Securities Regulation Daily Former Level Global chief’s claims against government agents go forward
Thursday, March 10, 2016

Former Level Global chief’s claims against government agents go forward

By Amanda Maine, J.D.

The federal district court in Manhattan handed the co-founder of defunct hedge fund Level Global Investors a partial victory in allowing several of his constitutional claims against government actors, including the Manhattan U.S. Attorney and several FBI agents, to proceed. The complaint adequately pleaded violations relating to allegedly false information used in an affidavit that resulted in a federal raid on Level Global and insider trading convictions that were eventually vacated (Ganek v. Leibowitz, March 10, 2016, Pauley, W.).

Level Global. David Ganek founded Level Global Investors with Anthony Chiasson in 2003. Level Global was an advisory firm that managed hedge funds. An FBI/U.S. Attorney’s Office probe targeting insider fraud at hedge funds in 2010 resulted in raids on and charges against several well-known hedge funds and industry professionals, including Level Global and Chiasson. As a result of the charges, which raised concerns for the fund’s investors, Level Global closed the fund.

Chiasson and fellow Level Global employee Todd Newman were convicted, but the convictions were vacated after they successfully appealed to the Second Circuit, which held that the government had failed to show that they willfully engaged in insider trading and rejected its theory of insider trading. Level Global had also settled civil charges with the SEC, which eventually agreed to pay back the $21.5 million obtained in the settlement.

Ganek’s allegations. Ganek filed suit in federal court against several government agents, including Manhattan U.S. Attorney Preet Bharara, others in the U.S. Attorney’s office, and FBI agents for violations of his Fourth and Fifth Amendment rights, supervisory liability, and failure to intercede. Ganek alleged that the affidavit supporting the government’s request for a search warrant contained deliberate misrepresentations and that the fabricated evidence led a magistrate judge to issue the warrant, precipitating the closure of Level Global.

Fourth Amendment claims. Regarding allegations that the government violated his Fourth Amendment rights, Ganek argued that the search of Level Global and his office lacked probable cause and was conducted in an unreasonable manner.

The court agreed with Ganek on his probable cause argument, holding that he had adequately pleaded that the affidavit contained materially false statements and that those statements were relevant to the magistrate’s probable cause finding. However, his Fourth Amendment claim challenging the reasonableness of the search did not pass muster because the government was not required to obtain a subpoena instead of a search warrant, and the government’s tip to theWall Street Journal about the impending raid was not the same as an unconstitutional “perp walk” under Lauro v. Charles.

Fifth Amendment claims. The court also rejected Ganek’s claims that he was deprived of “substantive due process” under the Fifth Amendment because his fabricated evidence claim is cognizable under the Fourth Amendment’s probable cause requirement, and as instructed by the Supreme Court, must be analyzed as such, and not as a substantive due process claim.

However, the court allowed Ganek’s “procedural due process” Fifth Amendment claim to proceed. Ganek adequately pleaded that the seizure of his personal items was premised on fabricated evidence that was authorized not by “lower echelon employees,” but by “highly trusted government agents and attorneys.”

Failure to intercede and supervisory claims. The court also saw no reason to dismiss Ganek’s failure to intercede and supervisory claims at this stage in the litigation. The complaint “plausibly pleaded” that the defendants should have interceded or that they would have learned details about the falsity of the information in the affidavit to entertain serious doubts about its veracity. The court recommended that the parties formulate “an equitable and proportional discovery plan” to identify which of the defendants were directly involved with the false affidavit.

The case is No. 15-cv-1446.

Attorneys: Anna Benvenutti Hoffmann (Cochran, Neufeld & Scheck, LLP) for David Ganek. Andrew Edward Krause, U.S. Attorney's Office, for David Leibowitz.

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