Start-up falls foul of court

NICK Leeson was in Australia less than four months ago. The infamous "rogue trader" of the 1990s was the drawcard speaker at the annual Fix Conference 2012, where the topic of the moment was high-frequency trading.

He was invited to talk about the importance of regulation and corporate governance to a room full of merchant bankers, high-frequency traders, and smooth-talking PR firms.

Leeson began by saying that he could understand why he wouldn't be on the list of speakers who they would expect to talk about those sorts of subjects.

The conference, at Sydney's Westin Hotel, had more than 1000 attendees. Like most trade shows, technology companies used the opportunity to promote the latest in cutting-edge trading.

One such start-up, Zeptonics, had a stall there. The technology company specialises in speeding up the network infrastructure within telephone exchanges and "co-location" facilities. This was the type of technology designed to support the algorithms used in high-speed share trading. While this form of trading has been rapidly growing it has also been worrying some big superannuation fund investors and exercising the minds of regulators.

But unknown to those milling around its stand, less than a week later the founder of Zeptonics, Matthew Hurd, would be in the Federal Court of Australia.

He would be there to answer allegations he had stolen confidential technological information from his former employer to develop and market what he said were his own high-speed trading devices.

It would be alleged that, by doing so, he had breached his employment contract, his fiduciary obligations and director's duties.

In one sense, last October had been a good month for Zeptonics. The company had been awarded a $40,000 New South Wales government prize for innovation excellence.

The award had followed an announcement last June that the company had produced the fastest switching device in the world, ZeptoMux, which can process orders at around 130 nanoseconds - a billionth of a second.

Mr Hurd was found by the Federal Court to have engaged in "reprehensible" and "dishonest" conduct by using technology and confidential information from his former employer, Zomojo, to develop his own trading devices. Mr Hurd was also accused of seeking to patent - in his own name - technologies developed by Zomojo.

Zomojo is an Australian technology company specialising in high-frequency trading. Mr Hurd's links with the company run deep. He is one of its founders, boasting on its LinkedIn page that he started the company on his laptop in 2005.

For the six years he was with Zomojo until February 2011, he received total remuneration of more than $3 million.

Even so from 2010 on, while still an employee of Zomojo, Mr Hurd had secretly established Zeptonics and started developing and marketing what he claimed to be his own high-speed trading devices.

By the time of his resignation from Zomojo in 2011, Mr Hurd and Zeptonics were privately offering sophisticated high-speed trading devices, claiming that they were the fastest in the world.

In her judgment last week, Justice Michelle Gordon was scathing of Mr Hurd's behaviour:

"From no later than September 2010, Hurd set out on a covert course of conduct that was nothing more than a flagrant and deplorable attempt to appropriate benefits for himself which were properly those of his employer."

Mr Hurd was also criticised by Justice Gordon for being a "most unsatisfactory witness" during his trial.

"During the course of his evidence, he admitted on no less than 26 occasions that what he wrote or said was false, a lie or both," she wrote in her judgment.

Justice Gordon ordered Mr Hurd and Zeptonics to stop using several products - including Zeptolink - and return them to Zomojo. That means Zeptonics' high-frequency trading customers will be forced stop using some Zeptonics products.

Mr Hurd has also been ordered to hold all profits made from the sale of the products in question in a trust fund for Zomojo, and to compensate Zomojo for losses suffered as a result of those sales.

Zomojo director and co-founder Dr Greg Robinson said that he was keen to move on from the episode.

"Zeptonics clients who have been operating Zomojo-owned technology will need to remove the relevant hardware and return it to us . . . while we regret any inconvenience this may cause them, it is the unfortunate and unavoidable consequence of Mr Hurd and Zeptonics selling technology they did not own," he said.

Zeptonics said it was complying with the court order but believed there were "substantial grounds for appeal".

Zeptonics also says it will try to help its customers and "seek a remedy through the courts".

A hearing later this year will determine how much compensation Mr Hurd and Zeptonics will have to pay to Zomojo.