Liquidnet Inc, a U.S. venue where institutions anonymously trade public stocks, was sued by Wedbush Securities Inc Thursday for allegedly stealing trade secrets to start a rival business trading shares of private companies.
The lawsuit came three days after Liquidnet hired Lou Kerner, formerly a Wedbush vice president of equity research covering social media and e-commerce, to spearhead the new business.
Kerner and Michael Silverstein, a colleague who also moved to Liquidnet from Wedbush, are also defendants in the lawsuit filed in the New York State Supreme Court in Manhattan.
Liquidnet spokeswoman Melissa Kanter said that company was closely reviewing the lawsuit, but did not have an immediate comment on the allegations. Both companies operate in New York, though Wedbush is based in Los Angeles.
The lawsuit raises the stakes in the trading of shares in unlisted companies such as Facebook Inc, a market Liquidnet said could be valued at $7 billion in transactions this year.
Liquidnet is known as a successful "dark pool," where institutions can swap large blocks of stock without alerting the broader marketplace.
Adding the ability for its hedge fund, pension fund and mutual fund clients to trade unlisted shares pits Liquidnet against private exchanges such as SecondMarket.
According to the complaint, Kerner and Silverstein earlier this year began working in Wedbush's new private shares group.
Wedbush said Kerner and Silverstein early this month began raiding its customer lists and other data, forwarding much of the information to personal email accounts and locking Wedbush out of its own databases by changing passwords.
It said the men resigned without notice on October 16, and upon joining Liquidnet the next day began "blatantly" soliciting Wedbush customers.
The defendants stole "with the goal of 'starting' the same business they took from Wedbush at Liquidnet," causing Wedbush "direct, immediate and irreparable harm," the complaint said.
Wedbush seeks to permanently block the defendants from using any alleged stolen trade secrets or customer data to compete, as well as compensatory damages and other remedies.
Technology companies such as Facebook and Groupon Inc have tested the markets for private shares to gauge how much they might be worth should they conduct initial public offerings.
In an interview on Monday, Kerner said that while few institutions invest in private shares, "they all still recognize that these companies are changing the world and that they will impact every single company in their portfolios."
The U.S. Securities and Exchange Commission is evaluating the market for private shares, though it is unclear how much regulation it might impose.
The case is Wedbush Securities Inc v. Liquidnet Inc et al, New York State Supreme Court, New York County, No. 652875/2011.
(Reporting by Jonathan Stempel in New York; Additional reporting by Jonathan Spicer; Editing by Gerald E. McCormick)