I’ve written several times before about hedge fund owner David Ganek’s groundbreaking lawsuit against federal agents and prosecutors in New York. See my posts here and here.
As I described the case:
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 government’s main defense was that the defendants—all federal employees—were protected by the doctrine of qualified immunity. Qualified immunity protects law enforcement officers from money damages imposed based on performance of their official duties. It’s a very high barrier to this type of civil lawsuit.
The district court rejected this argument in part, concluding that some of Mr. Ganek’s claims could proceed. Specifically, it allowed his Fourth Amendment claims to continue because Mr. Ganek had alleged that defendants made a deliberate or reckless misstatement of a material fact when they sought a warrant to search his property. It also refused to dismiss his Fifth Amendment claim based on the defendants’ alleged fabrication of evidence against him, as well as refused to dismiss some of the claims based on supervisory liability.
The defendants filed an interlocutory appeal. It took a few months, but the Second Circuit issued its opinion in October 2017. (I know, I know, I’m a little late to the party. But thanks to a busy late-year trial calendar, I’m a bit behind in my posts.)
The Second Circuit Reverses the District Court
The case was heard before Judges Raggi, Chin and Carney, and Judge Raggi authored the unanimous opinion.
To get past the qualified immunity defense, Mr. Ganek had to allege, first, that the defendants had violated his constitutional rights and that the rights violated were “clearly established” at the time. This second element is viewed from the perspective of a reasonable officer in the defendant’s position.
Fourth Amendment Claim
As to the Fourth Amendment claim, the court of appeals reversed the denial of the motion to dismiss. The court concluded that the false statement at issue was “not necessary to probable cause” and therefore, did not violate any of Mr. Ganek’s constitutional rights.
As a reminder, the alleged false statement was this: A cooperating informant (and Level Global employee) Sam Adondakis told the government agents that he had passed insider information to Mr. Ganek but did not tell him that the information came from an insider. However, in its application for a search warrant for Mr. Ganek’s property, the government affidavit swore that Mr. Adondakis had told Mr. Ganek that the information came from an insider.
This is no small matter. Insider trading depends on knowledge that the information came from…an insider. This is the basis of the intent to commit the crime.
But the court (probably correctly) concluded that although proof of Mr. Ganek’s intent would help the probable cause determination, it is not required:
While evidence that Ganek knowingly traded on inside information would enhance probable cause to search his office, the absence of such mens rea evidence would not preclude probable cause for such a search. One has only to imagine a scenario where the government seeks to search the residence of a person who left a box on a subway car that exploded and killed numerous persons. The person may have known the contents of the box when he acted, or he may have been an unwitting dupe. No matter. Whatever his mens rea, his involvement in the actus reus of a crime would sufficiently establish probable cause to search his residence for criminal evidence pertaining to the bombing. So here, where the warrant affidavit clearly alleges knowing insider trading by various [Level Global] employees, as well as Ganek’s trading on some of the same inside information, and where correction of the affidavit leaves only his mens rea at issue, there was at least a fair probability to think that his office was among the [Level Global] premises where evidence of an insider trading scheme would be found.
The court evaluated the affidavit without the offending statement and found that there was still sufficient probable cause to justify the search of Mr. Ganek’s office and other Level Global premises. Because there was evidence of Mr. Ganek’s participation in possible insider trading, this was sufficient to justify the search, even though there may not have been evidence of his intent to do so.
As a result, there was no clear violation of Mr. Ganek’s Fourth Amendment rights and the defendants were entitled to qualified immunity.
Fifth Amendment Claim
The court also reversed the lower court’s refusal to dismiss the Fifth Amendment claims based on procedural due process.
It relied on the same analysis as for the Fourth Amendment claim. Even if he had been deprived of property rights,
the alleged deprivation of property resulting from the search of his office cannot be said to be the result of the fabrication of evidence in view of our corrected affidavit analysis.
There was probable cause even where a “corrected” affidavit is considered and thus no clear violation of the Fifth Amendment.
Things get even more interesting when the court analyzes the “failure-to-intercede” claim against the supervisor defendants. The court concluded that
There is no constitutional right—and certainly none that is clearly established by law—to have law enforcement officials issue public statements clarifying a person’s investigative status.
In fact, the court noted that it was likely better for the government not to clarify a person’s status in an investigation.
And this is likely true–my clients don’t want their status splashed across the front page of the newspaper. Then again, none of my clients have been watching their business go down the drain as media articles incorrectly report their investigatory status.
In the end, the court remanded for entry of judgment in favor of the defendants on all of the claims. In other words, it’s over.
The Problem with this Opinion
Reading this opinion isn’t troubling, until it is.
Let me explain.
When I read the opinion, each little part made sense. The court does an able job of taking apart each claim and analyzing why each one fails.
But when you step back and consider what happened here (or at least what is alleged in the complaint), that’s when the trouble starts.
There is little dispute that the complaint alleges that federal law enforcement agents included a knowing false statement in a warrant application. And that misstatement wasn’t about an address or the color of the front door, it was about the most important element of the insider trading crime—intent.
There is also little dispute that the execution of the search warrant and the public fallout from it led to the demise of Mr. Ganek’s firm.
What the court essentially said is that there is no remedy for this conduct. None. A law enforcement agent can lie on a search warrant affidavit but the defendant cannot sue him, as long as the lie was minor enough.
To be clear, I’m not saying that these defendants intentionally lied. (I handle defamation case, so I’m not going down that path without knowing more about the case.) But that’s what the complaint alleges. The court’s role was to treat every allegation in the complaint as true. And the court found that even assuming the agents intentionally lied, the courts are powerless to impose a remedy.
The only possible outcome of this opinion is to give law enforcement officers greater latitude to stretch the truth. That’s what I mean when I saw this opinion is troubling.
Mr. Ganek is the rare defendant who has the resources to fight this injustice all the way, and with excellent and expensive lawyers, even he cannot convince the system to let him have his day in court.
It may be that Mr. Ganek would lose at trial. It may be that he may even lose on a motion for summary judgment. But it seems to me that he should have at least been given the chance to try to prove his case.