Fund Executive Ganek Can’t Sue Prosecutors for Firm’s Demise

(Bloomberg) -- A former hedge fund executive’s bold attempt to hold prosecutors responsible for the demise of his firm fell apart as an appeals court threw out his case, saying that authorities had a legal basis for a search warrant even if false information was used to obtain it.

David Ganek, a co-founder of Level Global Investors LP, sued former Manhattan U.S. Attorney Preet Bharara and more than a dozen of his deputies and FBI agents in 2015, alleging that they used fabricated evidence to justify a 2010 raid of the firm. Prosecutors won a partial dismissal of the case last year and appealed seeking to have the entire case thrown out.

On Tuesday, an appeals court in Manhattan threw out the remainder of the lawsuit, finding that prosecutors and agents had immunity from Ganek’s claims. The appellate judges said it didn’t matter whether law enforcement officials used a false statement from a Level Global employee to obtain a warrant to search the firm because the statement wasn’t necessary to establish probable cause.

Ganek was never accused of wrongdoing. He said that negative publicity after the raid led to the collapse of the fund in February 2011.

“This is a dangerous day for private citizens and a great day for ambitious, attention-seeking prosecutors who are now being rewarded with total immunity even when they lie and leak,” Ganek said in a statement. “The good news is this ruling does not preclude the Department of Justice from bringing disciplinary charges.”

A spokesman for Bharara’s successor, acting Manhattan U.S. Attorney Joon Kim, declined to comment, saying the ruling spoke for itself. Bharara tweeted about the decision: “Appeals court unanimously dismisses every aspect of hedge funder David Ganek’s baseless lawsuit against me and 14 other public servants.”

Dozens Convicted

After a years-long crackdown on insider-trading that resulted in dozens of convictions and sent traders and company insiders to prison, Ganek’s lawsuit in February 2015 was the most conspicuous counter-punch by a hedge fund executive who felt wronged by the government.

Ganek sued two months after a federal appeals court issued a ruling that forced prosecutors to abandon a dozen cases and upended an investigation that took direct aim at Wall Street. He sought to hold the government accountable for relying on what he said was false evidence to justify the November 2010 raid on his firm.

Ganek said in his lawsuit that he waged a last-ditch effort to save his business after the raid, as his lawyer pleaded with Bharara to clear him of the allegations. He said that the request fell on deaf ears and that Level Global, which had $4 billion under management, was forced to shut down.

A lower-court judge said last year that Ganek’s “grave allegations” deserved further scrutiny, a decision that the appeals court reversed on Tuesday.

FBI Affidavit

Ganek’s suit focused on an FBI affidavit justifying the raid, which stated that a witness, a Level Global analyst named Sam Adondakis, told agents that he had informed Ganek of the source of insider information for trading tips. But Adondakis, who cooperated with prosecutors and testified for the government, later denied that assertion at trial.

The appeals court said evidence that Ganek knowingly traded on inside information would give authorities probable cause to conduct a search, but it wasn’t needed in order to get a warrant.

The affidavit alleges that some of Ganek’s employees had traded on inside information and that “there was at least a fair probability to think that his office was among the LG premises where evidence of an insider trading scheme would be found,” the appeals court said, referring to Level Global.

Ganek “was a sophisticated trader who would likely know without needing to be told that the sort of information being conveyed -- e.g., future projections provided in advance of earnings announcements -- was not yet public and could not be obtained without the aid of an insider,” the court added.

Adondakis pleaded guilty to insider trading, and another Level Global co-founder, Anthony Chiasson, was found guilty at a trial, but Chiasson’s conviction was reversed by an appeals court in 2014 and prosecutors later dismissed Adondakis’s case. The U.S. Securities and Exchange Commission returned a $21.5 million fine paid by the firm.

Another man who was convicted with Chiasson, Todd Newman, a portfolio manager at Diamondback Capital Management LLC, also won a reversal in the 2014 appeals court ruling, which made it harder for prosecutors to bring insider-trading cases. The U.S. Supreme Court declined to hear the Newman and Chiasson case, but it later issued a decision in another matter that was favorable to the government.

In its 37-page decision, the appeals court said the prosecutors and FBI agents who were sued had “qualified immunity,” which provides them with “a broad shield from claims for money damages arising from the performances of their duties.” Lawsuits must be dismissed unless a plaintiff claims a government official violated his “clearly established” rights, the court said.

Ganek now invests his own money through a firm he founded called Apocalypse 22 LLC.

The appeals court case is Ganek v. Leibowitz, 16-1463, U.S. 2nd Circuit Court of Appeals. The lower court case is Ganek v. Leibowitz, 15-cv-01446, U.S. District Court, Southern District of New York (Manhattan).

(A previous version of this story misstated the day of the decision.)

--With assistance from Greg Farrell and Christian Berthelsen

To contact the reporter on this story: Chris Dolmetsch in New York State Supreme Court in Manhattan at cdolmetsch@bloomberg.net.

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, David S. Joachim, Paul Cox