Och-Ziff Case Raises Issue of "Bad Actor' Rule
A likely sticking point in Och-Ziff Capital’s settlement talks with the U.S. Justice Department is the applicability of the “bad-actor” rule, according to industry lawyers following the case.
The publicly traded fund-management company is under pressure from federal prosecutors to plead guilty to bribery in connection with past investments and marketing practices in Africa. Simultaneously, the SEC is seeking civil penalties totaling as much as $400 million, The Wall Street Journal reported last week.
But the bad-actor rule poses a potentially bigger problem for the firm, hedge fund lawyers said. Under a provision of the Dodd-Frank Act that took effect in 2013, investment firms found guilty of felonies or misdemeanors, or that are subject to certain SEC orders, no longer are qualified to offer private securities under Rule 506 of the Securities Act of 1933 — the exemption from public registration covering the vast majority of private-fund offerings. Firms or “covered persons” deemed to be bad actors effectively are barred from marketing for up to 10 years.
“I’m sure Och-Ziff’s counsel will try like hell to negotiate the details of the settlement so that it doesn’t constitute a disqualifying event [for] any future or current Och-Ziff offerings,” said Greg Florio, a partner at hedge fund law firm Orical.
The government’s probe of Och-Ziff centers in part on allegations that former executives paid brokers’ fees to Libyan officials in exchange for an investment from the country’s sovereign wealth fund. Separately, prosecutors accuse Och-Ziff of funding illegal payments to government officials in the Democratic Republic of Congo, where the firm was investing in natural resources, the Journal reported.
For their part, Och-Ziff’s lawyers have argued the company shouldn’t be held criminally liable because the alleged wrongdoing wasn’t known inside the firm beyond the few executives involved. Och-Ziff, with $42 billion under management, is led by Dan Och.
“There are a ton of nuances that attorneys need to be aware of when negotiating these settlement agreements to avoid disqualification,” Florio said. “For instance, certain SEC disciplinary orders are disqualifying events, with ‘order’ being a specifically defined legal term. So lawyers agonize over what is and what is not an order to try to negotiate a settlement that would not constitute an ‘order’ of the SEC, and therefore not be a disqualifying event under the bad-actor rule.”
Irwin Kishner, a lawyer at Herrick Feinstein, said the SEC also has the power to grant waivers to the bad-actor rule. “So as part of the negotiations, that topic would come up,” he said.
The SEC granted such a waiver to Credit Suisse in 2014 after the bank, as part of a settlement with federal prosecutors, admitted to helping U.S. clients set up illegal offshore accounts. The pass allowed Credit Suisse to continue running 44 internally managed hedge funds and to continue marketing vehicles run by outside managers, including Och-Ziff.