In Ganek v. Leibowitz, No. 16-1463 (2d Cir. Oct. 17, 2017) (Raggi, Chin, Carney), the Second Circuit reversed and remanded a district court’s determination that federal law enforcement authorities were not entitled to qualified immunity from plaintiff’s Bivens claims for money damages for violations of the Fourth and Fifth Amendment in procuring and executing a search warrant. 

The plaintiff, David Ganek, who had co-founded the hedge fund Level Global Investors (“LG”) sued named agents of the Federal Bureau of Investigation (“FBI”) and prosecutors from the United States Attorney’s Office for the Southern District of New York (“SDNY”).  Pursuant to a search warrant obtained by the U.S. Attorney’s Office, the FBI agents had raided LG’s offices and searched and made copies of several LG employees’ files and documents, including Ganek’s.  The FBI’s informant—LG analyst Spyridon Adondakis, whose intelligence gave rise to the search warrant—had told authorities that he had knowingly received sensitive, non-public information from insiders that he passed onto other LG employees, and that those LG employees went on to make trading decisions based on that information, but he also stated that he “never” told Ganek that his information “came from an inside source.”  In spite of this fact, the search warrant affidavit sworn by an FBI agent (and submitted to a magistrate judge by a SDNY prosecutor) stated, in relevant part that the informant had “informed GANEK . . . of the sources of the Inside Information” given to him.

The execution of the search warrant drew much public attention, as it is not common for search warrants to be executed at presumably legitimate businesses.  LG faced a crisis, with investors seeking to withdraw from the fund.  After the warrant had been executed, Ganek asked then-U.S. Attorney for the SDNY, Preet Bharara to issue a press release clarifying that Mr. Ganek himself was not a target of the investigation, but his request was declined.  Shortly thereafter, “due to the flight of investors from LG” in the wake of the publicized search of LG’s offices, Ganek announced that he was closing the fund.  Two LG employees—Adondakis and LG co-founder Anthony Chiasson—were both indicted for insider trading.  Adondakis pleaded guilty and cooperated against Chiasson, who was convicted at trial.  Chiasson’s conviction was later reversed on appeal.  See United States v. Newman, 773 F.3d 438 (2d Cir. 2014).  Ganek was never charged.

In the aftermath of the criminal case, Ganek filed his civil complaint against several FBI agents and federal prosecutors.  The defendants moved to dismiss the complaint on qualified immunity grounds, but the district court (Pauley, J.) allowed to proceed Ganek’s Fourth and Fifth Amendment claims grounded in “a deliberate or reckless misstatement of material fact in the warrant affidavit” and the potential “fabrication of evidence.”

The Second Circuit reversed.  In an opinion by Judge Raggi, the Court concluded that, even assuming the statement in the affidavit underlying the search warrant that the information had told Ganek about the source of his information was not true, it was “not necessary to [establish] probable cause” to search Ganek’s documents.  The Court saw the issue as relatively straightforward, and “consider[ed] a hypothetical corrected affidavit,” which it “produced by deleting any alleged misstatements from the original warrant affidavit and adding to it an relevant omitted information.” 

Applying that practice to the case at hand, the Court posited a hypothetical corrected affidavit that “clearly alleges knowing insider trading by various LG employees, as well as Ganek’s trading on some of the same inside information,” which established the actus rea of insider trading and “le[ft] only [Ganek’s] mens rea at issue.”  The panel noted that these facts gave rise to a “‘fair probability that evidence of insider trading and related crimes as committed by the cooperator” and by “persons other than the cooperator would be found in the LG premises, including Ganek’s office.” 

Turning to Ganek’s Fifth Amendment due process claim, the Court noted that because “probable cause existed to search Ganek’s office even when the alleged fabricated statement is deleted,” any property that he lost was not “attributable” to the allegedly fabricated evidence.  As a result, the Court found, Ganek had no viable Fifth Amendment claim.

Lastly, the Court rejected Ganek’s failure-to-intercede claim against non-supervisor defendants for failing to correct the misstatement in the search warrant affidavit, and against supervisor defendants for failing to issue a public statement that Ganek himself was not the target of the investigation.  The Court dismissed the first argument on the ground that the hypothetical corrected affidavit established probable cause to search Ganek’s office, and dismissed the second on the ground that “there is no constitutional right . . . to have law enforcement officials issue public statements clarifying a person’s investigative status.”  All of Ganek’s claims were therefore dismissed.

It is understandable that David Ganek was upset.  His hedge fund closed its doors in the aftermath of the FBI and SDNY’s highly publicized execution of a search warrant of his firm’s offices.  The affidavit underlying that search warrant contained what all parties ultimately agreed was a false statement that Ganek himself had committed insider trading and knew that others within his firm had committed insider training.  According to the Second Circuit’s opinion, in the course of executing the search warrant, “Defendants provided advanced notice of the LG search to the Wall Street Journal, which took and published photographs of FBI agents carrying boxes out of LG.”  Ganek was never indicted and thus remains innocent of insider trading, but his firm is no longer operational.

However, the Second Circuit’s ability to provide any relief to Ganek was limited by established law.  The Court addressed the straightforward question of whether probable cause to search Ganek’s office would have existed if the misstatement were removed from the affidavit.  As the Court reasoned, there certainly was—the hypothetical corrected search warrant established that Ganek had likely traded on the information that the informant obtained from an insider, and it established that others at the company had done so with knowledge of the source of the information.  There was reason to believe that additional information related to those actions would be found in Ganek’s files.

There is nothing in the record or in the Court’s opinion that indicates that the misstatement in the affidavit was the product of anything other than a good-faith mistake.  Assuming that this is true, the result is fair.  People make mistakes, and a system in which criminal defendants or others could sue agents and prosecutors would be to the detriment of society at large.  However, one can imagine a case where a rogue agent intentionally inserts a falsehood like this to bolster the government’s position to prosecute an individual or to obtain a search warrant.[1]  Qualified immunity makes it impossible even to take discovery from an agent in these circumstances.  It is generally accepted that qualified immunity is the price necessary to prevent public servants from being sued in their personal capacities when they make mistakes.  At the same time, it is worth reflecting on whether the legal framework achieves the proper balance between wanting federal law enforcement authorities to be able to investigate cases without fear or favor on the one hand and protecting private citizens against institutional impropriety on the other.