Squarepoint Ops, LLC v. Sesum (In re Sesum)

662 B.R. 840

IN RE: Vojislav SESUM, Debtor.

Squarepoint Ops, LLC, Plaintiff, v. Vojislav Sesum, Defendant.

Case No.: 20-10794-lgb

Adv. Pro. No.: 20-01090-lgb

United States Bankruptcy Court, S.D. New York

Signed June 13, 2024

Lazare Potter Giacovas & Moyle, 747 Third Avenue, 16th Floor, New York, NY 10017, By: Robert A. Giacovas, Esq., Lainie E. Cohen, Esq., Michael T. Conway, Esq., Attorneys for Squarepoint Ops, LLC.

Whitman Breed Abbott & Morgan LLC, 500 West Putnam Avenue, Greenwich, CT 06830, By: James C. Riley, Esq., Neubert, Pepe & Monteith, P.C., 195 Church Street, New Haven, CT 06510, By: Douglas S. Skalka, Esq., Attorneys for Vojislav Sesum.

MEMORANDUM OPINION

LISA G. BECKERMAN, UNITED STATES BANKRUPTCY JUDGE.

On May 22, 2020, Squarepoint Ops, LLC commenced an adversary proceeding against the Debtor, Vojislav Sesum, seeking a determination that the debt that Sesum owes Squarepoint under the Arbitration Award (as defined below) is not dischargeable pursuant to sections 523(a)(4) and/or 523(a)(6) of the United States Bankruptcy Code. For the reasons set forth in this decision, the Court finds that the debt is dischargeable. Additionally, the Court finds that the injunction included in the Arbitration Award does not constitute a "claim" and therefore is not dischargeable.

I. PROCEDURAL BACKGROUND

A. Background

Squarepoint Ops, LLC ("Squarepoint" or "Plaintiff") is a "global asset management firm that utilizes a diversified portfolio of systematic and quantitative strategies that are developed with highly confidential and proprietary information." ECF No. 1 at 2; ECF No. 33 at 1. Vojislav Sesum ("Sesum" or "Debtor" or "Defendant") was employed as a quantitative researcher at Squarepoint between September 1, 2015 and March 5, 2018. ECF No. 33 at 3. In his role as a quantitative researcher, Sesum "developed algorithms and performed research for the purpose of creating business strategies for investments in equities." Id. After resigning from Squarepoint, Sesum joined Millennium Management, Inc. ("Millennium") in June 2018 as a portfolio manager. ECF No. 34 at ¶¶ 3, 31.

Following Sesum's resignation, Squarepoint undertook a "routine investigation... of the work that Sesum had been conducting" to "ensure that no IP had been removed." ECF No. 1 at ¶ 66. Based on its findings, Squarepoint claims that "[d]uring his employ as a quantitative researcher for Squarepoint, Sesum improperly accessed, collected, and downloaded proprietary data (including source code) for some of Squarepoint's most valuable quantitative trading strategies and then surreptitiously created a successful trading strategy that he kept hidden and disguised in his personal directory from Squarepoint." ECF No. 33 at 1. Squarepoint adds that the "trading strategy that Sesum created belonged to Squarepoint" and he "intentionally hid the strategy from Squarepoint, refused to turn the strategy over to Squarepoint when he resigned, and then took it to his new employer ... [Millennium]." Id. at 1-2.

B. Arbitration and District Court Proceedings

In April 2018, Squarepoint commenced a civil proceeding in the United States District Court for the Southern District of New York (the "District Court") and arbitration proceedings against Sesum. ECF No. 33 at 4.

i. Request for a Preliminary Injunction

Squarepoint first filed a Petition for a Preliminary Injunction Pending the Arbitration in the District Court. Squarepoint Ops, LLC v. Vojislav Sesum, Case No. 18-cv-03524 (S.D.N.Y. 2018) ("2018 Proceeding"). In May 2018, Judge Analisa Torres entered an order denying Squarepoint's request for a preliminary injunction and dismissing the action. 2018 Proceeding at ECF Nos. 11, 15, 21, 25, 26.

ii. Initial Arbitration Award

In February 2019, Squarepoint and Sesum participated in a four-day arbitration administered by the American Arbitration Association (the "Arbitration"). J-43. The Parties submitted post-arbitration briefing and delivered closing arguments in June 2019. In July 2019, the arbitrator issued a 39-page Final Award in favor of Squarepoint (the "Initial Arbitration Award"). J-43, Final Award at 1-39. In its decision, the arbitrator made three key findings. First, the arbitrator found that Sesum's actions were in breach of his duty of loyalty owed to Squarepoint, awarding Squarepoint damages totaling $188,136.87. Id. at 30. Second, the arbitrator ordered the disgorgement of profits made by Sesum through his use of the Strategy,¹ which the arbitrator calculated to be $919,052.78. Id. at 13, 33-34. Third, the arbitrator ordered injunctive relief against Sesum (the "Injunction"), which required Sesum to (i) return the underlying code and backtests to Squarepoint, (ii) inform Millennium that he did not own the Pre-Employment Intellectual Property, (iii) cease use of the Strategy and pay Squarepoint any profits he was paid by Millennium, and (iv) inform Millennium of the injunctive relief. Id. at 36-37.

iii. 2019 District Court Proceeding

On August 6, 2019, Squarepoint filed a Petition to Confirm the Initial Arbitration Award (the "Petition for Confirmation") in the District Court. Squarepoint Ops, LLC v. Vojislav Sesum, Case No. 19-cv-07317 (S.D.N.Y. 2019) ("2019 Proceeding"). On September 13, 2019, Sesum filed a Motion to Vacate the Initial Arbitration Award (the "Motion to Vacate") and a Memorandum of Law in Support of its Motion to Vacate. 2019 Proceeding at ECF Nos. 15, 16. Squarepoint filed its opposition to the Motion to Vacate on September 30, 2019, and Sesum filed its reply to the opposition on October 15, 2019. Id. at ECF Nos. 23, 28. In March 2020, Judge Loretta A. Preska granted and denied in part both Squarepoint's Petition for Confirmation and Sesum's Motion to Vacate (the "March Order"). Id. at ECF No. 32. Judge Preska remanded the Initial Arbitration Award to the arbitrator for clarification related to the injunctive relief portion of the award. Id.

iv. Modified Arbitration Award

In response to Judge Preska's March Order, the arbitrator issued a Modified Final Award on May 21, 2020 (collectively, with the Initial Arbitration Award, the "Arbitration Award"), clarifying the scope of the injunctive relief. J-43, Modified Final Award at 1-7. In the Arbitration Award, the arbitrator clarified the scope of the Injunction. Id. at 4 n.2. The arbitrator clarified that the "scope of the injunction applies to what Sesum cannot do directly or indirectly." Id. The arbitrator also pointed to the exhibits which it found describe the "intellectual property" that is the subject of the Injunction. Id. The arbitrator indicated that the "intellectual property" is described in the Portfolio Management Survey and Finance Manager Agreement, both prepared by Sesum, as well as notes prepared by Millennium during their interview of Sesum. Id.

II. ADVERSARY PROCEEDING

In March 2020, Sesum filed a petition in the United States Bankruptcy Court for the Southern District of New York (the "Court") seeking relief under Chapter 7 of the United States Bankruptcy Code (the "Bankruptcy Code"). In re Vojislav Sesum, No. 20-10794 (Bankr. S.D.N.Y. 2020) ("Main Case"). Squarepoint then initiated an adversary proceeding (the "Adversary Proceeding") by filing a complaint (the "Complaint") seeking a determination that the debt owed to Squarepoint under the Arbitration Award is non-dischargeable pursuant to sections 523(a)(4) and/or 523(a)(6) of the Bankruptcy Code. ECF No. 1. On July 6, 2020, Sesum filed its answer to the Complaint. ECF No. 5.

In September 2020, the Court granted Squarepoint's Motion to Confirm the Arbitration Award. Main Case at ECF No. 35.

A. Motion for Summary Judgment

Discovery was completed in March 2021. ECF No. 23. In June 2021, Plaintiff filed a motion for summary judgment (the "Summary Judgment Motion"), a statement of facts, and a declaration in support of the Summary Judgment Motion. ECF Nos. 23, 25, 26. Squarepoint sought a declaration that the Arbitration Award is non-dischargeable pursuant to sections 523(a)(4) and/or 523(a)(6) due to "[Sesum's] willful and malicious misappropriation of Squarepoint's trade secrets." ECF No. 26 at 1. On August 18, 2021, Sesum filed a Memorandum of Law in Opposition to the Summary Judgment Motion and related documents. ECF Nos. 28, 29, 31 at 2. The Court heard oral arguments regarding the Summary Judgment Motion in September 2021.

In September 2022, the Court issued an Opinion and Order denying Squarepoint's Motion for Summary Judgment (the "SJ Opinion"). ECF No. 31. The Court found that Squarepoint failed to prove the fraudulent intent necessary to support its argument that Sesum's actions amounted to embezzlement. Id. at 5. The Court also found that Squarepoint failed to provide sufficient evidence of willfulness as required under section 523(a)(6). Id. at 6.

B. Trial

On February 6, 2023, the Court entered a Joint Pre-Trial Order outlining the two issues to be tried. ECF No. 33. First, "whether Sesum's conduct was undertaken with fraudulent intent such as to fall within the exception to discharge of 11 U.S.C. 523(a)(4) for embezzlement." Id. at 7. Second, "whether Sesum acted with the requisite willfulness to come within the exception to discharge of 11 U.S.C. 523(a)(6)." Id. The Defendant filed a declaration in lieu of direct testimony (the "Declaration"). ECF No. 34. A two-day trial was held on February 28, 2023 and March 3, 2023 (the "Trial").² ECF Nos. 35, 36.

At the Trial, it became clear that there are two additional issues that must be decided by this Court: whether there was embezzlement of property by Sesum, and, if the Court were to rule in favor of the Defendant, clarification of the scope of the discharge of Squarepoint's claim. Specifically, the Court must decide whether there was property, as defined under New York state law, which was appropriated by the Debtor, and whether the Injunction is included as part of Squarepoint's claim for purposes of discharge.

i. Post-Trial Briefing

Following the Trial, ...