First FCPA Case Against Hedge Fund
On September 29, 2016, the Securities and Exchange Commission (the “SEC”) announced that Och-Ziff Capital Management Group (“Och-Ziff”) agreed to pay nearly $200 million to the SEC to settle civil charges of violating the Foreign Corrupt Practices Act (“FCPA”). Also, Och-Ziff’s Chief Executive Officer, Daniel Och, agreed to pay nearly $2.2 million to settle related charges.
The SEC order found that beginning in 2007 and continuing through 2011, Och-Ziff, primarily through the misconduct of two senior employees, entered into a series of transactions and investments in which Och-Ziff paid bribes through intermediaries, agents and business partners to government officials in Libya, Chad, Niger and the Democratic Republic of the Congo. Two senior employees, including the head of Och-Ziff Europe and another investment professional working in Och-Ziff’s European office, had specific knowledge about the bribes. The SEC order states that other Och-Ziff executives ignored red flags about corruption risk and permitted the transactions to proceed.
The SEC order lists the bribes that were paid by Och-Ziff: (i) payments of more than $3 million to senior government officials to secure a $300 million investment by the Libyan Investment Authority into Och-Ziff funds in 2007, (ii) payments of investor funds of $400,000 as a “deal fee” to an official in Libya in connection with an investment of $40 million by Och-Ziff funds into a Libyan property development project in 2007, (iii) a significant portion of a convertible loan of approximately $124 million from Och Ziff investor funds to an African mining-focused fund was used to pay bribes to officials in the Democratic Republic of the Congo, and (iv) other bribes as listed in the SEC order.
The SEC order notes that in most cases, the bribes involved the use of managed investor funds, rather than Och-Ziff’s own capital. OZ Management LP (“OZ Management”) was a registered investment adviser that managed the investor funds entrusted to Och-Ziff and authorized the use of the funds for the bribes that were paid to foreign government officials to obtain or retain business for Och-Ziff and its business partners. Och-Ziff incorrectly categorized these payments as investments or convertible loans despite the fact that the two employees in Europe knew that investor funds would be used to pay bribes. As a result, Och-Ziff did not accurately and fairly reflect the transactions in its books and records and did not design and maintain an adequate system of internal accounting controls to prevent these violations.
Furthermore, the SEC alleged that both Daniel S. Och, Chief Executive Officer and Chairman of the Board of Och-Ziff, and Joel M. Frank, Chief Financial Officer of Och-Ziff, were aware of the high risk of corruption in these transactions and, despite this risks, Och approved and Frank authorized Och-Ziff to enter into these transactions. In short, although neither Och nor Frank knew that bribes would be paid, Och caused books and records violations and Frank caused books and records and internal controls violations in connection with the transactions.
The SEC order finds that Och-Ziff violated the anti-bribery, books and records and internal controls provisions of the Securities Exchange Act of 1934 and the affiliated investment adviser OZ Management violated the anti-fraud provisions of the Investment Advisers Act of 1940. Och-Ziff and OZ Management agreed to pay $199,045,167 in disgorgement and interest penalties. Further, Och agreed to pay nearly $2.2 million in disgorgement and interest penalties. In addition, Och-Ziff entered into a deferred prosecution agreement with the Justice Department in a parallel criminal proceeding, and Och-Ziff agreed to pay a total criminal penalty of $213,055,689. The total regulatory and criminal penalties to be paid by Och-Ziff total approximately $412 million.
CCOs should review their business practices, particularly with respect to business dealings where government oversight is high in jurisdictions with bribery risk, and institute policies to protect against improper conduct.
CCOs should actively investigate transactions in which red flags are raised with respect to bribery risk; ignorance is not an excuse.
CCOs and related personnel conducting reviews should carefully analyze flagged transactions and thoroughly document their analysis.