In Part I of the series, I introduced the idea that defense counsel are increasingly fighting back against DOJ in creative ways. In Part II, we talked about Sheldon Silver and his defense counsel’s efforts to use DOJ’s very public statements against Mr. Silver as a reason to dismiss the indictment.
In Part III, we’re going to take a look at yet another innovative technique to fight back against DOJ: a civil complaint alleging a Bivens claim against the agents and SDNY prosecutors for money damages.
The plaintiff is David Ganek, the former head of now-defunct hedge fund Level Global. The government executed a search warrant for his office and personal devices. As a result of extensive publicity about the investigation and raid, Level Global went out of business. Even though Mr. Ganek was never charged with insider trading, he lost his business.
The district court refused to dismiss the case, and that decision is on appeal in the Second Circuit. So, this one is not a complete victory (yet) but it’s an interesting road-map for challenging the government’s actions.
The Investigation into Level Global and David Ganek
In 2007, the FBI and DOJ began investigating insider trading at hedge funds. They used techniques such as wiretaps and search warrants. During this time, the government began investigating Level Global, a New York-based hedge fund. David Ganek headed Level Global.
In November 2010, the government interviewed a formal Level Global employee Sam Adondakis. What happened during that interview—and what the government did with what Mr Adondakis supposedly said—is very much at issue in this case.
According to the complaint, Adondakis implicated two other Level Global employees in insider trading, but did not state that Mr. Ganek was ever aware that information came from corporate insiders. In other words, he didn’t implicate Mr. Ganek at all.
The government nonetheless used its interview with Adondakis to obtain a search warrant to search Mr. Ganek’s office and personal electronic devices. The November 21, 2010 affidavit states that Adondakis
obtained Inside Information from insiders of public companies through third-party consultants . . . On certain occasions, ADONDAKIS provided this Inside Information to DAVID GANEK . . . and GANEK . . . executed and caused others to execute certain securities transactions based, in part, on the Inside Information, and that ADONDAKIS informed GANEK . . . of the sources of Inside Information.
This is the only statement in the 39-pageaffidavit linking Mr. Ganek personally to any insider trading.
It is worth noting that the affidavit defines “Inside Information” broadly to mean “material, nonpublic information regarding certain public companies’ quarterly earnings releases and other market moving events.” The government’s investigation focused in large part on supposed insider trading based on information given to Level Global from someone within Dell and trades executed by Level Global as a result of that inside information. The government makes much of this definition of Inside Information, pointing out in its brief that that it is not specific to Dell.
The government obtained and executed (on November 22, 2010) a search warrant against Level Global and against Mr. Ganek personally. The complaint alleges that the government leaked the raid to the Wall Street Journal, which wrote about it, leading to considerable negative publicity for the company.
At the time of the raid, the affidavit was sealed. Mr. Ganek had no idea what the allegations were against him. After the raid, Level Global hired an outside law firm to conduct an internal investigation. That investigation found that Mr. Ganek had not engaged personally in any insider trading.
However, according to the complaint, because of the publicity in the Wall Street Journal, Level Global’s business was destroyed. Investors fled based on the existence of the unresolved investigation. Mr. Ganek’s lawyers met with the U.S. Attorney’s Office in December 2010 to express their concerns about the harm that the raid and its publicity caused. The investigation continued.
A former federal prosecutor (a lawyer on Mr. Ganek’s legal team) contacted Preet Bharara to discuss the harm to the company resulting from the search. Mr. Bharara, not surprisingly, told the former federal prosecutor that there was nothing he could do. As the investigation continued, Mr. Ganek remained under personal scrutiny. Eventually, in February 2011, Level Global went out of business.
In January 2012, seven individuals were charged for insider trading, including one Level Global employee (Anthony Chiasson). A few months later, Mr. Ganek finally obtained a copy of the search warrant and its accompanying affidavit.
During Mr. Chiasson’s trial, Adondakis and FBI Agent David Makol (one of the defendants here) testified.
Adondakis testified he “never told [Ganek]” about his source within Dell. Agent Makol corroborated Adondakis’ testimony. He testified “I was certain that Mr. Adondakis was not saying that he specifically told Mr. Ganek that the information was coming from someone at Dell, so it was confusing.” He later testified
Mr. Adondakis did not say that he told Mr. Ganek that the Dell information was coming from a source inside Dell.
The complaint focuses heavily on the difference between the affidavit and the testimony at trial to show that the government made deliberate misstatements to obtain the search warrant.
Mr. Ganek was never charged with a crime.
Mr. Ganek filed his complaint on February 26, 2015. The complaint divides the fifteen defendants into the “Non-Supervisor Defendants” and the “Supervisor Defendants.” The Non-Supervisor Defendants included the line attorneys and FBI agents assigned to the case. The Supervisor Defendants included the head of the USAO’s Criminal Division and the U.S. Attorney himself, Preet Bharara.
Based on Bivens, Mr. Ganek alleges that the Non-Supervisor Defendants violated his Fifth Amendment due process rights by relying on fabricated evidence to deprive him of liberty and property. He also claimed that they violated his Fourth Amendment right to be free from unreasonable searches. According to Mr. Ganek, the Supervisor Defendants, including Mr. Bharara, were personally involved in the investigation and thus liable as well.
The Government’s Motion to Dismiss
The government filed a motion to dismiss. It made two primary arguments. First, the government argued that qualified immunity protected all the defendants in the case. Second, it argued that the Supervisor Defendants cannot be held liable personally. It also argued (rather weakly, I thought) that the three-year statute of limitations barred the claim.
Statute of limitations. The search was conducted on November 22, 2010. According to the government, there’s a three-year statute of limitations for Bivens actions in New York. The complaint, filed four years after the search, is untimely and should be dismissed.
Qualified Immunity. The qualified immunity doctrine protects government officials from liability for money damages as long as their conduct “does not violate clearly established statutory or constitutional rights of which a reasonable person would have known.” It is a two-step process. First, the court must determine whether the facts establish a violation of a constitutional right. Second, the court must determine whether or not that constitutional right was clearly established at the time of the wrongdoing.
To show that the warrant was based on less than probable cause, a plaintiff must show that the government knowingly and intentionally (or with reckless disregard for the truth) falsified the affidavit and that the false statements in the affidavit were necessary to the finding of probable cause by the magistrate judge.
Needless to say, this is a tough standard for Mr. Ganek to meet.
In this argument, the government relied relies heavily on the definition of “Inside Information” in the affidavit. According to the government, the affidavit states only that Adondakis provided Inside Information to Mr. Ganek, not that he provided inside information about Dell to Mr. Ganek. So, the trial testimony about Dell did not create a falsehood.
Next, the government argued that even if they were false, the statements attributed to Adondakis in the affidavit were not necessary to the finding of probable cause. Admittedly, probable cause a very low standard. The government argues that it had enough information in the affidavit to justify a search of Mr. Ganek’s office and devices based on its evidence as to possible insider trading at the company.
As the government puts it
if the allegedly false statement regarding Ganek’s knowledge of the sources of the Inside Information is eliminated from the search warrant affidavit, the remaining assertions in the affidavit – which the complaint does not contest – easily provide sufficient probable cause to search Ganek’s office and electronic devices.
The government also contended that Mr. Ganek cannot established a valid claim for violation of the Fourth Amendment. For example, the government pointed out that there likely were exigent circumstances to execute a search warrant rather than issue a subpoena.
It also argued that the allegation that one or more of the defendants leaked the investigation and search to the Wall Street Journal was “pure speculation and fails to allege the personal involvement of any particular defendant in a purportedly inappropriate notification of the news media.” In essence, the government argues that there is no clearly established constitutional right against leaking information to the news media.
(Granted, it may not be a constitutional right but it likely violates grand jury secrecy rules and the U.S. Attorney’s Manual as well.)
The government also rejected Mr. Ganek’s Fifth Amendment claim based on the supposed fabrication of evidence in the affidavit for the search warrant. The government argued that Mr. Ganek cannot set out a procedural due process claim based on reputational harm resulting from the search of Level Global because it does not meet the standard for deprivation of “liberty or property. ”
Amazingly, the government argued that Mr. Ganek “cannot show any stigma.” It will be interesting to know whether these agents would feel the same way if a search warrant were executed against them and then publicized in the Wall Street Journal.
Finally, the government argued that there are no actionable claims against the Supervisor Defendants. Plaintiff must allege specific facts against each of the Supervisor Defendants showing that they personally knew about and participated in the wrongdoing. The government argues that he has not done so. General involvement in an investigation, according to the government, is insufficient to establish supervisory liability.
This is already a very long post. So, rather than describe all of Mr. Ganek’s arguments, I’ll jump ahead to court’s decision. The court granted the government’s motion to dismiss in part but denied it in part as well.
In short, the case goes on.
Bear with me here. There were a lot of arguments made and considered. Because I want this post to help inform other defense counsel as to what arguments could be raised, I’ll march through the claims the court considered, one by one.
First, the court easily disposed of the government’s statute of limitations argument. Although the statute of limitations is three years and Mr. Ganek filed his complaint beyond that three-year period of limitation, the court concluded:
While Ganek may have first been injured on the date the search warrant was executed, it was not until after the Affidavit was unsealed that Ganek reasonably became aware of any Bivens claim. Accordingly, this lawsuit is timely
Next, the court rejected the government’s argument that the statements in the affidavit were not false even taking the complaint’s allegations as true:
This argument misses the mark. The plain language of the Affidavit states that Ganek was informed of the sources of all “Inside Information.” But trial testimony indicated that Adondakis did not inform Ganek of any source of “Inside Information” as defined by the Affidavit. And Adondakis allegedly told Defendants he could not implicate Ganek in any insider trading. Ganek has adequately pled that the Affidavit contained materially false statements and/or omissions.
The court also rejected the government’s argument that Adondakis’ statements were not necessary for the issuance of the search warrant for Mr. Ganek.
Given the tremendous amount of personal information such a search would likely ensnare, the argument that a corrected affidavit would not of been relevant to the magistrates determination is not persuasive.
Probable cause must be based on “particularized information” about the place to be searched and not based on the target’s nearby existence.
The court did reject a few of Mr. Ganek’s arguments, refusing to find that the government violated his constitutional rights by executing a search warrant rather than issuing a subpoena and refused to find a constitutional violation for the leaks to the media.
As to the Fifth Amendment claims, the court rejected Mr. Ganek’s argument based on deprivation of property for the harm to his reputation. He had failed to meet the “stigma plus” standard. This standard requires a plaintiff to show that there must be a specific and adverse government action that restricted a party’s liberty. That was not alleged in the complaint.
However, the district court allowed Mr. Ganek’s Fifth Amendment procedural due process claim based on the seizure of his personal items to go forward. The complaint had alleged sufficient facts showing that the seizure was based on fabricated evidence.
Mr. Ganek had also raised an argument based on the defendants’ failure to intercede (or failure to intervene) after learning of the fabricated statements. The court treated it as an argument in the alternative to Mr. Ganek’s Fourth and Fifth Amendment claims. At least as to the Supervisor Defendants,
Ganek plausibly pleads that the Supervisor Defendants could have prevented a significant amount of the harm caused by the alleged Fourth Amendment violation if they had learned—prior to Level Global’s closure—that the search of Ganek’s office had been predicated on false evidence.
So the court rejected defendants’ qualified immunity claim, leaving it available for an defense at the summary judgment stage.
As a final matter, the court permitted the claims to proceed against the Supervisor Defendants personally. It acknowledged that they cannot be held liable under respondeat superior. The court only had to conclude that it was plausible that the Supervisor Defendants were personally involved in the false statements. That standard had been satisfied:
Ganek pleads that the Supervisor Defendants were kept abreast of developments, prioritized the prosecution of high level executives, and tipped the Wall Street Journal. Moreover, the Complaint contains thorough allegations establishing the high priority placed by the Supervisor Defendants on the insider trading investigation. These allegations include specific facts establishing the plausibility of the Supervisor Defendants’ involvement prior to the raid, including admissions by certain defendants that the raid’s consequences “had been carefully considered at the highest levels,” and DOJ policy indicating that any decision to tip the press required supervisory approval. In short, given the high-profile nature of the investigation and involvement of the Supervisor Defendants, as alleged in great detail in the Complaint, it is plausible that some of the Supervisor Defendants would have learned details of the November 2, 2010 Meeting and, at the very least, “entertained serious doubts as to the truth of [the allegations] in the Affidavit.”
What’s Going on Now?
The case is currently on appeal to the Second Circuit. The briefs have been submitted and the case will likely be argued at the end of March.
The mere fact that this case survived a motion to dismiss is huge. Think about it: the court basically said it is possible to hold the United States Attorney (and line attorneys and agents) personally liable for money damages based on a false statement in an affidavit.
These kinds of claims are, and should be, rare. It’s hard to know what happened during a proffer session. This time, Mr. Ganek was lucky to have Adondakis’ trial testimony to test the affidavit’s allegations. It would be reassuring if magistrate judges started looking a little closer at applications for search warrants in light of the troubling allegations here.
This case was high profile. That plainly hurt Mr. Ganek at the time (because the media attention was intense), but it helped him at this stage. This fact clearly played into the court’s ruling. It would be unlikely that a judge in a low-profile case would be so willing to hold supervisors liable. But it is entirely plausible–and likely–that Mr. Bharara was well aware of what had happened in the proffer session with Adondakis and what was in the affidavit, given the attention to these insider trading cases. Even if he didn’t know every detail, he was kept “in the loop.”
Mr. Bharara has never been one to shy away from taking credit when his line attorneys win a big case. It seems only fair that he likewise be held liable if they do something wrong. Now, that’s not the legal theory of this case (it would lose) but it’s a good closing argument.