. The company also claimed that the men violated the contract by seeking to hire company employees, all the while attempting to keep their start-up and hiring activities secret.

The court ruled that the men did violate the agreement and ordered them to not compete with Citadel for the duration of the contract. However, the court found Citadel's request that the competing company be shut down entirely for a nine-month period to be excessively stifling and punitive, and denied it.

A central issue in the case was a court order to one of the executives to preserve relevant documents in his possession. He acknowledged in court that he disobeyed the order by deleting the files from his home computers.

The court penalized him heavily for that act, fining him $1.1 million and also ordering that he pay a portion (unstated) of Citadel's costs and legal fees related to testing the machines.

Per Citadel's request, the money was split between two Chicago charities.

Related Resource: online.wsj.com "Former Citadel Executive Pays $1.1 Million Penalty" October 19, 2010

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