Och-Ziff finally out from under SEC restriction over Africa bribery case
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July 02, 2019 10:18 AM

Och-Ziff finally out from under SEC restriction over Africa bribery case

Bloomberg
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    Bloomberg
    Former SEC Commissioner Kara Stein opposed granting Och-Ziff a waiver from additional penalties.

    The hedge fund firm founded by billionaire Daniel Och has finally put one of the industry's biggest scandals behind it — quietly.

    Seizing on a business-friendly shift at the Securities and Exchange Commission during the Trump administration, Och-Ziff Capital Management Group Inc. has persuaded the regulator to lift a punitive sanction that was imposed on the firm in the wake of a multiyear investigation into bribery in Africa.

    The relief, secured last month with the help of an ex-top SEC lawyer, removes a restriction that made it difficult for Och-Ziff to raise money for hedge funds. It's a big win. While Och-Ziff has been able to solicit investors' cash for other products, largely missing out on hedge funds — and their lucrative fees — has weighed on the firm. Since Och-Ziff's 2016 SEC settlement, its multistrategy hedge funds have suffered about $19 billion in net outflows.

    During the Obama administration, Och-Ziff was told that getting its punishments waived was basically off the table, according to people familiar with the matter. But turnover at the SEC, capped by the January departure of a Democratic commissioner who often sparred with Wall Street, paved the way for the firm to get a reprieve.

    The move comes as the financial industry broadly benefits from the deregulatory agenda that has swept through Washington under President Donald Trump. While administration officials say the lighter touch has jump-started the economy, Democrats in Congress argue that banks and asset managers are escaping tough oversight.

    Spokesmen for Och-Ziff and the SEC declined to comment.

    Och-Ziff's predicament stemmed from tough but little-known SEC rules. When financial firms get sued by the regulator, automatic punishments kick in that make it hard for them to obtain fresh capital. For years, the SEC routinely gave companies waivers from the additional penalties, making the sanctions all but irrelevant. That changed after the 2008 financial crisis when Washington's sentiment toward Wall Street soured and the agency started facing criticism for granting the exemptions.


    Illegal payments

    What put Och-Ziff in the SEC's penalty box was one of the most high-profile enforcement actions brought against a hedge fund in recent memory. In September 2016, Och-Ziff agreed to pay about $412 million to resolve claims by the Justice Department and SEC that former senior executives at the firm made illegal payments to government officials in Africa to win business.

    The cases triggered an automatic SEC punishment that prevented Och-Ziff from engaging in the main type of so-called private placement that hedge funds rely on to raise money from institutions and wealthy individuals in the U.S. These private offerings are exempt from SEC registration and disclosure requirements as long as the securities are only sold to certain categories of sophisticated investors who are assumed to be financially savvy.

    The impact on Och-Ziff, which is publicly traded, has been significant. Assets managed by its multistrategy hedge funds have plunged 56% to $10.3 billion as of March 31. The majority of Och-Ziff's $32.3 billion of assets now come from other products, like collateralized loan obligations, which generate lower fees.

    Meredith Cross, a former SEC attorney hired by Och-Ziff, spelled out the firm's dire situation in a recent letter to the regulator. Getting a waiver was "truly a necessity, not a luxury," according to Ms. Cross, who's now a partner at WilmerHale in Washington.

    "Several of Och-Ziff's largest investors have ceased doing new business with the firm," Ms. Cross wrote. The SEC fundraising restriction "has played a significant role in many limited partner investors' decisions to redeem from Och-Ziff's multistrategy funds, has virtually halted all new subscriptions to those funds, and is resulting in continuing negative impact to Och-Ziff's business and its public shareholders," she said.

    Ms. Cross, who previously led the SEC division that deals with corporate disclosures, also pointed to a number of reforms Och-Ziff has implemented to prevent misconduct like the bribery claims from recurring. And she said the firm's management has changed since the alleged infractions, noting that Mr. Och has stepped down as chairman and chief executive officer.

    Her overtures proved successful, as the SEC granted Och-Ziff a waiver June 13, according to an order posted on the agency's website.

    Ms. Cross didn't respond to requests for comment and Mr. Och declined to comment through a spokesman.


    Don't bother

    The backstory of why the firm had to wait years to get relief stems from how politically fraught waivers became near the end of Barack Obama's presidency, with progressives including Sen. Elizabeth Warren, D-Mass., regularly bashing the SEC for exempting firms from additional penalties.

    Indeed, when Och-Ziff settled with the SEC in 2016, it was made clear behind-the-scenes that a waiver was unlikely so the firm shouldn't bother even asking for one, said people familiar with the matter who asked not to be named because the negotiations with the regulator were private.

    Och-Ziff's biggest hurdle was then-SEC Commissioner Kara Stein, a former Democratic Senate aide and fierce critic of granting waivers. While SEC staff members can approve waivers on their own, any commissioner can override that authority by demanding a vote of the regulator's five politically appointed officials, something Ms. Stein did repeatedly.

    Throughout 2017 and 2018 her presence loomed large in rebutting Och-Ziff. Mr. Trump had appointed Jay Clayton, a former law partner at Sullivan & Cromwell who represented financial firms, to be chairman of the SEC. But Och-Ziff was a former client of Mr. Clayton, who worked on its 2007 initial public offering.


    Deadlocked votes

    Top SEC officials often avoid weighing in on matters related to past clients due to conflict of interest concerns. If Mr. Clayton recused himself on Och-Ziff, any commission vote on the firm's sanctions would have likely been deadlocked.

    But when Ms. Stein left in January of this year, things swung in Och-Ziff's favor and the firm pounced. The SEC was now down to four commissioners: Clayton, Republicans Hester Peirce and Elad Roisman, and Robert Jackson Jr., a political independent who holds a Democratic seat at the agency.

    When a vote on Och-Ziff's waiver came before the commission last month, Mr. Clayton sat it out, according to SEC records. The vote was 2-1 with Peirce and Roisman supporting the issuance of a waiver and Mr. Jackson dissenting.

    Representatives for Ms. Peirce and Mr. Jackson declined to comment, while Roisman's office didn't respond to requests seeking comment.


    Delayed appointment

    One more factor may have helped Och-Ziff. In mid-2018, Senate Democrats began urging the White House to pick Allison Lee to fill the SEC seat that Ms. Stein would soon vacate, according to people familiar. Ms. Lee is a former aide to Ms. Stein, and it was assumed that she would be aligned with her former boss's agenda, including on waiver requests like Och-Ziff's.

    But Mr. Trump didn't nominate Ms. Lee until April. The Senate confirmed her for an SEC seat June 20, one week after Och-Ziff had secured its waiver.

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