The news spread like wildfire across trading floors in New York, Boston and Connecticut: The Federal Bureau of Investigation had raided four hedge fund firms looking for evidence associated with suspected insider trading.
The date was November 22, 2010; the firms in question were Barai Capital Management, Diamondback Capital Management, Level Global Investors and Loch Capital Management. Within months all four had closed, after experiencing significant redemptions from investors as a result of the raids, while the U. S. attorney for the Southern District of New York, Preet Bharara, proceeded with his insider trading investigation across the hedge fund industry. In 2012, Bharara filed charges against 12 individuals from two of the targeted firms. But one man was never charged: David Ganek.
While the founder and principal of New Yorkbased Level Global was named in the affidavit submitted to a judge by the FBI in support of the 2010 search warrant, neither he nor his firm which had $4 billion in assets and was worth approximately $400 million at the time it was raided were ever charged with a crime. Now Ganek is pushing back.
Ganek is seeking to clear his name. Addressing a crowd of nearly 400 investors and other financial professionals at this weeks Delivering Alpha conference, co-sponsored by Institutional Investor and CNBC, the erstwhile hedge fund manager told Andrew Ross Sorkin that he had not originally planned to sue the government: Its funny, because out of 100 people I may have asked about should I sue the government, I got 100 Are you crazy? [responses]. But, Ganek explained, as he talked through his situation with noted civil rights attorney Barry Scheck co-founder of the Innocence Project, which works to free people incarcerated for crimes they did not commit and his staff, it became increasingly clear to the Level Global founder that he had a case.
A review by Institutional Investor of Ganeks legal case, as well as of a separate insider trading investigation involving Level Global, lays open the inner day-to-day workings at his hedge fund. The two cases show how, despite seemingly strict compliance controls, some individuals at the firm became party to information on securities from company insiders.
In February 2015, four years after he shut down his firm, Ganek filed a complaint in the U.S. Southern District Court of New York against Bharara, members of the FBI and the U.S. Attorneys Securities and Commodities Fraud Task Force involved in the November 2010 raid and related investigation. The complaint accuses Bharara and the other defendants of violating Ganeks constitutional right not to be deprived of property or reputation. The case claims that Ganek should not have been included in the search warrant because the affidavit in support of the warrant contained false statements that Ganek had knowledge of the alleged insider trading taking place at Level Global and the defendants either knew or should have known that the information was false. The subsequent failure on the part of Bhararas office to make clear that Ganek was not a target of the investigation further compounded the problem, causing a rush of investor redemptions that left the hedge fund manager with no choice but to close his business. Ganek has requested a jury trial.
A former partner with the Stamford, Connecticutbased hedge fund firm SAC Capital Advisors itself the subject of a high-profile Bharara probe into insider trading Ganek started Level Global with fellow SAC alum Anthony Chiasson. According to Ganeks complaint, however, the two were not equal partners: Mr. Ganek was the principal partner, with a large majority interest in the business. Mr. Ganek was also the more prominent of the partners and the public face of Level Global, known broadly in New York and national finance circles as a successful asset manager, as well as for his philanthropy, service on boards of trustees, and as a sophisticated collector of modern art. Ganeks wife, Danielle, is a socialite and author; the two live in the same Park Avenue apartment building as hedge fund manager Israel Englander, founder of Millennium Management. (In 2013 the building experienced a series of burglaries, with the Ganeks losing $100,000 worth of jewelry and watches and Englanders wife, Caryl, losing a $7,500 gold watch.) The Ganeks put their apartment up for sale in 2014; it is currently listed for $32.5 million.
In Ganeks version of events, as laid out in his complaint, the prosecutors clearly wanted his high-profile scalp. Indeed, of all the people to have been caught up in the probe spearheaded by Bharara and the FBI, Ganeks reputation and wealth was second only to that of SAC founder Steven Cohen. (Cohen has also never been found guilty of any insider trading charges, though in January 2016 he was found guilty by the Securities and Exchange Commission of failure to supervise and barred from the industry for two years. Cohen, who today runs his family office, Point72 Asset Management, neither confirmed nor denied the Commissions findings.) Yet, as court documents make clear, there is little or no evidence to suggest Ganek knew of any insider trading taking place at his firm.
The Level Global case is made more complex by what happened subsequent to the raid. In May 2013, Todd Newman, a former Diamondback trader, and Chiasson were found guilty of conspiring with six others to earn $72 million by illegally trading technology stocks specifically, PC maker Dell and semiconductor company Nvidia Corp. The state witness in the case was a former Level Global analyst, Spyridon (Sam) Adondakis.
Chiasson and Newman were each sentenced to six and a half years in prison. In December 2014, however, the U.S. Court of Appeals for the Second Circuit in Manhattan overturned the ruling, citing erroneous instructions to the jury. In the decision which also nullified the convictions against Newman and Chiassons alleged co-conspirators the appeals court found that to prove insider trading the prosecutor had to show beyond reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for personal benefit. The court also decided there was insufficient evidence to prove that Chiasson and Newman knew they were trading on insider information.
The Supreme Court chose not to hear the governments appeal of the case, effectively ending the prosecution. This January, Level Global won a federal court case to dismiss the $21.5 million civil penalty the firm had paid to the SEC on related charges. A few months later it was reported that Chiasson had launched his own firm, Aurmedis Global. Yet Ganek, who for the past five years has been investing via his own family office, Apocalypse 22, in New York, still wants exoneration.
In his complaint, Ganek says his firm likely could have survived the raid and probe if the U.S. Attorneys office had made clear that he was not the subject of the insider trading investigation. Large hedge fund investors and their advisers have a sophisticated understanding of the potential impact of federal investigations, argues Ganek. They knew that while a hedge fund could survive the investigation and prosecution of lower-level employees, or even a minor partner, the risk to their own investments was too great if the principal of the hedge fund was a target or a focus of a much-publicized raid.
Ganeks lawsuit offers numerous examples to show that he was not party to insider information. Under oath, Adondakis repeatedly testified that Ganek did not know the source of the insider information on trading ideas. (Ganek alleges that the defendants falsified evidence to suggest that the managing partner did know about the source of the information in order to obtain the warrant.) The hedge fund manager also paid for two internal audits of his firm, both of which showed he was not aware of any improprieties.
Nonetheless, the evidence in Ganeks case and the defendants appeal, filed in the U.S. Court of Appeals for the Second Circuit, suggests something was awry with the way at least one analyst at Level Global was obtaining information, even if that did not meet the bar for illegal insider trading.
Under oath at trial Adondakis testified to using insider information provided by, in each case, a contact at the company in question in his investment analyses of both Dell and Nvidia, and that Chiasson, as well as others at Level Global (though not Ganek), knew about the nature of the source of that information. Asked if he implicated Chiasson in insider trading, Adondakis answered, I told the truth about what happened, and I guess does that, I guess that implicates him. Chiassons defense, however, has always vehemently denied that Chiasson knew Adondakis had access to insider information. In court Chiassons lawyers demonstrated how Adondakis would doctor e-mails that he sent to Chiasson so that the tech analysts bosses did not know the source of the information. On cross-examination Adondakis testified that he had a protocol for changing his e-mail communications to eliminate incriminating evidence.
In his case against Bharara and others, Ganek says that in May 2010, Level Global determined that Mr. Adondakis had violated the compliance regime [at Level], and he was asked to leave the company. Ganeks statement suggests that what happened with Adondakis was an isolated incident one which the firms own compliance efforts rooted out.
The Newman and Chiasson case, however, is not the only insider trading prosecution involving a Level Global analyst. In an Atlanta court in November 2014 in a case unrelated to the U.S. Attorney for the Southern District of New York but brought about through efforts by the Financial Fraud Enforcement Task Force, established by President Barack Obama in 2009 an ex-employee of Level Global pleaded guilty to one count of conspiracy to commit securities fraud.
Former Level Global consumer sector analyst Mark Megallis guilty plea was part of an insider trading case connected to trading in shares of childrens apparel manufacturer Carters. The court sentenced Megalli to two years in prison.
After the New York Second Circuit Court overturned the Newman and Chiasson verdict, Megalli, who was also required to pay a civil penalty of $62,003 on related charges, is seeking to have his criminal case overturned. His appeal is pending on the outcome of a Supreme Court ruling on a different insider trading case.
At no point in the court transcripts and filings reviewed by Institutional Investor did Megalli or the criminal or civil prosecution suggest that Ganek knew about the tainted nature of the intelligence that the former Level Global analyst had received about Carters. As with the New York case, however, Megallis sheds light on the inner workings of Level Global, and on how insider information came to be used to make trades.
According to the facts of the case, Megalli directed trading in Carters stock twice after receiving insider information, once in October 2009 and again in July 2010. Megalli received his information from Eric Martin, who had been vice president of investor relations at the childrenswear company. Martin, also the subject of litigation, had been hired as an outside consultant by Level Global and was getting insider information from a former Carters colleague still at the firm.
In the court transcript of the October 2015 hearing for the civil case brought by the SEC, Megalli explains how he had been hired by Ganek to build up a consumer sector investment business at Level Global. It was common, Megalli says, for the firm to use outside consultants for research. There were multiple people that we would use for research and analysis that were third parties to Level Global, Megalli told the court. These were either sell-side stock researchers or they had consulting companies and so forth.
In describing how the investment and research process worked at Level Global, Megalli revealed that technology expert Chiasson also served as head of research. The firm would occasionally conduct research meetings at which its top ten analysts would pitch their best ideas before the entire investment staff. Often Chiasson would explain what the technology team which, in addition to making investments in Level Globals main fund, managed a separate technology hedge fund was thinking.
Megalli states as well that Ganek ran what he called center book, for which Ganek cherry-picked the best ideas. Traders would pitch Ganek their ideas for inclusion in that portfolio. Megalli says he never pitched Carters to Ganek because it was not an important enough position for consideration by the managing partner.
Ganek is not unaware of the ironies of his case or of the parallels between apparent compliance failures possible at a firm when an analyst is keen for information that he or she can turn into dollars and what might happen within a results-hungry prosecutors office.
I think one of the ironies here is that the line is very thin between the ambitions of the prosecutors, the shortcuts to success that they experienced, and not unlike the very same things they are trying to prosecute out and rid the markets of, Ganek told the audience at Delivering Alpha. And its a disturbing combination. And its not something that should exist.
Bharara and the other defendants appealed to have Ganeks case tossed out of court. In May a judge upheld some, but not all, of Ganeks charges, allowing the case to proceed. A second appeal is pending.
When Bharara spoke at Delivering Alpha in July 2013, during the height of his offices prosecution of alleged insider trading activities at hedge funds, the U.S. attorney general joked that he was sorry that he had not brought subpoenas for everyone in the room. If Ganeks case is successful and legal scholars have said the bar to win is set very high Bharara will likely wish the FBI had issued one fewer search warrant on that day in November 2010.
Follow Imogen Rose Smith on Twitter at @imogennyc.