United States: Former Hedge Fund Manager's Civil Rights Suit Against New York U.S. Attorney Permitted To Proceed Into Discovery

Shortly into his tenure as United States Attorney for the Southern District of New York, Preet Bharara announced a crackdown on insider trading, indicating that it would be his office's "top criminal priority" and that investigations would utilize novel and "covert methods" to achieve convictions, including using wiretaps and informants. According to Bharara, "every legitimate tool should be at our disposal." Over the next several years, federal prosecutors in Manhattan initiated nearly 100 insider trading cases against some of Wall Street's leading names, and secured more than 80 convictions, many through guilty pleas. For his work, Time magazine featured Bharara on its February 13, 2012 cover under the headline: "This Man is Busting Wall Street."

Bharara's crusade against insider trading received a serious blow, however, in December 2014, when the Second Circuit vacated the convictions of two hedge fund managers in U.S. v. Newman, No. 13-1837, 2014 WL 6911278 (2d Cir. Dec. 10, 2014), finding that prosecutors had not shown that defendants knew that the corporate insider disclosed information in exchange for "personal benefit" (for more detail on Newman, see here). As chronicled in depth in this space (see here, here, here, here, and here), Newman caused significant fallout—insider trading charges were dropped and additional convictions were vacated.

On March 10, 2016, Bharara and his team suffered another setback: a federal judge permitted a civil rights case filed by one of Bharara's former insider trading targets, hedge fund manager David Ganek, to proceed into discovery.

By way of background, Ganek's hedge fund, Level Global Investors ("LGI"), was raided by the FBI in November 2010 in connection with alleged insider trading. The search warrant permitted agents to search LGI's offices and seize Ganek's personal files and mobile phone. The raid was highly publicized; having been notified in advance, the Wall Street Journal was on hand and published photographs from the raid. This development apparently caused justifiable concern among LGI's investors and several weeks later, Ganek's lawyer allegedly informed Bharara that LGI would be forced to close unless Bharara publicly clarified that Ganek was not the target of an insider trading investigation. Bharara made no such clarification, and LGI closed in February 2011. No charges were ever brought against Ganek.

In February 2015, Ganek initiated a suit against Bharara, six of his subordinates at the U.S. attorney's office, and numerous FBI personnel, alleging that the defendants' roles in the LGI investigation leading to LGI's shuttering violated Ganek's constitutional rights. Central to this case was the affidavit used by investigators to obtain the search warrant, which was signed by a former LGI research analyst named Sam Adondakis. The affidavit, which was finally provided to Ganek in 2012, asserted that Adondakis had: (1) "obtained Inside Information from insiders at public companies"; (2) "provided this Inside Information" to Ganek, who executed trades thereon; and most importantly (3) "informed [Ganek] regarding the sources of the Inside Information." Ganek alleges that Adondakis actually told the FBI that he never informed Ganek about his inside sources, and thus the affidavit was fabricated in substantial part. Indeed, both Adondakis and the FBI agent who took his initial proffer testified at the Newman trial that Adondakis never stated that he informed Ganek regarding his inside source. Accordingly, Ganek claims that several of the defendants fabricated inculpatory evidence against Ganek and used that evidence to obtain a search warrant in violation of his Fourth and Fifth Amendment rights. The complaint also alleges that additional defendants (including Bharara) failed to intervene to prevent the allegedly unlawful search or prevent further harm to Ganek's reputation and business prospects.

Defendants moved to dismiss Ganek's claims on the ground (among others) that the doctrine of qualified immunity barred the suit. But earlier this month Judge William H. Pauley denied (in large part) defendants' motion in Ganek v. Leibowitz, No. 15-cv-1446, 2016 WL 929227 (S.D.N.Y. Mar. 10, 2016).

Indeed, the Court found that Ganek "adequately pled" that the affidavit in question "contained materially false statements and omissions" and that the misrepresentation was material, i.e., relevant to the magistrate's determination of whether to authorize the search of Ganek's files, computers and phones. Thus, Ganek's complaint adequately stated a claim for a violation of the Fourth Amendment's probable cause requirement. In connection with Ganek's Fifth Amendment procedural due process claim—which includes the right "not to be deprived of liberty as a result of the fabrication of evidence by a government officer"—the Court found Ganek sufficiently pled an "injurious false statement" and that the seizure of his personal items was premised on that statement. Finally, regarding Ganek's claim that Bharara and others violated their affirmative duty "to protect the constitutional rights of citizens from infringement by other law enforcement officers"—the "failure to intervene" claim—the Court noted Bharara's refusal to clarify that Ganek was not the target of the investigation, even after learning that the affidavit misrepresented Adondakis' proffer. On this point, the Court observed that "government attorneys are ethically obligated to limit the collateral damage resulting from government investigations" and thus found that Ganek's claim was sufficiently pled. Judge Pauley also dismissed three of Ganek's other claims, including one premised on vicarious liability.

The Ganek case presents a relatively rare instance of a plaintiff's claims prevailing over the defense of qualified immunity. As a result, the case will proceed into discovery in which Ganek will seek documents and testimony to determine, as Judge Pauley stated, "whether this case is about a simple misunderstanding or whether something more troubling was afoot."

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