A former Citadel Investment Group LLC executive testified Monday that legal action brought by his former employer could put his new company in jeopardy, as he continued to deny violating a non-compete agreement with the Chicago-based hedge fund firm.

Jace Kohlmeier, a former senior member of Citadel's high-frequency trading group, maintained that his start-up, Teza Technologies LLC, was not developing trading strategies in the months immediately following his departure.

He warned the Illinois Chancery Court against an injunction that could shutter Teza and harm its employees.

"There's a serious risk that if the injunction Citadel seeks is granted, that our company would not be able to financially sustain itself," said Kohlmeier, now president of Teza.

Citing payroll and legal expenses, Kohlmeier said it was "almost certain" that Teza would overrun its $25 million in financial commitments, putting the future of the company in question.

Citadel in July began legal action against Teza following its formation earlier this year. It alleged that Kohlmeier and another former member of Citadel's high frequency trading group, Mikhail Malyshev, had breached agreements not to compete with Citadel for a period of nine months after leaving the company.

Kohlmeier and Malyshev, now chief executive of Teza, built Citadel's high frequency trading unit over four years into a business generating annual profit of $1 billion until both left the company in February.

Their new firm came to light in July when Sergey Aleynikov, a former Goldman Sachs Group Inc. (GS) employee hired by Teza, was arrested by the FBI on charges he stole computer codes from his former employer.

Teza subsequently fired Aleynikov, now facing charges in a Manhattan federal court.

In Citadel's case against Teza, legal arguments early Monday focused on whether or not Teza was creating trading strategies, which would put Kohlmeier and Malyshev in violation of their non-compete agreements.

Kohlmeier insisted that the work being done at Teza amounted to setting up infrastructure - testing software and connectivity tools while evaluating connections to exchanges like CME Group Inc. (CME) and NYSE Euronext's (NYX) derivatives platform, Liffe.

He also denied that a proposed piece of coding, designed by a Teza employee to predict changes to IBM's (IBM) share price one second in the future, constituted a trading strategy and instead compared it with a "calculator" that wouldn't produce tradeable results.

Despite the work done setting up the firm, Kohlmeier said that Teza is "by no means ready to trade, so it doesn't compute how it could be constituted as a competitive threat."

Kohlmeier acknowledged that by creating Teza with Malyshev, he risked tens of millions of dollars in deferred compensation from Citadel. He also said that during the course of interviewing for positions at Teza, the company stopped pursuing candidates who were also considering jobs at his former employer.

Citadel wants the full nine-month non-compete agreements with Kohlmeier and Malyshev enforced, and in separate arbitration is pursuing $300 million worth of damages from the defendants, along with $100 million from a former Citadel lawyer now serving as Teza's general counsel.

The case is expected to continue Tuesday.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4135; jacob.bunge@dowjones.com