White-Collar Crime

A Suit Against Bharara For Going After Hedge Funds Survives A Motion to Dismiss

Qualified immunity couldn't save Preet Bharara from discovery in this lawsuit.

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Bharara_Preet_Headshot-300x420Imagine that you run a hedge fund. You’re a rich guy. You’re a powerful guy. You like it that way.

One day, the FBI raids your office. They tell the Wall Street Journal that they’re going to raid your office. The Journal shows up, photographs it, and runs those photos the next day. Things break very very bad for you.

Or, as the U.S. District Court for the Southern District of New York described it:

In late 2010, the FBI executed coordinated raids on several well-known hedge funds in a highly touted investigation of insider trading. Plaintiff David Ganek’s hedge fund, Level Global Investors, was among them. These raids sent shockwaves through Wall Street: investment bankers and traders were indicted, and multi-billion dollar businesses—including Level Global—were shuttered. But five years later, a different picture has emerged. The Second Circuit rejected the Government’s theory of insider trading. Criminal convictions were vacated, and indictments dismissed. And in a nearly unprecedented role-reversal, the SEC agreed to disgorge monies it collected in connection with consent judgments against various hedge funds, including Level Global.

I may be just guessing here, but I bet the kind of person who starts a hedge fund is not the kind of person who takes being run out of business well.

David Ganek went to his lawyers and asked what he could do to get back at the people who destroyed his business. They proposed what many would have thought would be a long shot — sue the U.S. Attorney for the Southern District of New York, his deputies, his line attorneys, and the FBI agents who supervised the raid.

The obvious issue in such a suit would be qualified immunity — unless the conduct of these government employees was clearly prohibited under the Constitution, there’s no liability, no discovery, and no lawsuit for long.

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According to the S.D.N.Y., though, there’s no qualified immunity on these facts.

The core facts in the complaint come from an affidavit that was used to secure the search warrant. There, the FBI said that a guy who used to work with Ganek — Adondakis — told the FBI that Ganek had access to inside information. Testimony at a later trial where Adondakis was snitching — the Newman trial — though, made it clear that Ganek didn’t know the inside information Adondakis was talking about. And that he told the FBI that before they signed the affidavit.

If that’s right, then there’s a materially false statement in the affidavit that is basically the only thing that supports searching and seizing Ganek’s stuff. And lying in an affidavit is not permissible under the Constitution.

But whether that gives rise to liability for the supervisors in the U.S. Attorney’s Office — including Preet Bharara himself — turns on whether those supervisors knew that there were false statements in the affidavit.

Here, the court found there’s enough to go past a motion to dismiss in light of the “high-profile nature of the investigation” as shown by the public statements made by that U.S. Attorney’s Office about the raids and its priorities in going after Wall Street.

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Worse, Ganek’s lawyers reached out to two of the supervisors and Bharara himself. The court held that a government official has an obligation to rectify a harm suffered from government conduct. As the Court explained it (internal citations omitted),

Q – Ganek also proffers that Defendants—particularly Bharara (with whom Ganek’s attorney spoke personally), and Zabel and Leibowitz (with whom Ganek’s attorneys met personally)—should have publicly clarified that Ganek, and Level Global generally, were not the targets of the insider trading investigation after learning that the Affidavit misrepresented Adondakis’ proffer during the November 2, 2010 Meeting. Certainly, government attorneys are ethically obligated to limit the collateral damage resulting from government investigations. Indeed, the U.S. Attorney’s Manual commands that prosecutors consider “collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable” when contemplating the prosecution of business organizations.

The allegation is that Bharara knew about the case, knew about the false statement in the affidavit, and yet did nothing to correct it because he wanted the political or public relations bounce from having it hang out there. Which, the district court found, is enough to beat a motion to dismiss. And, if true, is pretty creepy.

A prosecutor is supposed to right wrongs. The ones that are easiest to right — and hardest — are those in the prosecutor’s own office. The charge here is that Bharara knew his office was doing wrong, but did nothing to correct it.

Obviously, it’s too soon to know what anyone knew. And absent those facts, it’s too soon to know what ought to happen.

But criminal cases are high stakes. Someone’s business and future can be destroyed, even when there’s no evidence they did something wrong. If the FBI put a false statement in an affidavit, folks in the U.S. Attorney’s Office knew about it, and they tipped off the Wall Street Journal anyway, causing a business to die, why not let the suit go forward?

If criminal prosecutions are blood sport, right now they look a lot more like hunting a drugged lion than boxing; prosecutions just never face a real threat of repercussions for bad acts.

But government officials have a lot of power to destroy lives without ever getting to an indicted case. How else is that power going to be checked?

Matt Kaiser is a white-collar defense attorney at Kaiser, LeGrand & Dillon PLLC. He’s represented stockbrokers, tax preparers, doctors, drug dealers, and political appointees in federal investigations and indicted cases. Most of his clients come to the government’s attention because of some kind of misunderstanding. Matt writes the Federal Criminal Appeals Blog and has put together a webpage that’s meant to be the WebMD of federal criminal defense. His twitter handle is @mattkaiser. His email is mkaiser@kaiserlegrand.com He’d love to hear from you if you’re inclined to say something nice.

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