Law

The Government's Error Can Destroy Your Business

And, thanks to an appeals court ruling, you have little recourse.
Corrected

Watch your business walk out the door.

Photographer: Joe Skipper/Getty Images

Suppose that federal agents arrive at your offices with a search warrant. They seize your computers and records and phones. It turns out that a fired employee has confessed to committing a crime. What does that have to do with you? The magistrate who signed the warrant had been presented with an affidavit stating that your employee implicated you in the crime.

The affidavit was false: simply, nakedly false. The employee had made no such claim.

The prosecutors alerted a major newspaper about the search, so there are photographs of agents carrying boxes from your office. Your business is ruined. The false affidavit plus a tipoff to the press equals the collapse of your company.

At this point I suspect you’d be more than a tad angry. You might even be angry enough sue somebody. Few people would blame you.

But you’d lose.

That’s the message of this week’s decision by an appellate court in Ganek v. Liebowitz, which dismissed a lawsuit by David Ganek, whose multibillion-dollar hedge fund, Level Global Investors LP, was destroyed in pretty much the way I just described. Sam Adondakis, a research analyst at Level Global, was fired in May 2010 for violating firm policies. A few months later, he admitted to federal agents that he had received nonpublic information and passed it on to various employees at Level Global, including Ganek. In an application for a search warrant that November, a federal agent stated that Adondakis had told investigators that he had told Ganek where the information came from.

The agent’s statement was false.

The magistrate issued the warrant, the raid proceeded, and the rest, so to speak, is history. Appalled clients demanded redemptions from Level Global, and lawyers for the $4 billion fund informed U.S. Attorney Preet Bharara that the company would have to close its doors unless the prosecutor was willing to make a public statement that Ganek was not a target. Bharara declined, and the fund collapsed.

Ganek -- who was never charged with a crime -- has been seeking vengeance ever since, most recently through the courts. He filed a civil suit against the prosecutors and agents involved in the raid, focusing on the false claim in the affidavit. The defendants claimed that they were protected under the doctrine of “qualified immunity,” which usually shields from personal liability law enforcement officials acting in good faith. Last year a trial judge dismissed the case in part but ruled that discovery could proceed, to try to determine whether the misstatement had been a simple mistake.

This week the U.S. Court of Appeals for the 2nd Circuit ordered the dismissal of the suit, on the ground that all the conduct to which Ganek objected did indeed fall within the qualified immunity doctrine. 1  In an opinion by Judge Reena Raggi, the court applied a simple test: Even if the affidavit included a false statement, there was no violation of Ganek’s rights as long as the warrant would still have been justified in the absence of the false statement. This test, the court determined, had been met. 2

Now, in the first place, I’m not entirely sure that the panel reached the only possible result. (We’ll get back to that in a moment.) But let’s assume the 2nd Circuit was right. After all, it’s true that a doctrine of qualified immunity is necessary to allow government to function, or else all officials would be endlessly tied up in litigation. It’s also a sensible rule that trivial errors in an affidavit don’t make the warrant invalid; otherwise every transposition of letters would require throwing out the fruits of a search.

But even if we grant all this, what happened to Ganek and Level Global provides a troubling reminder of the legal asymmetry between the right of government officials to speak falsely and the right of private citizens to do the same. Government officials regularly get away with errors and omissions for which the rest of us would be punished.

Some simple examples: A CEO who mistakenly presents wrong numbers invites retribution that would never be visited upon a cabinet official who does the same. A police detective who lies to a suspect about a material fact to get a confession is just doing his job, but a suspect who lies right back is committing a crime. And though a material falsehood in a federal warrant winds up leading to no liability, just try including a material falsehood on a form -- any form -- that you as an individual must file with federal officials. The overall impression is of a government that loves to impose on the rest of us rules it would never consider imposing on itself.

Which brings us back to Ganek. Most nonlawyers would be appalled at the idea that a warrant based on a blatant falsehood can still be valid. 3  Some courts agree. In a recent Ohio case, a suspect told investigators that a friend was holding at his house a bag of drugs that belonged to her. A search warrant was issued, based on an affidavit falsely stating that the suspect told investigators that she could purchase drugs from the friend. The warrant was executed, narcotics were found, and the friend was arrested. A trial judge threw out the evidence on the ground that the error was either deliberate or reckless, and the court of appeals agreed. Absent the false statement, the warrant would have been much narrower.

Judges, when they choose to, can issue sharp rebukes to officials who don’t bother to get their facts straight. In Ganek’s case, the 2nd Circuit passed up the opportunity to issue just such a warning. Maybe on the facts the court was right. 4  Even so, we should all be troubled that a government constantly on the lookout for new ways to punish our mistakes thinks its own should be taken in stride.

(Corrects spelling of Preet Bharara's last name in eighth paragraph.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

  1. The reason that the decision on immunity leads to dismissal is that the immunity in question is not an immunity from damages but an immunity from suit -- that is, from the burden of being required to mount a defense.

  2. There was also a question as to whether there was an underlying crime, given that the broad definition of insider trading on which the prosecution was relying was soon slapped down by the 2nd Circuit. However, the 2nd Circuit’s narrower definition was soon also slapped down, at least in part, by the U.S. Supreme Court. None of this mattered to the case at hand, because, as Judge Raggi explained, the question of the qualified immunity of prosecutors and law enforcement officers has to be decided based on what they reasonably thought the law was at the time.

  3. Perhaps this is what Ganek himself had in mind when he lambasted the outcome as marking “a dangerous day for private citizens.”

  4. After all, Anthony Chiasson, the co-founder of Level Global, was convicted of insider trading. On the other hand, his conviction was later thrown out.

To contact the author of this story:
Stephen L. Carter at scarter01@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net

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