CNBC Exclusive: CNBC’s Andrew Ross Sorkin Interviews David Ganek from CNBC Institutional Investor Delivering Alpha Conference

WHEN: Today, Tuesday, September 13th

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with David Ganek, Level Global Investors Founder and Head Portfolio Manager, live from the CNBC Institutional Investor Delivering Alpha conference in New York City on Tuesday, September 13th.

Mandatory credit: CNBC Institutional Investor Delivering Alpha conference.

ANDREW ROSS SORKIN: Thank you. And I want to thank David for being here. This is his first time speaking out publicly about this unique situation, let's call it. I want to start this conversation.

How did you decide to poke the bear, if you will? How did you decide that you were going to be the one that was going to sue the government?

DAVID GANEK: You mean the bear market? Or -- oh. The U.S. Attorney's Office, that bear.

Well, that decision really came a few years into this, approximately three and a half years into this, after the Second Circuit had reversed the charges against Newman and Chiasson, in what has become a very historic ruling.

I was having a meeting with Barry Scheck. And the purpose of the meeting was Barry, who is a preeminent civil rights lawyer, had founded something called the Innocence Project, which really does God's work in terms of getting people out of jail for -- to find DNA to get people out of incarceration. And in that meeting, Barry said to me, you sound like -- we talked about our case and what happened. He said, you sound like you might have a case.

And I said, Barry, you know, I've talked to many lawyers about this over the years. And I've been assured suing the government, or poking the bear, as you say, would be a completely futile experience. And I had moved on from that idea. But nonetheless, he said, come meet with some of my partners. And I said sure. What's a few hours?

I came down to his office and met with them. And when I got there, they gave me the same disclaimer I had heard from many lawyers in the past: It's not worth suing the government. It will take forever. It will cost a fortune. I have experience with this. They don't exactly play fair in that orbit. And don't waste your time. Move on with your life.

I said thanks. We spent a few hours. We started going over facts. And during that meeting, we had a moment where dots got connected. And effectively, the dots that got connected was we discovered that the affidavit that was responsible for the raid of Level Global contained a serious misrepresentation in it, a misrepresentation that was borne out by testimony at the actual trial by the one witness the government had and by the FBI agent in charge of the case.

And at that point, the lawyers wrote to me and they said you may be sitting on an atom bomb. And I said, well, that's interesting. That's certainly a change from where this meeting started. And they said, call me in a week. Let's set up a call. It was Christmas break. We were all going away.

Called them a week later. They said, we've done our work. We think you have a very substantive case.

And my response was, well, can you contextualize that for me? Is there precedent? Can you show me other cases that I could look at and understand this better?

And they said, to tell you the truth, there really isn't. This is quite unprecedented.

At that point, I had a decision to make. We had this very compelling fact pattern that was, by their estimation, atom bomb-like, or very unique. Did I want to move forward with my life or did I want to really kind of go at what had happened and all my feelings about what the prior few years had brought and the unexpected turn in my life and the lives of my employees and the lives of my family.

And after confirming with my family and getting their support, you know, I had kind of gotten the green light. But before I got the green light, I said -- they had a woman named Nancy Gertner, who is of counsel to Barry's firm, who is an ex-Clinton-appointed federal judge and still a Harvard law professor. And they wanted to send this information on to Nancy to get her opinion and get her feeling for what this case could mean from her perspective.

And Nancy took what -- heard what the case was about, a lie in an affidavit by the U.S. Attorney's Office. And Nancy said no F'ing way that happened. We gave her the docs. And then, after going over them a week later, she called back. And she goes, no F'ing way. I can't believe that happened. And at that point, she signed on to help me run the case with the rest of the people at Barry's firm. And then we were off.

ANDREW ROSS SORKIN: Before we fast-forward to where we are now, take us back, though, to 2010, to when this raid happened and the weeks around that and what happened afterwards. And just for those in the audience who don't know the story, so they understand sort of the personal journey, if not roller coaster, that you have been on.

DAVID GANEK: Well, it's a hard thing to really explain, Andrew. To show up at work -- this was November 22, 2010. The next day was my wife's birthday -- to show up at work on Monday morning, what were we worried about at that time of year? Well, our business was terrific. We had sold a piece of our business a few months earlier. We were raising a lot -- to a subsidiary fund of Goldman. And things were great. It was the end of the year. We were getting ready to deal with compensation issues, et cetera, et cetera. Thanksgiving vacation was right around the corner.

And I got in the car to go to work that morning. And I show up at the office. And there's 30 people downstairs in front of the building, normally where a few people are smoking cigarettes. And I'm like, what's going on? Why are all you guys down here? And they said the FBI is upstairs raiding our business.

And to tell you the truth, it's not something that -- I mean, maybe it still hasn't settled in. I mean, practically speaking, it did. But from that point in time, life really stopped for myself and for my business, for all of our employees. And I would say it was a complete eruption of commotion and confusion and stress and everything else you can imagine over the next weeks.

ANDREW ROSS SORKIN: Now, you say that this prosecution, but, more importantly, the raid itself was irresponsible not only in the fraudulent way that you've alleged took place in the affidavit, but that the raid itself was irresponsible in that it put other people who might not have been guilty in harm's way, meaning the other people at your firm.

I want to read you something. Preet Bharara was here at this Delivering Alpha conference. And he was asked about the potential for when he goes and does a raid, what it could mean. And this is what he said.

He said, "Firefighters, just like prosecutors in my office and other regulators, they are conditioned and they're trained to make sure that you don't do undue damage, but you've got to figure out whether or not there is a fire. And firefighters sometimes will go into a building to make sure they are saving lives and putting out the fire. And it turns out it was just smoke, but damage occurs to the building. And damage occurs, as I understand it and as people in my office are sensitized to understand it, to business organizations, even from the mere opening of an investigation, and we know that."

What did you think when you heard that?

DAVID GANEK: Well, it's interesting. I was sitting in my office, of course dialed into this conference, watching it at that point in time, totally unaware that even Preet was speaking and what he was going to say. And I really felt, as did other people who ultimately heard it, that he was speaking to this episode of these raids.

I think it's worth taking a step back and considering just how unprecedented it is to raid going concerns. There's actually a U.S. Attorney's handbook that says you should consider the collateral damage of what the action may be. Now, that doesn't mean it's illegal to raid -- and it actually isn't illegal to raid -- but one needs to consider -- you know, I guess it's the better judgment rule. What was the reason for the raid?

Four months earlier, the U.S. attorney had been giving a speech to the New York Bar, and had basically said in what was effectively a call to arms -- mind you, this is right in the shadows of the financial crisis. That would be 2009, 2010 time frame -- and said we are going to use the most stringent form of law enforcement on people in the finance industry, just like mobsters and just like drug dealers, and wire tap, raids, et cetera, et cetera. And it was almost like he had a responsibility to make good on what he had said.

So for him to bust down our doors, to come off the elevator, to have FBI agents with guns out and exposed onto a business that -- first of all, all of our information is completely backed up. There's not any, you know, in this day and age, there's nothing -- everything is quite transparent about how we do business and the records of how we do business. You really had to question what were the objectives of this.

And when you take a step back from this case, there are different pods, as I look at it, about what happened. There was the unjust, then there was what my lawsuit is about, which would be the illegal. The unjust was when they raided our firm, they had not even bothered to check our trading records. So they had no idea whether the stuff that was alleged as probable cause in the affidavit, if we had even traded it and what our experience had been with it.

After the raid, they never looked at any of the evidence that they got from the raid. They relied solely on the subpoenas, so nothing that they gathered was even looked at. That's a fact. So you ask yourself, what was the purpose of this raid. I think it leaves you -- or at least leaves me with only the issue of it being political, of it being of a pandering to what was going on in the world at that point in time; that we're going to show these guys.

Now, I have made my mark, my life and career in the markets, and I'm wholeheartedly a believer in safeguarding the integrity of the markets, but to do this and not have done your homework before you began what they actually did, to me, isn't safeguarding markets. To me, it's creating uncertainty and fear and risk in market participants.

ANDREW ROSS SORKIN: You have sued not just Preet Bharara personally, but also sued 15 people in total in the department, including supervisors. Why did you do that?

DAVID GANEK: Well, I'll break a little bit of news. Before we filed the lawsuit -- first of all, the U.S. Attorney's Office is completely opaque. There's very little information that you can get your hands on that reveals anything of substance. When we filed the lawsuit, we had to cover the food chain of everybody who might be involved in our case, some of whom we knew and some of whom we weren't sure; but before we filed the lawsuit, we actually sent a draft of our complaint to the government and we asked them, we said if this is -- if we are barking up the wrong tree, we want to know.

I was particularly sensitive to not charging people who might not be involved, because people in my life had gone through that and I know how difficult of an experience that can be. And when we gave them the complaint and we said look, you need to be willing to be deposed, to let us know this guy's not involved or that guy's not involved or whatever it is, they completely declined our offer.

So they let it go forward. They would have had the power to remove people from that group if they didn't belong there, but they didn't.

ANDREW ROSS SORKIN: Do you feel uncomfortable there are going to be certain people on that list that clearly weren't part of this, in the same way I know you feel uncomfortable about the people at your firm?

DAVID GANEK: Yeah. That's why we gave them the opportunity to help -- we don't have the information of who to include or not to include; so yes, I feel uncomfortable and I would prefer it not to have been that way, but we were ultimately left with very little choice.

And, frankly, look, there needs to be transparency here. My objectives for doing this, first, are about accountability. Facts are a stubborn thing. And this case is sorely in need of disclosure of facts. How did this happen? Why did this happen? What were they thinking about when they said we're going to do a raid?

More specifically to me, what were they thinking about when they misrepresented what was said about me versus what they wrote in the affidavit? That is what enabled them to include me in the affidavit. And as the head of the firm was ultimately the hurdle that I could not overcome.

ANDREW ROSS SORKIN: You were an unindicted coconspirator. That was what --

DAVID GANEK: No. That came much later. Unindicted coconspirator comes as you get closer to trial. And it's an evidentiary tactic by prosecutors to get evidence in trial that's not -- you don't have to subpoena a person.

ANDREW ROSS SORKIN: Let me play devil's advocate for a second. And I will try as best I can to pretend I am Preet Bharara, and a prosecutor who would say, look, it is our job, as he said here at this table, as a firefighter, to go in. We need to be able to investigate things. We are not always going to get it right. There are going to be times that in the process of investigating, we are going to get it wrong, and there are going to be people who are going to be injured along the way.

What do you say to that? What do you say to the idea that the justice system wouldn't work if prosecutors were only allowed to both prosecute and/or raid and/or pursue things that they knew 100% from moment one?

DAVID GANEK: Well, I mean, I think there's a couple ways that I would respond to that. First of all, you have the use of subpoena. So all of the evidence that they did get from this case came via that very same subpoena. So what is the actual value add of doing a raid when there could be collateral damage?

In my complaint, before I made the decision to shut down the firm, you would read in my complaint that we actually reached out to the U.S. Attorney's office and said we think you're barking up the wrong tree, but unless you can give Ganek some type of cloud cover that he's not a target in this investigation, he's going to shut the firm down. And we made that call to them. And they said, sorry, we can't help you, but you're on your own.

Look, you have to -- you know, it's a matter of what is your objective in -- you know, when you raid somebody, this is -- in my mind, the second the FBI came off of our elevator, it was on -- in some respects an investigation, a trial, and a conviction all in one in the court of public opinion, not to mention that the press was tipped off and was waiting to report the news.

The commercial consequences of that are huge. And the commercial consequences of that put 70 people out of business -- I mean, 70 people's careers were completely rerouted. The resumes probably -- and I hope this isn't the case today -- have that monicker on it. And it didn't need to be that way.

ANDREW ROSS SORKIN: How personal is this for you now?

DAVID GANEK: Well, I think there's a component of it that's personal. But, really, there's three things that are sort of in play here.

One, for me, yes, there's a component of it being personal. But would I rather not be suing the government? And I think it's a silly question. Of course I would rather not be involved in this.

ANDREW ROSS SORKIN: But I say this because you are a risk manager. So when you decide that you're going to sue the government, I imagine you look at all the permutations and all of the risks.

DAVID GANEK: Yeah.

It's funny, because if, out of 100 people I may have asked about should I sue the government, I got 100 "Are you crazy?" I got 100 "Don't poke the bear."

It's a sad commentary, the proxy of people that I spoke to, who came from all walks of life, what their feelings are about messing with the government. It really shouldn't be something that is such a thing that sounds as -- that is actually as crazy as it probably is. I don't think it ought to be that way.

But the other things that are in play here are the names and reputations of the people who worked at Level, who helped build a very successful business. And there is further leverage here, because accountability will lead to deterrence. And when you put the team of people who are supporting me, Barry and Nancy, these are not people who stand with the caricature that I represent of the art-collecting hedge fund manager who has everything, so to speak. The character -- a version of the character from "Billions," not quite that successful.

And that caricature is not who these civil rights lawyers stand with. So when you combine them with what the facts are here that we feel very strongly that have led us to win the first round of this, I think there's actually a deterrence here that can lead to a --

ANDREW ROSS SORKIN: What do you make of the insider trading laws as they stand now?

DAVID GANEK: Look, my strong feeling about that is I don't really have an opinion about how they stand now, other than that they need to be made clearer. They're very ambiguous now. And to the extent there's ambiguity, it really favors the prosecutor. And I think this case, the Newman-Chiasson case, was an example of that, that they could take that case and make a case out of that, not something that, if the laws were clearer, they would actually be able to do.

I can't help but separate the effect that this has had on the markets. I think it contributed to the general malaise of performance, not the fears that this represents, the uncertainty that this represents. I think that clarity on that would only serve everybody's purpose.

ANDREW ROSS SORKIN: But the current laws that stand, given this appeal, as ambiguous as it is, seems to be a pretty big hole now.

DAVID GANEK: No doubt. Again, that's not my domain. I'm just arguing for laws that are clear. Yeah, I agree it does. And I think that that's something that should be addressed, but it has to be addressed by Congress. It shouldn't be addressed by prosecutors.

ANDREW ROSS SORKIN: You've talked about accountability. I'm curious about your views about the idea that prosecutors oftentimes end up working for people in this audience, prosecutors who have gone after insider trading cases and others in the hedge fund industry have made careers now part of the revolving door, if you will. Paul Singer was here earlier.

DAVID GANEK: Yes. Yes. Well --

ANDREW ROSS SORKIN: I'm referring to his general --

DAVID GANEK: I know who you are referring to. And I think you are referring to the number two person for the U.S. Attorney's Office, who now has other lawyers consider him the A-Rod contract for U.S. attorneys leaving and going into the private sector working at a hedge fund ironically.

But what we've seen is a very consistent revolving door of prosecutors leaving that office -- you see, I think inherently, one of the observations you get from sort of getting the front-row seat that I got to all of this is that this is a very dangerous setup. And in some respects, what happened to Level and happened to me were collateral damage and roadkill from this setup.

You have high-profile cases. You have unaccountable prosecutors with total immunity who don't worry about the consequences enough anyway of their actions. And you have prize jobs waiting for them with their attachments to these cases.

And I think one of the defenses that the government used in one of their briefs in my case that ultimately was unsuccessful was to say this can't happen. The government doesn't do things like this. And, to me, that's either a massively naive statement or one of the most arrogant statements imaginable, to say they don't do things like this.

And I think one of the ironies here is that the line is very thin between the -- the ambitions of the prosecutors, the shortcuts to success that they experience, and not unlike the very same things they are trying to prosecute out and rid the markets of. And it's a disturbing combination. And it's not something that should exist.

ANDREW ROSS SORKIN: We are going to run out of time, but I'm curious. If you could do all this again, what would you do differently to avoid this from the beginning? Was there a way to do that?

DAVID GANEK: You know, I suspect that there probably wasn't. I think a variety of things happened. Too big to fail happened. There was an appetite of anger that was completely justified. And then there were targets that could become a way to quench that anger that the public had and still has.

So if prosecutors start to go down this road of -- the word I used before was "pandering," somebody's going to get caught in that. And, to me, you would just hope that the people who have so much power vested in them, the power --

ANDREW ROSS SORKIN: Is there something that you or the firm would have done around compliance or other things to be stricter on accountability?

DAVID GANEK: I only say that because Mr. Chiasson was originally found guilty. It was appealed and they won based on a change in the understanding or thought around the law. There's probably another argument that says that there was a change in thought around how the law was even perceived in terms of these prosecutions. But, yeah, look, the easy answer to that is you always wish you had more compliance or better compliance to avoid these situations.

Compliance was -- we had a very institutional roster of investors. They don't invest with firms that don't check every single box, and certainly compliance was an important box then and became an even more important box ultimately.

But, yeah, would you have preferred that to be the case? Absolutely, I would have. But I don't really think it would have ultimately made a difference the way the rules of engagement had been determined and ultimately what happened.

ANDREW ROSS SORKIN: Final question. As an insider now looking out on this industry, what do you make of it? You wish you were still doing it?

DAVID GANEK: I guess it hasn't been a great few years. I don't think I would have chosen to not be in the business for the reason that I ultimately had to make that decision. I would have much rather be up here talking about what the last panel was up here talking about, or talking about a good idea, or whatever it might be.

But as I've separated myself more and more from the industry, one thing that Mark Lasry said today, I agree with very much in principle. I think hedge funds are expected to sort of walk on water as an investment class. And they just clearly cannot for a variety of reasons. And very few people have ever really been successful at doing that.

So I think the relationship or the contract between managers and investors needs to change. Managers need to give investors time, and investors need to take real risk, or nobody is going to end up winning in the long run.

ANDREW ROSS SORKIN: David Ganek, I want to thank you for this conversation. I want to thank you for your candor and for taking the time to do this during the case, as this is an ongoing situation. And we appreciate you being here today. So thank you.

DAVID GANEK: Thank you very much.

(Applause.)

About CNBC:

With CNBC in the U.S., CNBC in Asia Pacific, CNBC in Europe, Middle East and Africa, CNBC World and CNBC HD, CNBC is the recognized world leader in business news and provides real-time financial market coverage and business information to approximately 386 million homes worldwide, including more than 100 million households in the United States and Canada. CNBC also provides daily business updates to 400 million households across China. The network's 15 live hours a day of business programming in North America (weekdays from 4:00 a.m. - 7:00 p.m. ET) is produced at CNBC's global headquarters in Englewood Cliffs, N.J., and includes reports from CNBC News bureaus worldwide. CNBC at night features a mix of new reality programming, CNBC's highly successful series produced exclusively for CNBC and a number of distinctive in-house documentaries.

CNBC also has a vast portfolio of digital products which deliver real-time financial market news and information across a variety of platforms including: CNBC.com; CNBC PRO, the premium, integrated desktop/mobile service that provides live access to CNBC programming, exclusive video content and global market data and analysis; a suite of CNBC mobile products including the CNBC Apps for iOS, Android and Windows devices; and additional products such as the CNBC App for the Apple Watch and Apple TV.

Members of the media can receive more information about CNBC and its programming on the NBCUniversal Media Village Web site at http://www.nbcumv.com/programming/cnbc.

For more information about NBCUniversal, please visit http://www.NBCUniversal.com.