Och-Ziff And Private Equity Corruption Risks

by Michael Volkov

private equitySometimes predictions come true.  Starting in 2011, the SEC sent shock waves through the private equity industry when it launched a general inquiry into private equity compliance with the FCPA.

The SEC issued ten letters to investment banks and private equity companies requesting information about their interactions with sovereign wealth funds and anti-corruption compliance programs.  The Director of the Serious Fraud Office made numerous pronouncements around the same time promising enforcement of the UK Bribery Act against private equity companies.

Since then it has been pretty quiet on the private equity front.  Och-Ziff Capital Management Group recently disclosed (here) that, starting in 2011, it has received “subpoenas” and requests for information (not grand jury subpoenas) from the Department of Justice concerning an investment by a sovereign wealth fund in some of Och-Ziff’s funds in 2007.

According to press reports, the inquiry centers on investments made by the Libyan Investment Authority.  DOJ and the SEC are investigating this matter to determine whether Och-Ziff may have made improper payments to Libyan Investment Authority officials, who are “foreign officials” for purposes of the FCPA.

The government’s investigation theory is no surprise and is consistent with the interpretation of the FCPA used to prosecute pharmaceutical and medical device industries, oil and gas companies and a number of other industry initiatives.

Sovereign wealth fund officials are considered “foreign officials” under the FCPA, and private equity companies have to exercise care in their interactions with sovereign wealth officials.private equity2

Och-Ziff’s disclosure, however, appears to cover some additional issues.  In the disclosure, Och-Ziff mentions that the investigation includes “investments by some of our funds, both directly and indirectly, in a number of companies in Africa.”

This part of the disclosure can be interpreted several ways.

First, Och-Ziff’s “investments” in the African companies may have been part of the quid pro quo for the Libyan Investment Authority’s investment in Och-Ziff’s funds.

Second, and less likely, is the possibility that Och-Ziff’s investment in a number of African companies may involve Och-Ziff’s acquisition of controlling interests in African companies that were involved in bribery payments to foreign officials.

The investigation of the Libyan Investment Authority has been conducted based on government access to documents and information made available after the overthrow of Muammar Qaddafi in 2011.

Och-Ziff’s stock fell 3.5 percent a day after the disclosure.

This is only the second investigation to be disclosed about dealings with the Libyan private equity4Investment Authority.  Goldman Sachs disclosed an FCPA investigation involving its dealings with the Libyan Investment Authority.

Aside from these two matters, the SEC’s silence in this area has been inexplicable.  After launching an industry inquiry, many expected more disclosures and more heads to roll.

The end result has been an enforcement dud.  It will be interesting to see how the Och-Ziff case is resolved.  For other private equity companies, they can continue to breathe a sigh of relief.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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Michael Volkov

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