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Fed Judge Dismisses UDF’s Frivolous Lawsuit Against Federal Officials

By Anna Peel. Originally published at ValueWalk.

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Fed Judge Jordan Dismisses UDF‘s Frivolous Lawsuit Against Federal Officials (US Attorneys, FBI) With Prejudice


Q3 2021 hedge fund letters, conferences and more

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF TEXAS

SHERMAN DIVISION

HOLLIS M. GREENLAW, ET AL.

v.

DAVID KLIMEK, ET AL.

CIVIL NO. 4:20-CV-311-SDJ

Memorandum Opinion And Order

A family of real estate development financing companies and their controlling executives are trying to hold federal officials responsible for allegedly spreading lies, falsifying evidence, and unlawfully searching their headquarters to aid a notorious short seller’s fraudulent scheme. But for this Court, the question is not whether such conduct violates the Constitution. The question here is whether, assuming the alleged constitutional violations exist, an implied cause of action for money damages is available to remedy such violations under the Constitution itself, more commonly known as a “Bivens action.” Hernandez v. Mesa, 140 S.Ct. 735, 742–43, 206 L.Ed.2d 29 (2020); accord Bivens v. Six Unknown Named Agents of Fed. Bureau of Narcotics, 403 U.S. 388, 397, 91 S.Ct. 1999, 29 L.Ed.2d 619 (1971). The answer is no. So the motion to dismiss currently before the Court, (Dkt. #25), will be GRANTED.

Background

This case arises from a securities-fraud investigation.1 In 2015, an “infamous” short seller, J. Kyle Bass, and representatives from his hedge fund gave presentations about UDF2 to officials from the Department of Justice, Securities and Exchange Commission, and Federal Bureau of Investigation. (Dkt. #60 ¶¶ 2, 88). These presentations allegedly contained false and misleading statements, including that UDF’s business operated as a Ponzi scheme. (Dkt. #60 ¶ 88). Bass and his hedge fund delivered the presentations to facilitate a so-called “short and distort” scheme, (Dkt. #60 ¶¶ 86–92), which involves “shorting a stock and then spreading rumors in an attempt to drive down its price,” (Dkt. #60 ¶ 83 (quoting James Chen, Short and Distort, INVESTOPEDIA, https://www.investopedia.com/terms/s/shortanddistort.asp (last updated Aug. 15, 2019))).

After attending these presentations, Assistant United States Attorney James Nicholas Bunch (one of the named defendants in this case) allegedly recruited FBI Special Agent David Klimek (another named defendant) to “conduct an unwarranted investigation of UDF.” (Dkt. #60 ¶ 90). During the months that followed, Bass and his hedge fund routinely provided false and misleading information about UDF to Bunch and Klimek, as well as to SEC officials who were conducting a parallel civil investigation. (Dkt. #60 ¶¶ 9, 90–151). Bunch and Klimek used that information to advance their criminal investigation and simultaneously aid Bass’s short and distort scheme. (Dkt. #60 ¶¶ 90–151). These officials also allegedly obstructed UDF’s efforts to clear its name by intimidating its independent auditor. (Dkt. #60 ¶¶ 116–125).

Meanwhile, Bass launched a smear campaign through news outlets and other media sources, encouraging them to publicize UDF’s business and legal troubles. (Dkt. #60 ¶¶ 126–64). The scheme continued through 2015, damaging UDF’s reputation and causing its stock to plumet. (Dkt. #60 ¶¶ 126–64).

Around the turn of the year, Special Agent Christine Edson (the other named defendant in this case) replaced Klimek as the lead investigator for the FBI. (Dkt. #60 ¶¶ 152–54). As Klimek did before her, Edson allegedly coordinated with Bass and his hedge fund to publicly spread misinformation about UDF in furtherance of the short and distort scheme. (Dkt. #60 ¶¶ 154–64). And in February 2016, with the assistance of Edson and Bunch, Bass drove the “final nail” in UDF’s coffin. (Dkt. #60 ¶¶ 165–87). At Bass’s request, Edson and Bunch applied for a warrant to search UDF’s headquarters. (Dkt. #60 ¶¶ 165–68). In the affidavit supporting the warrant application, Edson and Bunch allegedly included false and misleading statements, which were supplied by Bass and his hedge fund, and omitted exculpatory information. (Dkt. #60 ¶¶ 165–68, 237, 246).

A magistrate judge in the Northern District of Texas issued the search warrant. (Dkt. #60 ¶¶ 167, 246). Six days later, the FBI raided UDF’s headquarters. Federal agents seized, among other things, bank records, tax documents, and electronic devices. (Dkt. #60 ¶¶ 169–70). News broke about the raid in real time, and Nasdaq suspended trading of UDF stock. (Dkt. #60 ¶¶ 171–75). And once the dust had settled, UDF and its shareholders had suffered significant financial losses. (Dkt. #60 ¶¶ 171–75). All told, by October 2016, the short and distort scheme concluded with Bass netting $60 million and UDF investors losing more than $500 million. (Dkt. #60 ¶ 199).

Based on these allegations, UDF and four of its executives—Plaintiffs Hollis Greenlaw, Todd Etter, Cara Obert, and Benjamin Wissink (collectively, the “Executives”)—filed this action. They claim that Defendants Bunch, Edson, and Klimek (collectively, the “Federal Officials”) violated their constitutional rights when they allegedly “aided and abetted” Bass’s “unlawful ‘short and distort’ scheme.” (Dkt. #60 ¶¶ 4, 236–55). Specifically, they assert that the Federal Officials deprived them of due process in violation of the Fifth Amendment by leaking material nonpublic information, unlawfully obtaining a warrant to search their headquarters, and obstructing UDF’s independent auditor. (Dkt. #60 ¶¶ 236–43). UDF and the Executives also claim that the Federal Officials violated their Fourth Amendment right to be free from unreasonable searches and seizures by knowingly making misrepresentations and omitting material facts in the affidavit submitted to obtain the search warrant. (Dkt. #60 ¶¶ 244–55). And they seek damages from the Federal Officials to remedy these alleged constitutional violations. (Dkt. #60 ¶¶ 220–35).

The Federal Officials now move to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6).3 (Dkt. #25). They argue that UDF and the Executives do not have a cause of action under Bivens and, in the alternative, that both qualified immunity and the statute of limitations independently bar the claims against them.

Read the full Memorandum Opinion And Order here.

Updated on

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