March 23, 2017 / 10:35 PM / 5 months ago

Feds try for toss of hedge fund founder’s misconduct case at 2nd Circuit

(Reuters) - On Friday morning, the Justice Department will appear before Judges Reena Raggi, Denny Chin and Susan Carney of the 2nd U.S. Circuit Court of Appeals to argue that even if an FBI agent misrepresented government evidence to obtain a search warrant in 2010 against hedge fund founder David Ganek, it doesn’t really matter.

In fact, the government insinuated in its brief to the 2nd Circuit that even though prosecutors never charged Ganek with insider trading – and even though the former employee who supplied the information at the heart of the government’s application for a search warrant specifically testified that he didn’t tell the FBI Ganek knew about his insider sources – Ganek still might have known about illegal trading at his fund.

That’s quite a remarkable doubling-down in a case accusing 15 FBI agents and federal prosecutors – including former U.S. Attorney Preet Bharara and his former top deputy Richard Zabel – of violating Ganek’s Fourth and Fifth Amendment rights. The Justice Department failed last year to convince U.S. District Judge William Pauley of Manhattan that Ganek’s claims should be dismissed under the doctrine of qualified immunity, which gives government officials broad leeway to conduct investigations. On appeal, the Justice Department strategy appears to be that Ganek, who shuttered his fund, Level Global, after the FBI raided his office in 2010, got no more than what he deserved.

Ganek’s lawyer, former federal judge Nancy Gertner of Neufeld Scheck & Brustin, said in the hedge fund founder’s 2nd Circuit brief that the government’s vague and unsubstantiated new shots at Ganek are a “troubling” tactic in an appeal focused on the Justice Department’s own alleged misconduct.

“It is not surprising that defendants ask this court to protect them from having to answer for their misconduct,” Gertner wrote in Ganek’s brief. “But what is surprising, in a case about tarnishing Ganek’s reputation without basis, is that defendants would use their papers as an opportunity to hint at new false allegations against him, in the face of sworn testimony from an FBI agent and the government informant clearing Ganek.”

As the National Association of Criminal Defense Lawyers said in an amicus brief backing Ganek, this a remarkable case. It’s rare for someone with Ganek’s high profile and financial resources to assert his constitutional rights in a so-called Bivens action against the government, rather than quietly retreating from attention. But then it’s also “highly unusual,” to quote the NACDL, for an investigating FBI agent to admit under oath “the existence of a false statement in a search warrant affidavit.”

Briefs from both sides suggest the appeal will center on how the 2nd Circuit views the facts of the government’s pursuit of Ganek, rather than on the law. There’s not much dispute about those facts. In 2010, about three years into a celebrated campaign against hedge fund insider trading, FBI agents confronted a onetime Level Global research analyst, Spyridon “Sam” Adondakis, in Central Park. Investigators told Adonakis they had wiretap evidence implicating him in insider trading. Adonakis, who had been fired from Level six months earlier, eventually agreed to provide the FBI with information about his former employer.

At a meeting on Nov. 2, 2010, with three FBI agents and two assistant U.S. attorneys, Adonakis admitted that he’d traded Dell shares based on confidential insider information. He also said he had shared his Dell information with Ganek and others at Level. Two people at the fund knew Adonakis’ information came from a Dell insider. Crucially, however, Adonakis said he had not told Ganek that he obtained his tip from a corporate insider.

On Nov. 19, FBI agent Holly Trask signed a 37-page affidavit in support of the government’s request for a search warrant against Ganek and others at Level. Trask had not been at the Nov. 2 meeting with Adonakis but was briefed by investigators who attended it. The affidavit said twice that Adonakis “informed Ganek … of the sources of the inside information.” A federal magistrate signed the search warrant, which specifically allowed investigators to seize evidence from Ganek.

The FBI tipped the Wall Street Journal about plans to raid Level so photographers captured images of agents carting boxes out of the fund’s offices on Nov. 22, 2010. Level’s investors began pulling out.

Desperate to reassure investors spooked that he personally was named in the search warrant, Ganek hired outside lawyers to conduct an internal investigation. After he came up clean in the internal inquiry, a Ganek lawyer reached out directly to U.S. Attorney Bharara in a last-ditch attempt to save the fund from shutting down. In response, the FBI prepared a report on its Nov. 2 meeting with Adonakis, including an allegation that Adonakis said Ganek was particularly interested in his information about Dell because it came from an insider. On Feb. 7, 2011, the U.S. attorney told Level he would not intervene to save the fund from shutting down. On Feb. 11, Level closed its doors.

That same day, prosecutors met with Adonakis for the first time since the Nov. 10 session. According to Judge Pauley, Adonakis told the government at the meeting in February, as he had previously said in November, that Ganek was not aware the trader’s Dell source was a corporate insider. Adonakis’ representations, in other words, apparently contradicted what the FBI said in the affidavit backing the search warrant request and in the February 2011 report on the first meeting with Adonakis.

Ganek knew none of these details for years. Only the FBI search warrant was public at the time the FBI raided Level. The affidavit that allowed the government to obtain the warrant remained confidential, even after Level co-founder Anthony Chiasson was charged with insider trading in Dell shares.

The affidavit surfaced a few months before Chiasson went to trial in November 2012, but it wasn’t until the trial itself that Ganek was given a reason to contest the FBI’s representations. As Judge Pauley recounted in his opinion allowing Ganek’s case to move forward, Adonakis testified at Chiasson’s trial that he told the government he’d never informed Ganek his source at Dell was a corporate insider.

An FBI agent who attended the first meeting with Adonakis corroborated Adonakis’ account in his testimony. “Mr. Adondakis did not say that he told Mr. Ganek that the Dell information was coming from a source inside Dell,” the agent testified.

Chiasson, as you are no doubt aware, was convicted at trial but ultimately exonerated in the 2nd Circuit’s infamous 2014 ruling in U.S. v. Newman. (Todd Newman, a former Diamondback portfolio manager, was Chiasson’s co-defendant.) Ganek, as I mentioned earlier, was not ever charged with wrongdoing. In January 2016, the Securities and Exchange Commission refunded Level’s $21.5 million settlement of claims related to Dell trades.

Judge Pauley said the FBI’s erroneous account of Adonakis’ testimony in the search warrant affidavit might have been “a simple misunderstanding.” But it also might have been an indication “something more troubling was afoot.” He concluded that Ganek is entitled to discovery to find out which interpretation is correct.

But according to the Justice Department, the affidavit is factually accurate. The government’s appellate brief contended that Ganek’s constitutional allegations and Judge Pauley’s analysis of them were based only on Adonakis’ testimony that he didn’t tell Ganek about his insider source at Dell. The affidavit wasn’t specific to Dell. So according to the Justice Department, “Ganek incorrectly equates information about Dell with the broader term ‘inside information,’ which was defined in the affidavit to cover material nonpublic information about ‘certain public companies,’” the government’s brief said. “The term ‘inside information’ as used in the search warrant affidavit … in fact did not even reference Dell. Ganek therefore fails to allege that the affidavit contained a misrepresentation or omission.”

Moreover, the government argued, investigators would have been entitled to search Ganek’s personal computer, phone and office even if they hadn’t alleged he knew Adonakis had an inside source at Dell. “A corrected affidavit would have demonstrated probable cause to search Ganek’s effects for evidence of his trading based on inside information about companies other than Dell,” the brief said.

You can see why that line of reasoning would be so maddening to Ganek and his lawyers, who, after all, fault the government for failing publicly to exonerate the hedge fund founder after conducting an allegedly illegal search of his personal effects and forcing him out of business – without ever formally accusing him of wrongdoing. In their view, the government’s latest insinuation against Ganek compounds the lies it has told about him since the FBI drafted the search warrant application.

”There is no basis to assert Adondakis might have implicated Ganek with respect to a different company,” their brief said. “As the complaint pleads, he did not.”

It’s going to be interesting to see what Friday’s panel thinks of the government’s stance. In the Newman decision, the 2nd Circuit already expressed reservations about overreaching by the U.S. attorney in his insider-trading crackdown. Since then, the FBI’s tactics have come under scrutiny in an internal investigation of press leaks by supervisory agent David Chaves, who oversaw the Level Global investigation and is a defendant in the Ganek suit. If the appellate court wants to write a skeptical epilogue to Preet Bharara’s insider-trading prosecution legacy, the Ganek case seems like a ripe opportunity.

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