U.S. appeals court mulls hedge fund founder's FBI misconduct case

By Brendan Pierson

NEW YORK (Reuters) - An attorney for the U.S. government on Friday urged a federal appeals court to toss an unusual lawsuit by hedge fund founder David Ganek, who claims the government lied to get a search warrant against him in an insider trading investigation.

Sarah Normand, arguing for the government before the 2nd U.S. Circuit Court of Appeals in Manhattan, said that even if the Federal Bureau of Investigation did make false statements, it had good cause for a warrant against Ganek anyway.

The three judges vigorously questioned both Normand and Nancy Gertner, a former federal judge now representing Ganek, but did not clearly signal how they might rule.

FBI agents raided the offices of Ganek's fund, Level Global, in 2010, after one of its analysts, Spyridon Adondakis, told them that he had traded Dell Inc shares on insider information, and shared such information with others at the fund. Level Global shut down soon after that.

In his 2015 lawsuit, filed in Manhattan federal court, Ganek claimed that in asking a magistrate judge for a warrant against him, the FBI falsely said Adondakis had told them that he had told Ganek the source of his information about Dell.

However, both Adondakis and an FBI agent who interviewed him later testified that Adondakis never said that. Last year, U.S. District Judge William Pauley refused to dismiss Ganek's lawsuit, which claims the search violated his Constitutional rights.

At Friday's argument, Normand said evidence of insider trading at Level Global was enough by itself to justify the search.

She also said it was not "plausible" that FBI agents decided to "run up the chain a decision to fabricate evidence."

Normand also did not concede that the FBI had made false statements. She said its statement about Ganek knowing of inside information was not about Dell specifically, but did not provide further details.

Pressed by Circuit Judge Reena Raggi, she said the government could stand by that assertion trial.

Gertner said evidence of some insider trading at Level Global did not justify a warrant against Ganek.

"If a guy in the mail room is trading on inside information, you have the right to search the entire business? That makes no sense," she said.

She also criticized the government for arguing that "the lie doesn't matter."

"The notion that there is no remedy for officers of the United States to lie in an affidavit is extraordinary," she said.

(Reporting By Brendan Pierson in New York; Editing by Bernard Orr)

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