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Targeted by U.S. Prosecutor, Hedge Fund Fights Back

Preet Bharara, the United States attorney, announcing insider trading charges in 2012.Credit...Robert Stolarik for The New York Times

On a crisp fall morning, F.B.I. agents staged a surprise raid of three hedge funds, feeding the growing national reputation of the prosecutor Preet Bharara as the new sheriff of Wall Street.

Now more than four years and dozens of insider trading convictions later, one of those funds — forced to close from the taint of the raid — is fighting back.

David Ganek, a Manhattan socialite and art collector whose $4 billion Level Global was one of the funds raided, sued Mr. Bharara on Thursday, claiming that the government violated his constitutional rights by fabricating accusations against him. The lawsuit against Mr. Bharara, the United States attorney in Manhattan, also named as defendants the federal prosecutors and F.B.I. agents who orchestrated the raid.

While legal experts said Mr. Ganek’s lawsuit could be a long shot, it comes at a time when Mr. Bharara’s image as an invincible prosecutor — racking up convictions on Wall Street and setting his sights on Albany’s power brokers — is beginning to fray.

Mr. Bharara’s crackdown on Wall Street, for one, is facing judicial challenges. Recently, a federal appeals court ruling overturned the convictions of two hedge fund traders, including Anthony Chiasson, Mr. Ganek’s partner at Level Global. And Sheldon Silver, the state assembly speaker whom Mr. Bharara recently indicted, has complained that the prosecutor’s office is fighting his case in the news media.

Mr. Ganek’s lawsuit was filed just hours after the confidential warrant underpinning the raid was unsealed by a federal judge at the request of The New York Times, which first sought the documents in January.

Together, the lawsuit and the warrant draw back the curtain on one of the government’s signature insider trading investigations, showing the breadth of suspicion surrounding Level Global, but they also raise new questions about whether some of the government’s aggressive tactics crossed a line.

The warrant says that a Level Global analyst cooperating with the government had revealed to Mr. Ganek “the sources of the inside information.” While that accusation was vague, it was enough to convince a magistrate judge at the time that there was probable cause to approve the warrant.

Mr. Ganek’s lawsuit contends that the warrant supporting the raid “falsely represented” that he was involved in insider trading. The lawsuit cited the courtroom testimony of the Level Global analyst, who never implicated Mr. Ganek, the lawsuit said. And the government never charged Mr. Ganek, though they labeled him an “unindicted co-conspirator.”

Convicted felons occasionally sue the government, claiming a violation of their civil rights. But it is rare for someone of Mr. Ganek’s wealth and stature — he and his wife listed their Upper East Side duplex for $44 million last year — to take aim at the city’s law enforcement without first being charged.

On Thursday, Mr. Bharara’s office declined to comment. The Federal Bureau of Investigation also declined to comment.

But in responding to Mr. Ganek’s lawsuit, the United States attorney’s office is likely to argue that the raids were necessary, a point the F.B.I. made in the warrant application. At the time, the government suspected that traders, heeding media reports of the looming investigation, were destroying emails and other evidence.

Lawsuits charging prosecutors with wrongdoing are difficult to prove and seldom successful, legal experts say.

“The only way you would be able to sue in a successful manner was to demonstrate the contents of the affidavit were made malicious and false,” said Michael Bachner, a white-collar criminal defense lawyer. “That’s very hard to prove.”

But Mr. Bachner added that federal authorities could not state something as a matter of fact in order to establish probable cause. A warrant application, he said, is supposed to include “particularized evidence from a reliable source.”

Mr. Bharara’s insider trading crackdown was unusual in that it featured the sort of hardball investigative tactics that typically drive investigations into organized crime, not securities fraud. Using wiretaps, unannounced visits to traders’ homes and, of course, office raids, the government won more than 80 insider trading convictions under Mr. Bharara, spreading fear on Wall Street.

Within months of the raid, Level Global shut its doors and shed about 80 jobs, as did the two other hedge funds raided that day: Loch Capital in Boston and Diamondback Capital Management in Connecticut, a spinoff of the giant hedge fund SAC Capital Advisors.

Mr. Ganek and Mr. Chiasson were once star traders at SAC Capital, the former hedge fund founded by the billionaire investor Steven A. Cohen, and long a focal point of the government’s investigation. Although SAC ultimately pleaded guilty to insider trading, the government never raided its offices, highlighting the rarity of such an aggressive move.

Mr. Ganek is not the first to question the government’s tactics.

In December, a federal appeals court overturned the convictions of Mr. Chiasson and Todd Newman, a former trader at Diamondback, saying the judge who oversaw the trial set too low a bar for conviction when instructing jurors. The appellate ruling reverberated throughout the legal world, reining in the boundaries of insider trading law and jeopardizing a number of recent convictions.

Mr. Bharara is challenging the ruling, saying it “threatens the effective enforcement of securities laws.”

Raj Rajaratnam, the hedge fund magnate whose insider trading conviction in 2011 represented the government’s first major victory, also challenged wiretapped evidence the government collected against him. He argued that the government’s wiretap application failed to disclose that the S.E.C. was already pursuing a conventional investigation.

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Anthony Chiasson, whose conviction for insider trading was recently overturned.Credit...Brendan McDermid/Reuters

While the judge overseeing Mr. Rajaratnam’s trial ultimately admitted the recordings as evidence, he admonished the government, saying “the omissions here are troubling to say the least.”

After Mr. Rajaratnam’s arrest, prosecutors and the F.B.I. turned the spotlight onto Level Global and others, setting up the Nov. 22, 2010, raid.

During the raid, one of the items the F.B.I. collected was a “list of artwork” belonging to Mr. Ganek in addition to a DVD that contained “extractions” from his iPhone and BlackBerry. In the course of the raid, the F.B.I. also seized a folder labeled “S/A/C/ Correspondence,” with a name that was redacted, according to the warrant materials.

To justify the raid, the government’s warrant application relied heavily on interviews the F.B.I. conducted with Spyridon Adondakis, a former employee of Level Global who had worked as an analyst for Mr. Chiasson. Mr. Adondakis, known as Sam, pleaded guilty to insider trading and later testified at the trial of Mr. Chiasson and Mr. Newman.

In the application, the F.B.I. said Mr. Adondakis alerted Mr. Ganek and Mr. Chiasson to inside information.

But while the application contained extended summaries of Mr. Chiasson’s conversations, including some wiretapped phone calls with an outside analyst, the references to Mr. Ganek were devoid of any detail. The warrant, Mr. Ganek’s lawsuit contends, contained nothing more than “conclusory” statements about his involvement.

Mr. Ganek argued that the statements were false, noting that during Mr. Chiasson’s trial in late 2012, Mr. Adondakis testified “he never told Mr. Ganek anything about the source” of his information at the technology company Dell. An F.B.I. agent corroborated Mr. Adondakis’s testimony.

Yet in fighting Mr. Ganek’s lawsuit, the government will most likely emphasize that some of Mr. Ganek’s own instant messages were introduced at Mr. Chiasson’s trial, including one in which he inquired whether a Level Global employee had heard “from his Dell contact,” referring to the computer company. Just because he was never charged does not mean he was not a suspect, the government will most likely argue.

Mr. Ganek’s legal team — which includes Nancy Gertner, a former federal judge in Massachusetts, and the noted litigator Barry Scheck — links the government’s actions to the downfall of Level Global. In the lawsuit, Mr. Ganek claims that he would have stemmed an investor exodus if the government had not mentioned him in the search warrant.

In an effort to clear his name and keep the fund alive, Level Global’s lawyers hired John Carroll, a former federal prosecutor who now practices law at Skadden, Arps, to conduct a forensic investigation. The forensic investigation, according to the lawsuit, found no evidence that Mr. Ganek broke the law.

Level Global’s lawyers submitted that report to Mr. Bharara’s office, hoping to persuade him that the office had erred by including Mr. Ganek in the search. But on Feb. 7, 2011, Mr. Bharara denied the request. Four days later, Mr. Ganek announced that Level Global was closing.

Today, Mr. Ganek runs a so-called family office that manages his own money. It is called Apocalypse 22 L.L.C.

A version of this article appears in print on  , Section A, Page 1 of the New York edition with the headline: Hedge Fund Sues U.S. Prosecutor. Order Reprints | Today’s Paper | Subscribe

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