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Hedge Fund Giant, Och-Ziff, To Pay Over $400 Million to Settle Charges Related to Violations of the Foreign Corrupt Practices Act

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  • Posted on: Oct 7 2016

On September 29, 2016, the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) announced that Och-Ziff Capital Management Group LLC (“Och-Ziff”), a New York-based alternative investment and hedge fund manager, and OZ Africa Management GP LLC (“OZ Africa”), its wholly-owned subsidiary, agreed to pay more than $400 million to settle charges that they used intermediaries and business partners to bribe officials of various African governments. The SEC will receive nearly $200 million to settle civil charges that Och-Ziff violated the Foreign Corrupt Practices Act (“FCPA”) and the DOJ will receive more than $213 million to settle criminal charges that Och Ziff and Och Africa bribed officials in the Democratic Republic of Congo (“DRC”) and Libya. The settlement amount represents one of the largest criminal penalties levied on a U.S. hedge fund.

As part of the settlement, Och-Ziff Chief Executive Officer, Daniel Och (“Och”), agreed to pay $2.2 million to settle charges that he “caused certain violations” of the FCPA.  Joel Frank (“Frank”), Och-Ziff Chief Financial Officer, also settled SEC charges for ignoring red flags, though his penalty is to be determined.

In addition to the monetary payments, OZ Africa pleaded guilty to one count of conspiracy – an unusual violation for a hedge fund since the law at issue is aimed at preventing bribery of foreign officials – and Och-Ziff entered into a deferred prosecution agreement, in which the charges related to misconduct in Congo, Libya, Chad and Niger would be dropped after three years if it complies with the terms of the deal.

The Scheme:

Beginning in February 2007, Och-Ziff retained a third-party to secure an investment from the Libyan Investment Authority (“LIA”), Libya’s $67 billion sovereign wealth fund, knowing that the “agent would need to pay bribes to Libyan officials.”  By late November 2007, the LIA invested $300 million in Och-Ziff hedge funds.  Och-Ziff paid the agent “a ‘finder’s fee’ of $3.75 million, knowing that all or a portion of the fees would be paid to Libyan officials in return for their assistance in obtaining the LIA’s investment.”  To conceal and disguise the bribes, Och-Ziff “falsified its books and records” “by paying the ‘finder’s fee’ through a sham consulting agreement.”

“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 [become] aware of suspicious transactions with high-risk partners in foreign countries.”

Separately, in late 2007, Och-Ziff employees began discussions with a businessman operating in the DRC “about entering into a partnership based on special access to lucrative investment opportunities in the DRC involving the country’s diamond and mining sectors.”  Och-Ziff knew that the businessman (later identified as Dan Gertler, an Israeli businessman with close ties to high-level Congolese officials) made corrupt payments to senior DRC officials to gain access to these investment opportunities.  As explained in the plea agreement, Och-Ziff entered into several DRC-related transactions in conjunction with the businessman, understanding that Och-Ziff’s funds would be used, in part, to bribe high-ranking DRC officials to secure access to, and preference for, the investment opportunities.  In late 2008, Och-Ziff tried to cover-up these payments in connection with an audit of the businessman’s records.  According to the DOJ, the cover-up occurred “after an Och-Ziff employee was alerted that an audit of the businessman’s records revealed payments to DRC officials.” In response, the Och-Ziff employee “instructed that any references to those payments be removed from a final report of the audit.”  According to DOJ press release, “the businessman paid tens of millions of dollars in bribes to DRC officials in exchange for investment opportunities that resulted in more than $90 million in profits for Och-Ziff.”

The Settlement:

In settlement of the DOJ’s allegations – i.e., two counts of conspiracy to violate the anti-bribery provisions of the FCPA, one count of falsifying its books and records and one count of failing to implement adequate internal controls – Och-Ziff agreed to pay a total criminal penalty of $213,055,689.  Och-Ziff also agreed to implement numerous internal controls, retain a compliance monitor for three years and cooperate with the DOJ’s ongoing investigation, including its investigation of individuals. The criminal charges will be dismissed if the company complies with the terms of the deferred­prosecution agreement and does not violate any other laws over the next three years.

OZ Africa pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA.  Sentencing has been scheduled for March 29, 2017.

“This case marks the first time a hedge fund has been held to account for violating the Foreign Corrupt Practices Act,” said Principal Deputy Assistant Attorney General Bitkower.  “In its pursuit of profits, Och-Ziff and its agents paid millions in bribes to high-level officials across Africa.  By exposing corruption in this industry, the Criminal Division’s Fraud Section continues to root out wrongdoing of all types in the financial sector.”

In settlement of the SEC’s allegations, Och-Ziff and OZ Management agreed to pay $173,186,178 in disgorgement, plus $25,858,989 in interest, for a total of $199,045,167.  Och agreed to pay $1.9 million in disgorgement and $273,718 in interest to settle the charges that he caused two illegal transactions in the DRC.  Frank agreed to pay a penalty that will be assessed at a future date for causing illegal transactions in Libya and the DRC. Och and Frank consented to the SEC’s order without admitting or denying the findings.

“Och-Ziff falsely recorded the bribe payments and failed to devise and maintain proper internal controls,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.  “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.”

The cases are pending in the U.S. District Court, Eastern District of New York: U.S. v. OZ Africa Management GP LLC, No. 16-cr-00515 (NGG), and U.S. v. Och-Ziff Capital Management Group LLC, No. 16-cr-00516 (NGG).

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