Och-Ziff bribery probe: what is at stake?
Och-Ziff, one of the world’s largest hedge funds with about $42bn in assets under management, is being investigated over whether it paid bribes in Zimbabwe, Congo and Libya. It has set aside $200m to pay fines to US authorities. Its founder, Daniel Och, said the firm expected the penalties from the Department of Justice and Securities and Exchange Commission to exceed that amount. If a case is brought, it would be the first hedge fund to face a penalty for alleged violations of the 1977 US Foreign Corrupt Practices Act. DoJ officials have recently stepped up their efforts to eradicate overseas bribery and are aiming to prosecute individuals.
What could a settlement look like?
Och-Ziff is being probed by both the DoJ and the SEC. The SEC usually levies fines in FCPA cases, while the DoJ usually chooses between offering a deferred prosecution agreement or demanding a guilty plea. Under a DPA, the hedge fund would avoid prosecution for a set period of time, as long as it pays a penalty, does not reoffend for the length of the agreement, and meets other conditions, such as having a corporate monitor. The firm could also be forced to plead guilty.
Can Och-Ziff afford the fine?
Och-Ziff had to borrow money to provision for a DoJ settlement that it expects to be at least $200m. Its shares have fallen sharply over the past year due to uncertainty over the size of the payment and the potential for reputational damage from a settlement.
Analysts covering Och-Ziff stock reacted positively after the hedge fund said it had set aside $200m for a settlement. Some have argued that the fact that Och-Ziff management has entered into settlement talks with the DoJ suggests that the company feels it could afford any potential penalty.
“We see the reserve as a good sign and one that signals the potential for resolution,” analysts at JPMorgan wrote earlier this month. “We note that if the settlement could lead to a terrible outcome for Och-Ziff, we expect the company would rather go to court. Thus, we’d view a settlement as a welcome outcome.”
However, Och-Ziff opted to borrow $120m of the money it set aside, which will lead to higher borrowing costs and could eat into earnings for shareholders.
How will investors in Och-Ziff’s funds react?
Investors have already pulled several billion dollars out of the funds since the investigation was disclosed in 2014. There has never been a case against a hedge fund over alleged FCPA violations. But in the past investors have stuck with fund managers such as David Einhorn and Philippe Jabre after they faced civil penalties in the UK for violating financial market rules.
However, in several US insider trading investigations that involved criminal charges, hedge funds have been forced to shut down. The Galleon Group, which once managed about $7bn, closed in 2009 when it became embroiled in scandal. Its founder, Raj Rajaratnam, and five others were arrested and charged with insider trading. When SAC Capital pleaded guilty in 2014 to making millions of dollars from illegal stock tips, it paid a record $1.8bn and agreed to not manage outside money for a period.
Does Och-Ziff face other legal issues?
The hedge fund is still facing a proposed US class action lawsuit in federal court in Manhattan. Investors who bought shares over a two-and-a-half-year period allege that Och-Ziff misled investors about the SEC and DoJ probes and failed to disclose allegations that it had violated the FCPA. In February, the judge overseeing the case threw out the claims against Michael Cohen, a former Och-Ziff employee who managed its African investments, and part of the claim against the firm and Mr Och.