David Ganek, the founder of the hedge fund Level Global, is suing the FBI and Southern District prosecutors in New York after the government's 2010 raid resulted in the shutting down of his $4 billion firm.
Back in December, the United States Court of Appeals for the Second Circuit, which covers New York City, tossed the insider-trading convictions of two hedge fund managers, including Level Global cofounder Anthony Chiasson.
At the time, Ganek called the court's decision "vindication" for the dozens of Level Global employees who lost their jobs.
And now he is taking the government to court.
"The government's reckless search of Level Global needlessly damaged my reputation and the reputations of dozens of other good, honest people," Ganek said in a statement.
He continued: "The action filed today makes clear that the government's search of my office was based upon a fabrication. The government has known about this misconduct for years, yet has taken no action to correct it. A responsible Justice Department would sanction the people who made the decision that had such predictably calamitous consequences for a respected business and its employees."
The case against Level Global's Chiasson and Todd Newman, a former portfolio manager at Diamondback, was really high profile. The codefendants had been accused of trading on inside information in Dell and Nvidia stocks. The two hedge funders were arrested in January 2012 and convicted in May 2013.
Level Global, which Chiasson and Ganek cofounded in 2003, was a Connecticut-based hedge fund that once managed about $4 billion in assets. The firm became a casualty of the government's massive crackdown on insider trading.
In November 2010, the FBI raided Level Global and Diamondback. One source present at the Level Global office during the raid described it to Business Insider as "surreal."
Level Global closed its doors in 2011, and roughly 65 of the fund's employees lost their jobs.
In 2013, Level Global agreed to pay the Securities and Exchange Commission $20.5 million to settle insider-trading charges.
One former Level Global employee, who will remain anonymous, had told us it had been difficult for many of the former employees to find a job, or at least one equal to theirs at Level Global.
Here's the release about the lawsuit:
David Ganek today filed a lawsuit regarding the prosecutorial misconduct that culminated with the improper search of his office at the Level Global hedge fund, including the use of fabricated information in the process of seeking judicial approval for the November 2010 search.
Reporters were tipped off in advance to be present during the high-profile search, one of the only instances ever when FBI agents have raided a financial services organization without simultaneously making arrests or filing charges. That raid directly and predictably led to the closing of Level Global and cost nearly 60 innocent people their jobs and reputations.
Ganek stated: "The government's reckless search of Level Global needlessly damaged my reputation and the reputations of dozens of other good, honest people. The action filed today makes clear that the government's search of my office was based upon a fabrication. The government has known about this misconduct for years, yet has taken no action to correct it. A responsible Justice Department would sanction the people who made the decision that had such predictably calamitous consequences for a respected business and its employees."
The Level Global search was based on a fabricated claim falsely attributed to a government informant. The government affidavit supporting the search warrant request, written by an FBI special agent and supposedly reviewed by seasoned prosecutors, included a material false statement.
But Ganek was never actually implicated in any wrongdoing at the time the warrant was issued, as acknowledged in courtroom testimony in the Anthony Chiasson/Todd Newman trial by both the informant and the lead FBI special agent:
- November 28, 2012, testimony by government cooperator Sam Adondakis:
- Prosecutor’s Question: "What, if anything, did you tell Mr. Ganek about Sandy Goyal's source within Dell?”
- Cooperator Sam Adondakis: "I never told him about it.”
- December 10, 2012, testimony by FBI special agent David Makol:
- "Mr. Adondakis did not say that he told Mr. Ganek that the Dell information was coming from a source inside Dell."
Of course, Ganek knew all along he was innocent. Immediately following the raid on Level Global he hired a law firm to conduct an independent investigation, which verified he had not engaged in wrongdoing. The firm’s attorney then asked prosecutors to acknowledge the raid improperly targeted Ganek. But United States Attorney for the Southern District of New York Preet Bharara personally refused to do that, saying that the office had not authorized the raid without considering the consequences, including the potential for closing the firm, and that they stood by their actions.
That was the final opportunity to save the $4 billion hedge fund because Ganek was the principal owner, and his sophisticated investors understandably were unwilling to invest in a fund whose founder was the target of an unprecedented government raid based on allegations of criminal activity. Bharara has since acknowledged that the closure of Level Global was a predictable response to the search, stating during a July 18, 2012 appearance on CNBC:
“...firefighters, just like prosecutors in my office and other regulators, they are conditioned and they’re trained to make sure that you don’t do undue damage. But you’ve got to figure out whether or not there’s a fire. And firefighters sometimes will go into a building to make sure they’re saving lives and putting out the fire, and it turns out it was just smoke, but damage occurs to the building. And damage occurs, as I understand it, and as people in my office are sensitized to understanding it, to business organizations, even from the mere opening of an investigation. And we know that.”
Adding insult to injury, prosecutors did not use any evidence gathered from the raid during the trial of Chiasson, a co-founder of the firm. That trial was based on information gathered through the standard use of subpoenas rather than the unprecedented and high-stakes public search. Chiasson’s conviction was recently reversed by the Second Circuit Court of Appeals on the grounds that there was no evidence of his guilt.
An entire firm was destroyed because of reckless prosecutorial misconduct that was justified by a fabrication. The only Level Global employee who engaged in wrongdoing was Adondakis, a former low-level employee the firm actually fired months before FBI agents raided the firm.
The lawsuit filed today based on violations of Ganek's right to due process under the Fifth Amendment and right to be free from unlawful searches and seizures under the Fourth Amendment. The suit names Preet Bharara, the United States Attorney for the Southern District of New York, along with the individual prosecutors and FBI supervisors and agents who are believed to have been involved in approving the improper search of Ganek's office at Level Global.
