- FCPA Professor - http://fcpaprofessor.com -

SEC Brings Historic FCPA Enforcement Action Against Daniel Och (CEO And Chairman Of Och-Ziff) and Joel Frank (CFO)

In connection with the $412 million Foreign Corrupt Practices Act enforcement action against Och-Ziff (the 4th largest of all-time – stay tuned for additional coverage as original source documents become available), the SEC also found that Daniel Och (CEO and Chairman of Och-Ziff – pictured) was a cause of certain of the company’s FCPA books and records violations and that Joel Frank (CFO) was a cause of certain of the company’s FCPA books and records and internal controls violations.

This represents, what is believed to be, the first time in FCPA history that the SEC also found the current CEO and CFO of the issuer company liable for company FCPA violations.

Without admitting or denying the SEC’s findings, Och agreed to pay approximately $2.2 million ($1,900,000 – reflecting his estimated share of gain to Och-Ziff resulting from the transactions with a Democratic Republic of Congo Partner and $273,718 in prejudgment interest). The $2.2 million Och agreed to pay is the largest settlement amount in FCPA history by an individual in an SEC action.

Frank likewise agreed to resolve the action without admitting or denying the SEC’s findings and the SEC stated [1] that and “a penalty will be assessed against him at a future date.”

The SEC’s order [2] states in summary fashion:

“This matter also concerns violations by Daniel S. Och, Chief Executive Officer and Chairman of the Board of Och-Ziff, and Joel M. Frank, Chief Financial Officer of Och-Ziff. As Och-Ziff’s Chief Executive Officer, Och had final decision-making authority on all private investments by Och-Ziff […]. Och personally approved the expenditure of funds in two transactions with Och-Ziff’s partner in the DRC in which bribes were paid. Those bribes were then inaccurately recorded as investments or loans on Och-Ziff’s books and records rather than bribe payments. As Och-Ziff’s Chief Financial Officer, Joel M. Frank was responsible for maintaining the accuracy of Och-Ziff’s books and records and for devising and maintaining Och-Ziff’s system of internal accounting controls. Frank approved the expenditure of Och-Ziff funds in transactions in which bribes or improper payments were made. Both Och and Frank were aware of the high risk of corruption in transactions with Och-Ziff’s DRC partner in light of his reputation and connections to high level DRC government officials. Despite these risks, Och approved and Frank authorized Och-Ziff to enter into each of these transactions. As a result, although neither Och nor Frank knew that bribes would be paid, Och caused Och-Ziff’s books and records violations in two DRC transactions, and Frank caused the company’s books and records and internal controls violations in connection with the two DRC Partner transactions and the LIA fee payment.”

Under the heading “Failures By Och and Frank” the order states:

“Och had final authority to approve all private investments by Och-Ziff, including all transactions described above. Och was aware of the risk of corruption in the transactions with DRC Partner, and contrary to the recommendation of his legal and compliance team, he approved the use of Och-Ziff investor funds in those transactions. As a consequence, Och caused Och-Ziff’s violations of the books and records provision of the FCPA.

Frank had ultimate responsibility for maintaining Och-Ziff’s and OZ Management’s books and records and for authorizing all uses of Och-Ziff funds. Under Och-Ziff’s structure at the time, the head of legal and compliance reported to Frank as chief financial officer. Frank was responsible for ensuring that all transactions were recorded accurately and in accordance with generally acceptable accounting procedures and was likewise responsible for devising and maintaining Och-Ziff’s internal accounting controls. Frank was also ultimately responsible for devising and maintaining Och-Ziff’s internal accounting controls sufficient to provide reasonable assurances that transactions: (i) were executed in accordance with management’s general or specific authorization; and (ii) were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets.

Each transaction described above required Frank’s authorization of the relevant disbursements. In the two DRC transactions and the LIA fee payment involving bribery, failures of Och-Ziff’s internal controls, and books and records violations, Frank failed to ensure that required information regarding transactions was documented accurately, that appropriate business partner information and due diligence was obtained, that transactions were structured properly to avoid corruption, and that ongoing due diligence and audits were performed to prevent or detect improper use of Och-Ziff investor funds. Frank approved Och-Ziff’s payments in the transactions with DRC Partner in which he believed there was a high risk of corruption. Despite his concerns, Frank deferred to Och as the final decision maker and executed payment on the 2008 convertible loan and 2010-2011 margin loan with DRC Partner per Och’s approval. As a consequence, Frank caused violations of the internal controls and books and records provisions of the FCPA by OchZiff in the three transactions noted above.”

*****

Och was represented by Alan Vinegrad [3] (Covington).

Frank was represented by Rich Morvillo [4] (Morvillo LLP).

*****

In a press release Och-Ziff stated: “Both individuals [Och and Frank] settled these matters without admitting or denying wrongdoing, and the settlements carry no restrictions or limitations on them.”

In the release, Och stated:

“This has been a deeply disappointing episode. This conduct is inconsistent with our core values and not representative of our hundreds of employees worldwide, who are dedicated to serving our clients with the utmost integrity. We have learned from this experience and taken significant steps to strengthen Och-Ziff. We are pleased to bring this matter to a conclusion and remain focused on generating returns in our funds.”

*****

Despite resolving agreeing to the 4th largest FCPA settlement of all-time and despite its current CEO and CFO also being held liable, Och-Ziff stock closed up 5.6% after the enforcement action was announced.