Ganek Suit Over Hedge Fund Raid Moves Forward Against U.S.

  • Ganek says FBI fabricated evidence that led to fund's collapse
  • U.S. must face suit over FBI's 2010 raid of Level Global fund

U.S. prosecutors, whose crackdown on insider trading ground to a near halt after an adverse appeals court ruling, may now have to defend themselves at a trial against allegations they used fabricated evidence that led to a hedge fund’s collapse.

Level Global Investors LP co-founder David Ganek can proceed with a lawsuit against U.S. Attorney Preet Bharara in New York, as well as several assistant prosecutors, FBI agents and supervisors who participated in an investigation of his hedge fund, a judge ruled. The unusual decision on Thursday means the government must provide evidence about its work to Ganek and perhaps defend itself before a jury.

Prosecutors were already reeling from the 2014 appeals court decision reversing the convictions of two fund managers, including Ganek’s partner. Now, adding insult to injury, U.S. District Judge William Pauley rejected the government’s request to throw out Ganek’s lawsuit in its entirety and said the suit’s “grave allegations” deserved further scrutiny. 

Ganek can start collecting evidence "to ascertain whether this case is about a simple misunderstanding or whether something more troubling was afoot," Pauley ruled.

“This is the first step toward holding the government accountable despite the fact that conventional wisdom has been the government can’t be held accountable for troubling conduct,” Ganek said in a statement after the ruling.

Evidence Fabricated

Ganek alleged that federal prosecutors, agents and supervisors violated his rights during a November 2010 search of Level Global which was based on evidence the U.S. fabricated to get a warrant. He also claims government agents tipped off the media to the raid. 

A former Level Global employee cooperating with the government implicated two other employees at the hedge fund in insider trading, but explicitly denied Ganek was told information came from corporate insiders, according to the complaint. In a warrant application the FBI claimed the cooperator gave Ganek inside information and Ganek traded on it.

Ganek said he waged a last-ditch effort to save his business, as his lawyer pleaded with Bharara to clear him of the allegations. He said the request fell on deaf ears and Level Global, which had $4 billion under management, was forced to shut down on Feb. 11, 2011.

“These raids sent shock waves through Wall Street: investment bankers and traders were indicted, and multi-billion dollar businesses -- including Level Global -- were shuttered,” Pauley wrote. “But five years later, a different picture has emerged.”

Dismissed Cases

The judge noted the appeals court’s decision led to the dismissal of more than a dozen insider-trading convictions while the Securities and Exchange Commission had to return $21.5 million to Level Global, which regulators obtained in a lawsuit against the fund.

Jim Margolin, a spokesman for Bharara, declined to comment on the decision.

Prosecutors argued the suit should be dismissed because it “rests entirely on a misreading of one non-essential statement” in the government’s search warrant.
Pauley rejected that request, although he tossed several claims, including a challenge to the reasonableness of the search of Level Global offices. He didn’t rule on the merits of the lawsuit.

Ganek, who currently invests his own money through his firm Apocalypse 22 LLC, wasn’t charged with wrongdoing. Level Global co-founder Anthony Chiasson and a portfolio manager at another fund were convicted of insider trading after a 2012 trial, but the appeals court reversed their convictions. The U.S. Supreme Court refused to hear the government’s appeal.

Prosecutors may eventually renew their bid to dismiss Ganek’s lawsuit but for now the case proceeds.

The case is Ganek v. Leibowitz, 15-cv-01446, U.S. District Court, Southern District of New York (Manhattan).

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