Clash Between Founder and Protégé Plunges Och-Ziff Into Crisis
Largest publicly traded hedge fund in U.S. faces turmoil as Daniel Och upends plan for James Levin to succeed him
Once they were mentor and protégé. Now Daniel Och and James Levin are trapped in a battle for the future of one of New York’s biggest investment firms.
In the late 1990s, Mr. Levin was working at a summer camp in Wisconsin, teaching Mr. Och’s son how to water ski. By last year, the younger man was in line to succeed Mr. Och as chief executive of Och-Ziff Capital Management LLC, the largest publicly traded hedge fund in the U.S. with $33 billion in assets under management. To entice him to stick around, Mr. Och handed Mr. Levin, who is 34 years old and goes by Jimmy, nearly $300 million in cash and Och-Ziff stock.
Over Christmas weekend, Och-Ziff rushed out a letter to investors revealing that the 57-year-old Mr. Och had changed his mind, overruling others in the process. “After extensive discussion with the board of directors, including the company’s independent directors, who support transitioning to Jimmy in the near future, it was the conclusion of Dan Och…that now is not the right time to transition to Jimmy.”
Mr. Och himself has never publicly addressed why he soured on Mr. Levin and reasserted control at the big firm. Interviews with more than a dozen people close to the situation at Och-Ziff suggest that many inside the firm, including board members and Mr. Levin, were shocked by the shift. People familiar with Mr. Och’s thinking say he felt Mr. Levin pushed too far, too fast, asking for more money and control than he was due.
“A level of distrust” had developed between the two executives, says a person close to the matter.
The sudden reversal comes at a time of transition for the industry. Founders of many hedge funds and private-equity firms are nearing retirement age, after pocketing fortunes over their careers, and are focusing on succession. Hedge funds, which manage $3 trillion, are also under pressure to justify their existence, with clients griping about the high fees and relatively poor returns.
Och-Ziff is now interviewing outside executives about becoming the firm’s CEO, while Mr. Levin is in talks about his own future. “We are engaged in a robust CEO succession process that is progressing well,” Mr. Och said in a written statement. ”We have a committed team, the firm had an excellent year in 2017, and I am confident we will build on that success in 2018 and beyond.”
Some clients say they may follow Mr. Levin out the door if he leaves.
“This was not well communicated or handled,” says Michael Rosen, chief investment officer at Angeles Investment Advisors LLC, which invests about $100 million in a fund overseen by Mr. Levin. He says Och-Ziff is dealing with “tension.”
The upheaval is remarkable for a firm long known for stability and steady, if unspectacular, gains. Mr. Och grew up in suburban New Jersey, the son of a doctor and a teacher at the local Jewish day school. Having graduated from the University of Pennsylvania’s Wharton School of Business, he spent more than a decade as a risk arbitrager at Goldman Sachs Group Inc. He founded Och-Ziff in 1994 with financial support from the Ziff family, founders of Ziff Davis Media, whom he got to know at Goldman.
Hedge funds were then just beginning to spread their wings and attract pension funds and other large clients. Then, as now, hedge-fund managers such as Mr. Och bet that certain investments would rise while others would fall, keeping about 20% of any investment gains.
Initially, Och-Ziff invested in merger deals before expanding to other strategies. Mr. Och generally avoided appearances on business television and industry conferences, and rarely raised his voice at the office. Confiding in a small group of friends, he preferred to motivate underlings by giving them relative independence to pursue investment strategies.
Och-Ziff was among the first hedge funds to go public, in November, 2007, the beginning of what some saw as a wave of such IPOs. Its shares soon reached an all-time high of $30.65. Mr. Och became a billionaire. With a majority of the firm’s voting-class shares, he could also essentially dictate the firm’s future.
Soon enough, the future darkened for Och-Ziff and much of Wall Street. Markets were crippled by the global credit crisis. Mr. Levin, who joined Och-Ziff in 2006 after stints at two other firms, led one of the few areas seeing surging growth. A computer-science major who earned a bachelor’s degree from Harvard University in three years, Mr. Levin became a protégé of both David Windreich, who ran the firm’s investments, and Mr. Och. Mr. Levin was even-keeled on the trading floor and struck colleagues as especially driven.
After the crisis ebbed, Mr. Och became bullish about complex “structured credit” debt investments, such as residential mortgage-backed securities, which investors had dumped. Others at the firm were lukewarm on the idea, but Mr. Levin became enthused, making a big bet on the investments with a 14-member team he now was leading.
In 2012, as U.S. housing rebounded, they made gains of almost $2 billion, more than half of the firm’s profits that year. In 2013, Mr. Levin, then 30 years old, was rewarded with a $119 million payday. As gains from these investments piled up, the firm in 2013 moved into offices with Central Park views in the prestigious Solow Building.
By 2014, Mr. Levin was running Och-Ziff’s credit business, which comprised nearly half the firm’s assets. That year, he began pushing for a larger piece of the firm’s equity, say people close to the firm. Worried about losing his prized employee, Mr. Och gave Mr. Levin what he wanted. Mr. Och also placed Mr. Levin on the firm’s management committee, though some at the company worried Mr. Levin had a short track record and didn’t deserve more influence.
Aware of Mr. Levin’s growing ambition, a colleague urged him to exhibit caution.
“Be patient, you’re in a great seat,” he told Mr. Levin, referring to his position within the firm.
In 2016, Mr. Levin made fresh financial demands to remain at the firm. Tension built with Mr. Och. In February of last year, he acceded, giving Mr. Levin a 10-year pay deal unlike any in Och-Ziff’s history. In addition to $4 million a year in cash, Mr. Levin received stock valued at $280 million at the time, with some of the award conditional on the appreciation of Och-Ziff shares.
As part of the deal, Mr. Och agreed to surrender around $100 million of his own stock to Mr. Levin, meaning Mr. Levin’s raise essentially came out of Mr. Och’s pocket.
Mr. Levin also was promoted to co-chief investment officer and tapped as Mr. Och’s eventual replacement. The firm moved to drop Mr. Och’s name and start calling itself OZ Capital, a sign it was preparing for a future without its founder.
The size of Mr. Levin’s deal, which resulted from months of difficult, closed-door meetings, caused grumbling among some colleagues, partly because it came as the firm dealt with an embarrassing criminal investigation into one of the firm’s senior deal makers, say people at the firm.
Michael Cohen, who once headed Och-Ziff’s Europe office, was accused in a 2017 civil complaint by the Securities and Exchange Commission of spearheading a bribery scheme that allegedly funneled millions of dollars in bribes to high-level officials in African countries to secure mining assets and other deals. Mr. Cohen, who left the firm in 2013, also faces criminal charges he defrauded a client in an alleged scheme connected to African investments, according to an indictment filed in Brooklyn federal court in October. A lawyer for Mr. Cohen denied the charges.
Mr. Och wasn’t alleged to have been aware of the actions, but he agreed to personally pay a civil sanction of $2.2 million to the SEC for a record-keeping violation. The firm paid a fine of $412 million to settle to settle criminal and civil charges it violated provisions of the Foreign Corrupt Practices Act. Mr. Och personally pledged what amounted to a $349 million interest-free loan to the company to cover most of the cost of the settlement.
Clients responded by pulling record amounts of money from the firm. Today, Och-Ziff, still one of the world’s largest hedge funds, manages about $33 billion, down from almost $50 billion in 2005, and its shares traded at $2.69 Tuesday.
The turmoil enhanced Mr. Levin’s bargaining power, because Mr. Och feared more clients would leave if he departed.
“The firm was on its knees, Jimmy had a lot of leverage,” says someone close to the matter.
A few months later, Mr. Levin decided it was time for a change atop the firm. Mr. Och and Mr. Windreich, the other co-CIO, were devoting less time to the firm’s investments and operations while Mr. Levin and a few others were effectively running the firm and scoring the firm’s biggest gains.
“We think the time is right,” Mr. Levin told Mr. Och in May of last year.
Mr. Och agreed and began working with Och-Ziff’s board and top executives on a succession plan. By last summer, it was agreed that Mr. Och would cede his role as chief executive around year-end, while remaining as chairman a bit longer.
The firm’s chief financial officer, Alesia Haas, Mr. Levin and Och-Ziff’s independent board directors proposed a series of moves in conjunction with the succession. The goal, they said, was to strengthen the firm’s balance sheet and bolster future earnings.
The proposals required Mr. Och to relinquish voting shares, so he wouldn’t control Och-Ziff after leaving, and forgo some future payments to shareholders. The proposal would have amounted to about $1 billion in current and future payments from Mr. Och and former partners to others, according to Mr. Och’s estimates. People close to the board disagreed, judging the figure to be closer to zero.
Mr. Och responded that he didn’t share the concerns about Och-Ziff’s balance sheet. The double-digit investment gains of 2017 meant it would have more cash than debt, he argued. At one point, Mr. Och said he would be open to remaining as chief executive past 2018. Board members said they wanted to proceed with the transition.
Over time, Mr. Och became irritated, say some who know him. Each new version of the plan seemed to him to add additional rewards for Mr. Levin at the expense of Mr. Och and former partners he felt were contractually entitled to the payments. And it all came just months after the February deal requiring Mr. Och to hand shares to Mr. Levin.
Mr. Och held Mr. Levin responsible for the various initiatives approved by the board, the people say. “He felt Jimmy forced his hand again,” said one.
“I have always run OZ Management in the best interest of the firm, our investors and shareholders, and my partners,” Mr. Och said in a written statement.
For his part, Mr. Levin felt caught in the middle of a growing rift between the board and some senior executives, who supported an immediate transition, and Mr. Och, who was pushing back, according to people close to the matter.
In late December, the five independent directors of Och-Ziff’s seven-member board presented the plan to move forward with the succession this year and unanimously voted to approve it.
“This is where the board wants to go,” a board member told Mr. Och.
Mr. Och said he wouldn’t accept the plan.
In its letter to clients sent Saturday, Dec. 23, Och-Ziff dropped the bombshell, adding, “Dan and the board of directors hope that Jimmy will remain as Co-Chief Investment Officer.”
Och-Ziff’s investor-relations team spent the holidays and much of January making emergency calls with public pension funds and other big investors. The team had few answers to questions about the firm’s future.
Now, Mr. Och is back running the firm. Both Och-Ziff and Mr. Levin appear to be in tough spots. Because Mr. Levin wasn’t fired, he would forgo the shares received last year and his lucrative pay package if he were to quit, according to terms of the deal. He also has a two-year noncompete clause in his contract precluding him from going to a new firm.
If Mr. Levin stays, it isn’t clear he will retain the power he had accumulated or be able to mend his relationship with Mr. Och. If a new CEO is recruited, the challenge could become more difficult.
At the same time, Mr. Levin commands the support of some within the firm and the respect of clients.
“He’s an exceptionally capable investor,” says Mr. Rosen of Angeles Investment Advisors. He says his firm likely will pull its money if Mr. Levin leaves. “That would be problematic,” he says.
