Och-Ziff’s Sprawling Africa Bribery Network Laid Out by U.S.by , , , and
Hedge fund billionaire turned blind eye to corruption risks
Scheme sought to win deals from officials, including a Qaddafi
Hedge fund founder Dan Och overruled his own lawyers and compliance officers when they raised warnings about a potentially corrupt partner in the Democratic Republic of Congo. Then the firm booked a series of bribes there as investments.
Those actions are part of a multiyear bribery conspiracy across Africa that benefited Och’s firm, Och-Ziff Capital Management LP, U.S. authorities said Thursday. The prosecution included regulatory sanctions against Och and another executive, a guilty plea by an Och-Ziff unit and $415 million in fines and penalties. It also broke new ground: Och-Ziff became the first hedge fund to be criminally sanctioned by the U.S. in an emerging-economy bribery scheme.
In court filings in federal and administrative courts Thursday, the government outlined more than $100 million in bribes as well as the questionable takeover of a Congo mining company and “suspicious payments” in Zimbabwe. Though the Securities and Exchange Commission said Och didn’t know about the bribes, the firm acknowledged it failed to accurately reflect how assets were used and didn’t have adequate internal controls.
"Och-Ziff, one of the largest hedge funds, positioned itself to profit from the corruption that is sadly endemic in certain parts of Africa, including Libya, the Democratic Republic of the Congo, Chad and Niger," U.S. Attorney Robert Capers in Brooklyn, New York, said in a statement. "Despite knowing that bribes were being paid to senior government officials, Och-Ziff repeatedly funded corrupt transactions."
Och-Ziff’s lawyer, Mark Schonfeld, said in court the firm has already made “substantial efforts” to improve its compliance programs.
Och says his firm is eager to move beyond the multiyear investigation. His success will depend partly on the goodwill of investors who have already pulled nearly $3 billion from the fund in the last two years. Och-Ziff is also likely to come under scrutiny from the SEC and other government agencies, which must determine whether to grant it permission to continue running certain lines of business.
The U.S. Justice Department and the SEC continue to investigate the roles of individuals in the conspiracy, people familiar with the matter have said, adding that any action against them could come later.
Och, 55, had final authority to approve all private investments by the fund, according to the government. He was aware of the risk of corruption in transactions in Congo and Libya and, in spite of red flags raised inside the firm, approved the use of Och-Ziff investor funds in those transactions, it said.
Joel M. Frank, 61, the fund’s chief financial officer, was among those who raised concerns, authorities said. But he also ultimately didn’t fulfill his responsibility to stop deals with a high risk of corruption, they said.
Frank also didn’t know about the bribes, according to court filings. The scheme was actually conducted by two senior executives, including the head of the European operation, according to the SEC. Neither of those Europe executives were charged or identified in either civil or criminal actions.
They are Michael Cohen, who started the European operation, and Vanja Baros, according to several people familiar with the investigation.
“Michael Cohen has an unblemished reputation built over the course of a career spent creating value for Och-Ziff’s investors,” said his attorney, Ron White. “We are confident that, when all the facts are known, it will be clear that he has done nothing wrong.”
Baros didn’t respond to voicemails seeking comment.
The government action concludes five years of U.S. investigations of Och-Ziff. As long as the firm adheres to the terms of its agreement with prosecutors, charges will be dropped after three years. Those charges are four counts of violating anti-bribery laws, including two counts of conspiracy for Och-Ziff employees’ actions from 2007 to 2013. The three-year DPA requires the company to cooperate with authorities and accept an outside monitor. In the meantime, OZ Africa Management GP, an Och-Ziff unit, pleaded guilty to a count of conspiring to bribe officials of the Democratic Republic of Congo.
The firm agreed to pay $413 million in fines, penalties and disgorgements. Och, who is worth roughly $3 billion, according to the Bloomberg Billionaires Index, personally agreed to pay nearly $2.2 million, the SEC said.
“This has been a deeply disappointing episode. 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,” Och said in a statement released by the fund.
Och-Ziff’s shares rose 5.7 percent to $4.49 on Thursday in New York, after a similar gain on Wednesday when news of the settlement became public.
A former Goldman Sachs trader, Och founded Och-Ziff in 1994 with $100 million from the Ziff brothers, whose inheritance came from a publishing empire. It is now the only publicly traded U.S. hedge fund operator.
Apart from the sanctions announced Thursday, the SEC potentially holds other levers over Och-Ziff. Firms subject to criminal and civil action may be automatically disqualified from certain business activities, including issuing shares and raising money, unless they gain permission from the agency in the form of a waiver, which have routinely been granted over the years.
Firms with guilty pleas may also require clearance from the Labor Department to continue managing certain pension and retirement funds.
“Guilty pleas and other types of resolutions with the government can trigger a variety of collateral consequences,” said Kevin Harnisch, a partner at the law firm Norton Rose Fulbright.
The granting of waivers has become politically charged over the past couple of years. SEC Chairwoman Mary Jo White has resisted pressure to use them as an “additional enforcement tool.”
In federal court in Brooklyn, New York, on Thursday, Och-Ziff lawyer Schonfeld told a judge that the firm’s Africa unit created a joint venture in 2007 to invest in African mining rights. He said two former employees paid “substantial amounts of money to secure access to valuable mining assets."
As a result, the two former employees “secured long-term deal flow to the Democratic Republic of Congo,” Schonfeld said. U.S. District Judge Nicholas Garaufis asked what the term "deal-flow" meant. Responded Schonfeld: "investment opportunities."
The bribes were routed through a middleman that the SEC complaint described as “DRC Partner” and “an infamous Israeli businessman with close ties to government officials at the highest level” in Congo. A person familiar with the matter identified that partner as Dan Gertler, an Israeli diamond billionaire.
A spokesman for Gertler’s Fleurette Group said that the firm “vigorously contests any and all accusations of wrongdoing in any of its dealings in the DRC including those with Och-Ziff. The Fleurette Group and Dan Gertler strongly deny the allegations announced today.”
Senior Och-Ziff officials ignored red flags about Gertler before lending him money, according to the SEC complaint, which says that some of them knew that he would use loans from the firm to pay bribes. Gertler “has some skeletons,” an Och-Ziff executive wrote in a 2006 e-mail cited in the SEC complaint.
Among the things Och and Frank were aware of, according to the complaint, were accusations that Gertler was known for paying bribes in the Democratic Republic of Congo. An attorney for the hedge fund seeking a background check on him wrote, in a February 2008 e-mail, that he “will be very easy to find … perhaps the impetus behind the movie ‘Blood Diamonds,’ ” according to the government.
“Och-Ziff allowed these corrupt relationships to continue in an effort to secure a return on investment rather than sever ties with illegal activity,” the SEC said.
After Och-Ziff’s African joint venture loaned Gertler’s company $124 million, some of it was funneled into offshore accounts in Gibraltar and then used to pay bribes, authorities said. Around the same time, Gertler invested $150 million more from Och-Ziff into a company operating in Zimbabwe, they added.
The SEC also outlined allegations of corruption that extended to the upper reaches of Libya. In March 2007, Och Ziff’s senior European executive met with a son of Col. Moammar Qaddafi in Vienna.
After the meeting, the senior executive told Och that “the meetings are amazing,” according an e-mail cited by the SEC. “They have 77 billion, half in cash and no idea who to give it to. I haven’t been this excited in a while.”
Those communications continued throughout the year, the SEC said. Bribes were paid to persuade Libyan officials to invest the country’s sovereign funds with the firm, according to its complaint.
In November, the Libyan Investment Authority agreed to invest $300 million in Och-Ziff funds and the next month paid the agent a fee through a shell company, the complaint said. Some of the millions of dollars Och-Ziff transferred reached Qaddafi’s son, it said.
The top European executive also made an $18 million personal loan to a Libyan agent in 2008 so the official could build a “super yacht,” the SEC said. But by 2010, the agent was unable to pay him back. So, without informing Och-Ziff, the top executive directed funds to a London-based mining company with the understanding that $4 million would be routed to him to help offset the personal loan, the SEC said.