When a Manhattan appeals court recently threw out what remained of former hedge fund founder David Ganek’s lawsuit against prosecutors and FBI agents, they broached a sensitive topic but also skirted the issue at the same time. Ganek, co-founder of Level Global Investors LP (LG), sued former US Attorney for the Southern District of New York Preet Bharara and 14 Department of Justice prosecutors and FBI investigators, claiming they used manufactured evidence to entice a judge to grant them a search warrant for insider trading. Ganek claimed inappropriate government actions resulted in investors fleeing the fund and it ceasing operation.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q3 2017 Hedge fund Letters, Conferences, Pitches; Pabrai Comeback And More

Ganek
By United States Department of Justice (http://www.justice.gov/usao/nys/meetattorney.html) [Public domain], via Wikimedia Commons
In siding with government employees, the court ruled prosecutors and investigators had “qualified immunity,” a common law concept that grants law enforcement officers broad protections from monetary claims related to how they perform their duties. They also ruled the search warrant did not entirely rest upon disputed evidence. In handing down the ruling, the court broached a sensitive topic – potential manufacturing of evidence to obtain a search warrant – but did not make this the deciding factor in the case.

“This is a dangerous day for private citizens and a great day for ambitious, attention-seeking prosecutors who are now being rewarded with total immunity even when they lie and leak,” Ganek told Bloomberg. “The good news is this ruling does not preclude the Department of Justice from bringing disciplinary charges.”

While the acting US Attorney in Manhattan, Joon Kim, declined to comment, Bharara seemed satisfied with the decision. “Appeals court unanimously dismisses every aspect of hedge funder David Ganek’s baseless lawsuit against me and 14 other public servants,” he said on Twitter.

Ganek was forced to close the then $4 billion hedge fund – valued at $400 million -- after a high profile raid on his offices and charges of insider trading resulted in investors fleeing. Ganek claimed investigators tipped off The Wall Street Journal in advance of their raid, which heightened attention to the issue before trial and prompted the collapse of his business. After the raid the newspaper published photographs of FBI agents carrying boxes out of LG, which painted a damaging picture of the firm, he claimed.

Ganek was not convicted of insider trading, but co-workers at the firm, including co-founder Anthony Chiasson and portfolio manager Sam Andondakis, were initially convicted. Their convictions were later overturned and the U.S. Securities and Exchange Commission returned a $21.5 million fine that had been levied against the hedge fund.

Before the raid, investigators had been sifting through a wide variety of suspicious activity.

Court documents reveal that from May to August 2010, FBI agents monitoring the cellphone conversations of third party consultant John Kinnucan and intercepted his communications with Chiasson “which revealed these two men’s knowing receipt of inside information from Kinnucan distinct from that provided by Adondakis.”

On October 14, investigators confronted Adondakis with wiretap evidence, which implicated Adondakis in insider trading while at LG. Afterwards, Adondakis agreed to cooperate with government authorities.

Documents show that Adondakis initially indicated Ganek was aware of insider trading at the firm, a claim that Adondakis later changed in court. This was a primary charge in Ganek's complaint, saying that Adondakis never said he had knowledge of insider trading and the claim was manufactured. But the court didn't think that was all that was needed for probable cause.

The court ruled that Ganek was “a sophisticated trader” who was likely to know insider trading was taking place at the hedge fund:

No different conclusion is warranted by adding to the corrected warrant affidavit Adondakis’s statement that he did not tell Ganek the inside source of the information conveyed to him.   The totality of the circumstances, viewed in a common sense manner, establish at least a “fair probability” that Ganek recognized the inside source of the information in any event.    He was a sophisticated trader, who would likely know without needing to be told that the sort of information being conveyed—e.g., future projections provided in advance of earnings announcements—was not yet public and could not be obtained without the aid of an insider.

Ganek, for his part, has taken a new tact and now invests his own money through a firm he named "Apocalypse 22 LLC."

Tags: