Global Glance: September 19, 2016
A quick look at intriguing international stories
By John Bostwick, Managing Editor, Radius
Och-Ziff and FCPA Risks
In an essay published last November in The New York Review of Books, Jed Rakoff discusses some recent private class-action suits against US financial institutions that resulted in multibillion-dollar settlements. The amounts of these settlements far exceeded those of similar settlements related to cases brought by the Securities Exchange Commission. The stiff penalties of the class-action settlements would appear to be powerful deterrents to fraud while also being effective in redressing past wrongs, i.e., in recompensing bilked shareholders.
But as Rakoff points out, there is a “circular quality” to the settlements in that “the monies awarded to the victim shareholders are paid not by the executives responsible for the frauds, but by the companies themselves — which means, in effect, by the current shareholders (or, if the company is in bankruptcy, by its secured creditors).” In other words, in most cases the current shareholders foot the bill for the penalties and are also left with devalued shares, while the implicated executives elude penalties and criminal prosecution.
For these reasons, Rakoff believes “class actions are no real substitute for criminal and regulatory prosecution of the individuals actually responsible for corporate misconduct.” He notes that while the US Justice Department indicated last September it would target such activities, “such governmental prosecution of high-level executives has been notoriously rare.” (Deputy Attorney General Sally Yates’ September 2015 memo on individual accountability for corporate wrongdoing is available here.)
Rakoff, who is a US District Judge for the Southern District of New York, has no doubt been following an ongoing story about Och-Ziff Capital Management Group, one of the world’s biggest hedge funds. According to an article last week in The Financial Times, Justice Department and SEC investigators are continuing to build a case involving Och-Ziff and bribes in Africa and two other continents. The Times indicates that “a corporate fine stretching into the hundreds of millions of dollars may not be enough for the US authorities who have specifically said they now want individuals to be called to account for corporate crime.” In case financial muckety-mucks didn’t already get the message, the Times adds that a successful prosecution “will put individual executives on notice that they cannot disclaim responsibility for far-flung misbehavior.”
The misbehavior in Och-Ziff’s case involves an alleged breach of the Foreign Corrupt Practices Act (FCPA), the US anti-bribery law that went into effect in 1977 (and which has been amended multiple times since). The Times reports that Och-Ziff leadership has earmarked over $400 million to pay for expected penalties related to FCPA violations in Africa. The article emphasizes the complexity of the investigation, which includes allegations against Samuel Mebiame, the son of a former prime minister of Gabon who was arrested by US authorities last month in Brooklyn. The Times says that prosecutors allege he “spent years traversing Africa lavishing millions of dollars of bribes on officials in Guinea, Chad and Niger as part of efforts to secure mining rights.” His efforts were made on behalf of a joint venture known as Africa Management Limited (ALM), whose investors include “an unnamed hedge fund” that just may have been Och-Ziff. Activities in other African countries are also involved, as are at least four individuals besides Mebiame who are connected to ALM.
The Times explains that the Justice Department’s “push for individual prosecutions has generated concern among some defense lawyers who say prosecutors are straining to establish culpability where there is none.” That said, the article points out that since Yates’ 2015 memo, there have been five FCPA enforcement actions, but there have been no charges in those cases against any individuals. The Och-Ziff case, the Times concludes, may “buck that trend.”
Though Mebiame was arrested just last month, the Och-Ziff investigation began years ago. The company announced in 2014 that it had received subpoenas from the SEC and Justice Department “in connection with an investigation involving the FCPA and related laws” starting back in 2011.
So the Och-Ziff case and related investigations have been years in the making — and they may persist well into the future. The four individuals already mentioned that are connected to ALM, for example, have not been accused of anything. But The New York Times observes that “Mr. Mebiame’s case could open the door to more action by the government. … the complaint made reference to a number of unidentified co-conspirators, suggesting more charges could come.”
Och-Ziff may also be subjected to a class-action suit brought by its shareholders from February 2012 to August 2014, who according to a Reuters article claim that the hedge fund “artificially inflated its share price by concealing its Africa dealings and the probes, and that the stock fell as the truth became known.” Reuters reports that a federal judge originally certified the class action last Wednesday, “only to throw out the certification six hours later after being advised that the company had not had a chance to object.” Och-Ziff’s lawyers have until October 11 to formally oppose the certification.
One element of the Och-Ziff probe that’s worth stressing is the power of third parties to profoundly negatively affect an organization’s bottom line and reputation. A Wall Street Journal article indicates that Mebiame was “given an ownership stake” in ALM, but he was as far as I can tell a third party hired by the joint venture because of his political connections in Africa. The Financial Times article, for example, indicates that Mebiame “works as a business fixer for investors in Africa.”
As the Och-Ziff case makes clear, hiring such “fixers” to secure business in foreign countries does not insulate the hiring party from blame in the event the third party is caught violating anticorruption laws (either those of the US or the home country). Here’s a passage from the jointly produced SEC/Justice Resource Guide to the US Foreign Corrupt Practices Act that highlights this fact in plain terms: “Although … foreign agents may provide entirely legitimate advice regarding local customs and procedures and may help facilitate business transactions, companies should be aware of the risks involved in engaging third-party agents or intermediaries. The fact that a bribe is paid by a third party does not eliminate the potential for criminal or civil FCPA liability.”
Need I add that US companies considering engaging an intermediary abroad must understand the attendant risks, perform due diligence on the third party and structure their contracts to reduce risks?