Last year, Piper Jaffray sued four former employees and the hedge fund they started after leaving the bank. The firm alleges the workers re-created technical research products from the ones they developed at Piper.

And in fact, Telluride itself had already sued and settled with another former employee in 2004 for stealing trade secrets that the employee said were strategies he created before arriving at the firm. That same year, Telluride found itself on the receiving end of a trade-secret suit brought by the former employer of a new hire.  

Falkenstein is fighting the suit because he believes it has no merit, and that any trading techniques he planned to use were from the public domain or taken from his prior experience.

But more importantly, Falkenstein has to fight it if he wants to keep doing the only thing he's ever done professionally. "Telluride would like me to work in marketing or something," he says. "I want to be a portfolio manager again. It's what I know. It's what I do."

The cases can be lengthy and quite costly to fight. Falkenstein calls it a "tactic" used by hedge funds—a single lawsuit is enough to make other employees too afraid to leave. "They only have to make an example out of one in 10 to make the tactic work," he says.

But Tara Norgard, an attorney with Carlson Caspers Vandenburgh & Lindquist who represents Telluride, says hedge funds are in business to make money, not spend it on lawyers for unnecessary lawsuits. They only sue if they have reason.

Moreover, hedge fund managers leave firms nearly every week to start their own funds without lawsuits following them. "It's a two-way street," she says. "Most know how to drive it. Some don't."

Trade-secret suits are difficult to follow in the public domain by their very nature: They're based on secrets. Add to that the complexity of hedge fund trading algorithms, and you have all the necessary ingredients for an endless legal battle.

The specific trade secrets at the heart of Falkenstein's case remain sealed. He claims that Telluride hasn't precisely defined the trade secrets they believe he stole. Norgard insists they have.

Falkenstein says he would love to settle the case and continue to work as a portfolio manager, but, so far, that option hasn't presented itself. The case is set to go to trial in January of 2009 after the discovery process has been completed.

Right now, Telluride is examining 10 years' worth of data from hard drives on Falkenstein's personal computers for evidence of stolen trade secrets. "There's nothing like a bunch of lawyers trying to figure out mean-variance optimization," he says.

Until the suit is resolved, of course, there's always more blogging to be done.