Och-Ziff pay $413m and a subsidiary is pleading guilty to violating anti-corruption laws, over charges the hedge fund paid bribes to Libya’s Gaddafi regime and other African nations.
Daniel Och, chief executive of the $39bn New York-listed hedge fund, agreed to pay $2.2m to settle the charges, according to the Securities and Exchange Commission. The regulator said that in addition to the nearly $200m it will receive from Och-Ziff in disgorgement and interest, Och-Ziff has entered into a deferred-prosecution agreement with the Department of Justice in a parallel criminal proceeding and will pay a criminal penalty of $213m.
The settlement removes the uncertainty that has hung over the hedge fund since it disclosed it was under investigation by the SEC and DoJ two years ago.
The SEC said Och-Ziff executives “ignored red flags and corruption risks and permitted illicit transactions to proceed” in Libya, Chad, Niger, Guinea, and the Democratic Republic of Congo.
“Och-Ziff engaged in complicated, far-reaching schemes to get special access and secure significant deals and profits through corruption,” said Andrew Ceresney, director of the SEC’s enforcement division. “Senior executives cannot turn a blind eye to the acts of their employees or agents when they became aware of suspicious transactions with high-risk partners in foreign countries.”
“This has been a deeply disappointing episode,” Mr Och said in a statement. “This conduct is inconsistent with our core values and not representative of our hundreds of employees worldwide, who are dedicated to serving our clients with the utmost integrity. We have learned from this experience and taken significant steps to strengthen Och-Ziff. We are pleased to bring this matter to a conclusion and remain focused on generating returns in our funds.”
The settlement demonstrates a renewed effort by the DoJ to crack down on foreign bribery, after a light year on fines in 2015.
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The US Foreign Corrupt Practices Act has banned overseas bribery since 1977, but the fine against Och-Ziff is only the second against a hedge fund for alleged bribery. Och-Ziff’s OZ Africa Management unit will plead guilty to one count of conspiracy to commit offences against the US.
“Firms will be held accountable for their misconduct no matter how they might structure complex transactions or attempt to insulate themselves from the conduct of their employees or agents,” said Kara Brockmeyer, chief of the SEC enforcement division’s unit dedicated to FCPA.
Och-Ziff this year set aside $414m to pay penalties it expected to incur as part of a deal to settle the bribery charges.
The SEC found that Mr Och caused violations in two transactions in the Democratic Republic of Congo, and the chief financial officer Joel Frank “caused violations” in transactions in that country and in Libya. A penalty will be assessed against Mr Frank at a future date. The executives did not admit or deny the findings.
Reputational risk could see
some investors pull capital from Och-Ziff
An acute sensitivity to reputational risk among pensions, endowments and foundations makes Och-Ziff’s involvement in a bribery probe in Africa particularly perilous. Those investors account for almost half of the hedge fund’s $39bn of assets.
Some clients have already pulled their money, shrinking the company’s assets from a peak of $48bn in July 2015. But the settlement will be a relief for the company as the uncertainty has deterred new investors, at a time when the hedge fund sector overall struggles with outflows and souring sentiment over high fees and underperformance.
As of July 1, pension funds accounted for 37 per cent of the assets Och-Ziff oversees, and foundations and endowments another 12 per cent. Those groups are “the most concerned” with reputational risk, according to Jefferies analysts led by Daniel Fannon.
Och-Ziff’s assets at peak in July 2015, now said to stand at $39bn
Helping its prospects, performance in Och-Ziff’s Master Fund has improved. The fund, which accounts for just over half of assets, returned 2 per cent in August, its best month since November 2014. That pulled this year’s performance above its high watermark — meaning the fund can again earn incentive fees.
The company is under pressure to retain client money, as its fee-paying assets must not fall below $22bn for two successive quarters, or it will be judged to be in default against its five-year unsecured revolving credit facility.
Further, if a subsidiary pleads guilty, it must obtain a waiver from the US Department of Labor to continue managing money for retirement plans as a “qualified professional asset manager”.
“Losing QPAM would make life more difficult for Och-Ziff,” said Urska Velikonja, a law professor at Emory University.
But relatively little money is at stake — just 1 per cent of Och-Ziff’s assets would be affected, according to a person with knowledge of the matter.
Och-Ziff went public in 2007 at $32 a share, and remains one of only a handful of hedge funds to have listed, alongside Man Group and Fortress.
Its shares had declined more than 70 per cent over the past year, hitting $3.21 in July. The stock has since recovered, rallying 5.6 per cent on Thursday to $4.49.