How a California hedge fund bulldozed the state’s labor laws to impose some of the harshest noncompetes on Wall Street

Over the summer, Wall Street was abuzz over a bill passed by New York lawmakers that would ban the practice of restraining employees from working for competitors. While many companies oppose the proposed law, which sits on Gov. Kathy Hochul’s desk, hedge funds in particular risk having their operations upended.

These firms, especially ones that invest millions building trading algorithms from scratch, have grown accustomed to barring employees from working for competitors, forcing them to vacate the industry through onerous noncompetition clauses to their employment contracts. In the quant-trading realm, these restrictions can last two years, and ugly battles over the practice have at times spilled into public view after trading firms have sued to enforce their vise grip on departing staff.

That’s partly why so few quantitative trading firms reside in California, whose labor-friendly laws have long favored employee mobility and competition. The state first banned noncompetition agreements in the 1800s.

The practice has become so entrenched in quant trading, according to a California employment attorney, that some New York finance clients are “gobsmacked” and “apoplectic” when informed they cannot legally impose a noncompete in the state.

But that doesn’t mean they can’t try.

Exhibit A: The Voleon Group, a prominent quantitative-trading firm based in Berkeley, California, that manages about $5 billion in assets. The hedge fund has bulldozed past state prohibitions to not just impose noncompetes, but impose some of the harshest noncompetes in the entire industry, according to seven former employees, industry experts, and documents detailing the firm’s restrictive covenants. The company’s policies have demanded employees leave the industry for two years without pay, and the firm has, in some cases, intimidated and threatened employees with legal action to compel compliance, according to people familiar with the matter.

In a statement to Insider, a Voleon spokesman said:

“Like most hedge funds, in order to protect its most sensitive intellectual property, Voleon requests that select employees sign noncompetition agreements. Voleon’s non-compete agreements are not a condition of employment. Those who sign it will receive a paid garden leave. Those who haven’t signed it remain employed at Voleon, but may not receive access to the most sensitive intellectual property.”

I think it’s predatory to strong-arm new grads to sign things like that ex-Voleon employee

The Voleon ex-employees who spoke to Insider said their noncompete agreements did not provide paid leave. Ex-employees and other sources close to the firm said the unpaid noncompetes have been applied broadly — including to people who say they had little exposure to the firm’s secret sauce. They described the firm’s noncompetes as a de facto condition of employment and said the firm was taking measures to restrict employees from joining competitors as recently as this year.

As New York lawmakers, and even federal regulators, contemplate bans on noncompetes, Voleon’s tactics offer a potential playbook to other investment firms facing similar restrictions and serve as a reminder that the imbalance of money and power between employers and employees can short-circuit well-intentioned legal provisions.

The Voleon Group was forged in the shadow of the University of California Berkeley by Michael Kharitonov and Jon McAuliffe, a couple of pioneering statistics and machine-learning researchers. The pair worked together at the quant hedge fund D.E. Shaw in the 1990s before each went on to complete a Ph.D. — Kharitonov at Stanford in computer science and McAuliffe at UC Berkeley in statistics.

“Machine learning” and “artificial intelligence” have become ubiquitous industry buzzwords in recent years, but Voleon is one of the trailblazers in the investing world.

Trading firms have for decades deployed statistical research and sophisticated algorithms to shake profits loose from the markets. But Voleon was among the earliest — and for a number of years one of the few — to hand the steering wheel over to the machines, and it has been the harvesting alpha from machine-learning strategies since 2007.

The difference is a bit like hunting for buried treasure in a Tesla, with modern navigation and driver-assistance systems, versus sending a car off and trusting it to find treasure on its own.

“It’s threaded through every process. That’s an important aspect of the culture,” one former employee said of Voleon’s machine-driven investment process.

Results for Voleon were meager early on, according to returns published by The Wall Street Journal in 2017, including a couple of money-losing years in 2009 and 2010. But then the machines hit their stride, producing some blowout years that left the market in the dust. Voleon dwarfed average hedge-fund industry returns from 2011 through 2015 — including gains of 35% and 46% in 2012 and 2013, respectively — before losing 9% in 2016.

Performance has been uneven since, according to returns published in various media outlets, and today, the fund manages around $5 billion in assets, down from $6.5 billion in early 2020.

Like so many other quant-trading firms, Voleon took care to protect its edge. Guarding the secret sauce and keeping a low profile were priorities, and for years the firm’s main office in Berkeley, a nondescript building with blacked-out windows and no external signage, was a visual reminder.

“It’s a very secretive culture, and the building reflected that,” the first former employee said. A second ex-employee was more blunt: “It looks like an abandoned warehouse.” The company added another similarly spartan building two doors down, with a plumbing supply store in between them. (More recently the firm acquired office space nearby in a more bustling strip of Berkeley.)

The firm’s secretiveness is also reflected in its noncompetes, which are some of the most aggressive in an industry known for austere restrictive covenants.

Lengthy noncompetition agreements are commonplace at most of the biggest names in quantitative trading, such as Citadel, Jump Trading, and Two Sigma. These firms, which are competing over a pool of billions in annual trading profits, do have valuable intellectual property to protect. They have robust trade secrets laws at their disposal, and ex-employees have been sentenced to prison for stealing computer code.

Or they can turn to noncompete clauses, which have evolved into a layer of protection that’s easier in practice to impose.

“This whole industry revolves around these noncompetes now,” said Harry Lipman, a New York-based employment attorney with Rottenberg Lipman Rich, who works with systematic trading firms. That’s in part because of the challenges of a firm discovering, much less proving, that a former employee used or disclosed confidential information to a rival, Lipman added.

But the contracts are often applied broadly, including to people with little to no exposure to real IP, and thus are viewed by many in the industry as thinly veiled retention tools.

“Many companies and hedge-fund companies define confidential information so broadly and define competition so broadly that they’re basically trying to chill their employees from leaving,” a second California employment attorney said.

Most quant-trading stalwarts tend to make it worth the employee’s while — partly to make such lengthy contracts more enforceable in courts — by paying them six-figure sums as they sit out of the industry for a couple of years before moving to a competitor. Most employees take the money and bide their time by working in a different industry, like Big Tech, or on startup projects until their noncompetes run out.

Voleon is an outlier in this regard.

“Everyone I’ve talked to has been shocked by the unpaid part,” one of the former employees said. He added: “They will defend that noncompete by saying more and more firms have two years. The trick is: And yes, they pay you something when they make you sit out of your career.”

“It’s a very cost-conscious culture. And this is consistent with that,” the person added.

Other employees Insider spoke with have a less generous view, with several describing the company as stingy — a third ex-employee bemoaned the company as “notoriously cheap” on compensation.

“They tried to do whatever they could to not pay people more,” said the second former employee.

Several employees said Voleon raised pay in the past couple of years as the market for talent has gotten stiffer.

A company spokesman told Insider that Voleon began updating contracts earlier this year to pay employees to sit out for 18 months. The spokesman declined to say when the updates were made, to whom they are applied, or how much they pay. Two-year unpaid noncompetes remained in effect for personnel at the firm this year, according to two people familiar with the matter.

In recruiting talented researchers to work at its fund, Voleon benefits from a distinct edge: It’s pretty much the only game in town.

The company leans into its academic image in marketing and recruiting for its fund, former employees say, and relies on young math brainiacs fresh out of graduate school to staff its firm.

That includes a sizable presence of employees from UC Berkeley, whose campus is several blocks from Voleon headquarters. It’s a seamless transition — and one of the few available — for graduates hoping to stay in the area and work in quantitative finance.

“They’re clearly using the brand name of Berkeley,” a fourth former employee said. “That’s their bread and butter to attract people.”

McAuliffe, the cofounder and chief investment officer, is also an adjunct professor at the university and teaches courses in applied statistics and machine learning. Martin Wainwright, a distinguished and award-winning former UC Berkeley statistics professor who joined MIT in 2022, also worked at the fund.

“We have really outstanding Ph.D. students at Berkeley in statistics,” McAuliffe said in a recent podcast interview.

Among the quotes featured on McAuliffe’s university bio page is one by physicist Howard Aiken: “Don’t worry about people stealing your ideas. If your ideas are any good, you’ll have to ram them down people’s throats.”

Despite its location and California’s prohibition on the practice, Voleon has been able to impose its noncompetes in part because the people it has hired are often too intimidated to fight them, according to the firm’s former employees who spoke to Insider.

“I was pretty naive. They hire guys fresh out of school,” the fourth former employee said, adding that he was impressed and attracted to Voleon in part because of its academic credentials, including the presence of Wainwright.

A fifth ex-employee said he was initially excited to land a job at Voleon, describing it as a relaxed environment and “not a bad place to be.” But he later learned that competitors paid far more, including while employees sit out their noncompete.

“It made me be like, ‘What the fuck did I sign?'” the ex-employee recalled.

This former employee said he felt frustrated because he didn’t know any proprietary or potentially damaging information, but fighting it felt daunting.

“I’m a small fish and they cost like $600 per hour,” this person said of hiring an attorney.

“I think it’s predatory to strong-arm new grads to sign things like that,” he added.

Voleon has imposed noncompetes for years, but in recent years, it has implemented restrictive covenants through a “voluntary” profit-participation program, according to copies of Voleon contracts seen by Insider. In short, a substantial annual bonus is contingent upon employees signing the agreement, which contains a host of employment restrictions, from not divulging trade secrets to a prohibition on working for an exhaustive list of businesses, including rivals, investors, clients, or even potential investors and clients.

In two of the contracts seen by Insider, the bonus payments exceeded the employee’s base salary.

Ostensibly, employees aren’t required to sign the agreement — they can opt out and not take the bonus. But former employees, as well as lawyers and recruiters who work in the industry, say it’s a de facto condition of employment as the bulk of total compensation at hedge funds comes through the bonus pay rather than base salary.

“No one is going to work at a hedge fund without the bonus,” one of the ex-employees said.

The Voleon spokesman said the agreements “are not explicitly or implicitly a condition of employment” and that the agreement is not a requirement to receive an annual bonus.

“We have employees who chose not to sign agreements and remain employed at the firm, as well as employees who began work at Voleon and chose to sign agreements at a later date,” the spokesman said in a statement.

He declined to specify what percentage of employees have not signed.

“I don’t know anyone who hasn’t signed,” another former employee said, adding that Voleon managers “tell you that everyone signs it. They encourage you to sign it.”

A 2019 employee contract seen by Insider said upon signing the agreement the employee would receive an immediate payment of more than $100,000, a guaranteed minimum payment in excess of $100,000 on their first employment anniversary, and then annual discretionary payments thereafter based on company performance. More recent employee contracts seen by Insider were substantially similar, though the payment amounts vary.

The contracts state that the employee consents to the agreement being governed by the laws of Delaware, a corporate-friendly haven that tilts toward favoring contract enforcement. Requiring employees to sign contracts agreeing to be governed by a different state’s laws and courts — so-called “choice of law” and “choice of forum” provisions — was  explicitly banned by California starting in 2017 with an update to the state’s labor code, though it makes an exception for provisions that are not a condition of employment.

“It’s designed to ensure that if you are an employee who lives or works in California, you get to hear your dispute in California applying California law,” Jessica Riggin, an employment attorney and partner at California-based Rukin Hyland & Riggin, said of the labor-code update.

Three ex-employees said they signed the Voleon contract because they believed it wouldn’t be enforceable in California or attorneys told them as much. They didn’t end up in disputes with the firm, though in some cases they left for companies unlikely to be considered competitors.

But some who’ve tried to leave for another investment firm have been met with resistance and intimidation, according to people familiar with the matter. In recent years, the company has threatened employees trying to defect to rivals with trade-secret-misappropriation lawsuits, the people said.

Some of Voleon’s rivals inadvertently buttress the company’s noncompete. Not wanting to risk a legal spat with a competitor, large trading firms specifically question candidates about their noncompete agreements, according to recruiters and former Voleon employees, in some cases asking them to secure a release from their contract before moving forward.

Multiple former employees have hired attorneys to fight Voleon’s efforts to prevent employees from working for rivals, arriving at out-of-court settlements, according to people familiar with the matter. Several of the former employees Insider spoke with stressed that hiring an attorney was key to navigating Voleon’s employment restrictions and getting the company to back down.

“It’s essentially unenforceable, but you need to lawyer up,” one of the ex-employees said. “They essentially use it as a scare tactic.”

But faced with the specter of a legal battle with a multibillion-dollar hedge fund, not everyone will embrace a fight — especially young employees without corporate savvy or the wherewithal to seek legal representation. The situation is even more precarious for employees on foreign-worker visas, whose ability to stay in the country is tied to sponsorship by the firm.

Others may not know they have options.

“They hire a lot of people just out of school who I would say are less savvy about these sorts of things,” one of the former employees said. “I think they are intimidated out of asserting their rights under California law.”

“Employees — particularly employees fresh out of college — may not be aware of their legal rights and may read this noncompete and take it very seriously and never leave this company,” said James Hannaway, an associate at Sanford Heisler Sharp in Washington, DC. “The bottom line is companies sometimes overreach just to have the effect of scaring people.”

It’s unclear how New York’s noncompete laws — or challenges at the federal level — will shake out. Some experts warn that the New York law, if signed by Hochul, could lead to an exodus of financial firms from the state.

But employee ignorance and fear, combined with shrewd legal language, may be an effective and cheaper alternative to switching headquarters, and enterprising and powerful employers will likely find ways to impose their will.

Voleon is far from the only California firm to evade the state’s public policy against noncompetes, a significant enough problem that state Attorney General Rob Bonta issued a press release last year “reminding employers and workers that noncompete agreements are not enforceable in California.” Such provisions are “prohibited in California,” he said.

The challenge is the law may say that, but what do you do when someone threatens you? California state Sen. Anna Caballero

The state has passed amendments over the years to close loopholes and make it more airtight but determined executives and clever corporate attorneys keep the cat-and-mouse game alive.

For instance, the 2017 update to the labor code, which clarified that employers can’t simply apply a different state’s laws and courts to California employees, carved out an exception if the employee hires a lawyer to negotiate the terms before signing.

This typically wouldn’t apply to many people outside of senior executives, but employment attorneys told Insider that some firms have pounced on the language, directing even junior job candidates to hire legal counsel before they sign the contract in an attempt to exploit the loophole and try to skirt California’s prohibition on noncompetes. Legal experts said this still would not make the noncompete enforceable under California’s longstanding laws, but it opens the door for a judge in a different state to enforce it.

Beyond the legal nuances, the most significant hurdle to most employees remains the cost and stress of fighting a powerful employer. It’s why the instances of actual litigation are tiny compared to the cases that never materialize, said Lipman, the New York-based employment attorney.

“It costs a lot of money to litigate these matters, and quants, like most of us, don’t want to get involved in litigation,” Lipman said.

But California companies may soon face stiffer repercussions for foisting noncompetes on their staff.

Over Labor Day, a new state bill was signed into law that further expands and strengthens California’s prohibition on noncompetes, specifying that the practice is unenforceable regardless of where the employee works or where the contract is signed. It also requires employers to provide for damages and attorney fees when an employee prevails.

State Sen. Anna Caballero said she sponsored the bill to address the power imbalance between employees and employers who seek to impose unlawful noncompetes.

“The challenge is the law may say that, but what do you do when someone threatens you?” Caballero told Insider. She added: “If you can get attorneys fees and damages because of the attempt to enforce the noncompete clause, then it makes it easier for you to stand up for your rights.”

Caballero said noncompete policies like Voleon’s don’t comport with the law and should be stopped.

Whether that will be enough to encourage more employees to face off against corporate giants to challenge unenforceable restrictive covenants remains to be seen.

Providing legal remedies may help, but only if employees are aware they exist.

The first California employment attorney, who asked to remain anonymous because of his work with hedge funds, recalled counseling a non-finance company a number of years ago about its noncompete policies:

“I said to the head of HR, ‘You know this noncompete is illegal right?’ They responded, ‘Yes, but my employees don’t.’ That’s the thinking.”

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