Employees of Teza Technologies knew the start-up trading firm faced serious risk of legal action from Citadel Investment Group, the previous employer of Teza's founders, and were told to be discreet about the new venture, according to court testimony Tuesday.

Several computer programmers hired last spring by the nascent high-frequency trading venture said that Teza executives warned them about reprisal from the Chicago-based hedge-fund giant, which this week pressed a legal case against Teza's founders alleging that they violated terms of their noncompete agreements with Citadel.

Teza's defense hinges on the argument that its founders, Misha Malyshev and Jace Kohlmeier, were overseeing the development of Teza's technical infrastructure, rather than creating actual trading strategies, which is forbidden by their Citadel noncompete agreements for a period of nine months following their resignation.

Chicago-based Citadel is looking to defend against the loss of two key members of its high-frequency trading group, which Malyshev and Kohlmeier helped build into a $1 billion business over the last four years.

High-frequency trading, driven by computer programs, seeks profits through rapid-fire transactions across multiple exchanges and trading venues, and has helped banks and proprietary trading firms make healthy returns as the broader market struggles.

In a videotaped deposition played before the court, Teza programmer Vladimir Roubtsov said that one of the first things he asked Malyshev after being approached for a job was whether Teza was in a legal gray zone.

"[Malyshev] said that he was subject to noncompete restrictions, which meant we won't be able to trade or develop strategies unless all the initial work will be concentrated on building infrastructure," said Roubtsov.

Malyshev and Kohlmeier, who began setting up Teza Technologies after departing Citadel in February, have stressed in their own testimony that they are not developing trading strategies.

In his own videotaped deposition, Teza programmer Demian Kosofsky said that he knew of no one at the firm working on trading strategies.

While he acknowledged discussing trading "signals" with Kohlmeier in early June, he said these were "dummy signals" designed for the purposes of testing the infrastructure that Kosofsky was developing.

According to Roubtsov's testimony, Malyshev also told Roubtsov to be discrete about working for Teza.

"The gist of his message was to not broadcast the fact that I now work for Teza," said Roubtsov. "For example, not to put Teza's name in my LinkedIn profile."

Steven Horn, another Teza programmer who appeared in a videotaped deposition, said that he was warned by Teza Chief Information Officer William Sterling of potential "legal complications" facing the start-up, when both Horn and Sterling were still employed by UBS AG (UBS).

Teza is dealing with other legal issues stemming from the July arrest of Sergey Aleynikov, a former programmer at Goldman Sachs Group Inc. (GS) charged with stealing code from the Wall Street bank. Aleynikov was subsequently fired from Teza.

On Monday, Sterling said that there were ownership questions around other pieces of code uploaded to Teza's database by programmers, and that Teza opted not to use any of that code in favor of being "conservative."

Roubtsov, in his videotaped deposition, acknowledged that he too may have uploaded coding that was "misappropriated."

He said that he contributed to Teza code that was also present in a public open-source project of his, and incorporated into work he had done for a firm called Totem.

"It is possible that Totem can claim rights to that code," Roubtsov said. "I find it difficult to assign ownership to it, because it was done based on ideas I had going back many years."

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