New Ruling in Och-Ziff Case Could Lead to a Billion Dollar Restitution Award and Throws Doubt on Benefits of Settling FCPA Cases
A federal judge in New York has found that certain investors were “victims” in a high-profile FCPA case that the government settled almost three years ago with Och-Ziff, a publicly traded hedge fund. On September 3, 2019, the court unsealed an order finding, over the opposition of both the government and Och-Ziff, that a group of about 50 individual and entity investors in Canadian mining company Africo Resources, Ltd. (“Africo”) were “victims” of Och-Ziff Capital Management Group LLC (“Och-Ziff”) and its defendant subsidiary OZ Africa Management GP, LLC’s (“OZ Africa”) wide-ranging foreign bribery scheme and may recover restitution for their losses. The shareholders’ claim for $1.8 billion in damages and the court’s ruling have prolonged a three-year sentencing for OZ Africa. Although the court acknowledged difficulty in quantifying the loss at issue and has requested additional briefing on the matter, the ruling, if it stands, could threaten the finality of the agreement, substantially increase the hedge fund’s financial exposure, and add a new and complicated consideration for future negotiated resolutions in FCPA matters.
The Relevant Facts and Procedural Background
Nearly three years ago, on September 29, 2016, OZ Africa pled guilty to one count of conspiracy to bribe Congolese government officials, in violation of the Foreign Corrupt Practices Act (“FCPA”). That same day, Och-Ziff also entered into a deferred prosecution agreement (“DPA”) with the government, admitting to violations of the anti-bribery, books and records and internal controls provisions of the FCPA. As described in the DPA and plea paperwork, Och-Ziff and OZ Africa arranged for bribes to be paid to Congolese officials, including judges, to allow them to take over Africo and its rights in a Congolese mine.1
As is common in such corporate criminal resolutions with the Department of Justice (“DOJ”), OZ Africa’s plea agreement was submitted under Federal Rule of Criminal Procedure 11(c)(1)(C), under which the parties agreed upon a specific sentence and disposition which then “binds the court once the court accepts the plea agreement.”2 Among other conditions in the “C-plea,” the court would have to approve the parties’ joint recommendation that the court not impose a criminal fine on OZ Africa, provided that Och-Ziff paid a monetary penalty of more than $213 million under the DPA.3 Although no victims were recognized in the DPA or plea paperwork, OZ Africa’s plea agreement provided that “any fine or restitution imposed by the Court will be due and payable within ten (10) business days of sentencing.”4
After multiple continuances,5 OZ Africa’s sentencing date was set for March 7, 2018. On February 16, 2018, as the sentencing date neared, the group of Africo investors (or “claimants”) sent a letter to the court seeking confirmation of their status as “victims” and an award of approximately $1.8 billion in restitution under application of the Mandatory Victims Restitution Act (“MVRA”), codified at 18 U.S.C. § 3663A.6
According to the claimants, the lead FBI case agent on the Och-Ziff case first contacted Africo’s former president and CEO in December 2016 to request a meeting, expressing his understanding that Africo “may have been a victim regarding some of those corrupt payments, and the government invited Africo to provide additional materials in support of its role as a victim in the case.”7 Africo provided the government with documents and legal arguments in support of its claimed status as a victim, and claimant’s counsel reportedly received notice from the government’s victim notification system recognizing Africo’s status as a victim or “potential victim” on April 25, 2017.8 On January 30, 2018, however, the government informed claimants of its preliminary conclusion that the claimants were not victims and therefore were not entitled to restitution under the MVRA, triggering the instant litigation.9
Who is a “Victim” Under the MVRA?
The MVRA requires that a court order restitution for a victim of an offense “against property under [Title 18] . . . including any offense committed by fraud or deceit[,]” where the victim has suffered a pecuniary loss.10 The statute defines “victim” as a “person directly and proximately harmed” as a result of defendant’s conduct.11
The disagreement over Africo’s status as a victim of the Och-Ziff bribery scheme focuses on two issues: (1) whether Africo’s interest in the mine constitutes “property” as contemplated under the MVRA, and (2) whether OZ Africa’s actions were the direct and proximate cause of Africo’s loss of the mining rights.12 Notably, in the Africo litigation, DOJ has taken the position (and OZ Africa agreed) that Africo had no cognizable claim to restitution under the MVRA. This position is generally consistent with DOJ’s longstanding handling of restitution claims in FCPA cases that do not involve other types of fraud or embezzlement with obviously identifiable victims or quantifiable loss amounts.13
Last week, the court sided with the claimants, finding that they were indeed victims entitled to restitution. In its Order, the court observed that the parties did not meaningfully dispute that conspiracies to violate the FCPA can be offenses against property that can trigger restitution under the MVRA. Finding that the court’s acceptance of OZ Africa’s guilty plea did not preclude it from ordering restitution at sentencing, the court next assessed whether the claimants were victims within the meaning of the MVRA and the extent to which OZ Africa could be held liable for the losses that the claimants suffered.
The court first rejected OZ Africa’s argument that the claimants’ status as shareholders in an entity, which owned stock in a Congolese company, which in turn owned stock in another Congolese company that owned the mining rights, meant that their claim to the mining rights was too attenuated to constitute “property” under the MVRA. The court concluded that the MVRA defines “victim” broadly and contains no “carve-out for holders of intangible property rights, such as shareholders who hold interests through special-purpose vehicles for tax purposes.”14 On OZ Africa’s liability for the claimants’ losses, the court held that OZ Africa was responsible for restitution arising from conduct of its co-conspirators that took place before it joined the conspiracy. Here, the court observed that OZ Africa admitted that it entered into business with one of its co-conspirators knowing that substantial bribes were paid to obtain the mining rights and OZ Africa’s funds were needed to make the corrupt payments.15 After finding that the claimants could recover their losses against OZ Africa, the court ordered the parties to submit supplemental briefing on the calculation of the losses.16 OZ Africa has since filed a motion for reconsideration of the court’s order.17
What This Could Mean for the Och-Ziff Case and Future FCPA Resolutions
The court’s order may jeopardize the future of the Och-Ziff agreement and could raise important new considerations for other companies looking for finality when contemplating criminal resolutions with DOJ. Although the court clearly signaled its intention to accept OZ Africa’s plea agreement given that restitution was specifically referenced within it, the parties’ opposition to restitution in the case strongly suggests that restitution was not contemplated by either party as part of the agreement, and OZ Africa may be able to raise a colorable claim for withdrawal on that basis.
Other companies with FCPA exposure may now have additional problems, as well. Given the court’s broad interpretation of “victim” under the MVRA, a host of new entities and individuals now may also seek “victim” status and restitution based on arguable losses stemming from other admitted FCPA violations. If the court’s ruling stands, future claimants very well could include third party shareholders like the Africo investors; investors in defendant companies whose funds were used improperly to make corrupt payments and then used to pay large fines that resulted; competitor companies and their shareholders who may have lost out on business by failing to pay bribes to foreign officials; and even foreign citizens who may claim to have been victimized by payments to their corrupt officials, thereby depriving them of the value of honest services and the rule of law. The list of potential victims goes on and the uncertainty is likely to have a significant effect on negotiated resolutions going forward.
If the ruling and underlying logic stands, one very probable outcome may be that the government and defendant companies opt in the future to enter into non-prosecution agreements (or “NPAs”), which would not involve court oversight or trigger any mandatory restitution under the MVRA. The use of NPAs as opposed to DPAs is somewhat controversial and raises some serious policy issues. One view is that NPAs represent the government letting bad actors get off more easily, which is a perception the DOJ would want to avoid, but the DOJ will also be motivated to settle cases and may have to turn to NPAs more often.
The OZ Africa opinion has opened the door for future claimants to recover billions against companies that resolve FCPA allegations with the government. Going forward, companies will now need to consider whether the benefits of settling their FCPA liability with the government are outweighed by the specter of unknown claimants seeking restitution. One of the most significant benefits to any settlement is certainty and this ruling makes it harder to be sure of that benefit.
1 See Och-Ziff DPA and OZ Africa Plea Agreement, available at https://www.justice.gov/criminal-fraud/fcpa/cases/och-ziff-capital-management-group-llc.
2 FED. R. CRIM. P. 11(c)(1)(C).
3 See OZ Africa Plea Agreement and Statement of Facts, United States v. OZ Africa Management GP LLC, No. 16-515 (E.D.N.Y. Sept. 29, 2016), ECF No. 11-3 (hereinafter “Plea Agreement”), at ¶ 20(a), available at https://www.justice.gov/criminal-fraud/file/900276/download. Under the terms of Och-Ziff’s DPA, Och-Ziff was required to “transfer the monetary penalty . . . into an escrow account within ten (10) days of the execution of [the DPA]” and the “monetary penalty . . . shall be released from the escrow account to the United States Treasury within ten (10) days of the entry of the judgment against [OZ Africa], in connection with its guilty plea. . . .” Och-Ziff DPA at ¶ 7, available at https://www.justice.gov/criminal-fraud/file/900261/download. Thus, it appears that Och-Ziff’s monetary penalty of over $213 million likely remains in escrow as of the day of this writing, since OZ Africa remains to be sentenced.
4 Id. at ¶ 12 (emphasis added).
5 Under normal circumstances, the court would have approved OZ Africa’s plea agreement and sentenced the entity shortly after the agreement was filed with the court almost three years ago. The sentencing date for OZ Africa was continued multiple times to enable Och-Ziff to apply for an exemption with the Department of Labor to allow it to continue to act as a qualified professional asset manager, as contemplated under the DPA.
6 See Claimants’ Letter to the Court, dated Feb. 16, 2018, United States v. OZ Africa Management GP LLC, No. 16-515 (E.D.N.Y.), ECF No. 26 (hereinafter “Claimants’ Letter”). According to the claimants, the $1.8 billion valuation is based on the value of the mine that would have been developed but for Och-Ziff’s corrupt scheme. See Court’s Memorandum & Order at 4, OZ Africa Management GP LLC, No. 16-515, ECF No. 51 (hereinafter “Order”).
7Id. at 7.
8 Id. at Ex. 5 (ECF No. 26-5).
9 Id. at 9.
10 18 U.S.C. §§ 3663A(a)(1), (c)(1)(A)(ii), (c)(1)(B).
11 Id. § 3663A(a)(2).
12 See Claimants’ Letter at 11-12; Mem. of Def. OZ Africa Management GP, LLC at 18-21, OZ Africa Management GP LLC, No. 16-515, ECF No. 11 (hereinafter “Def’s Memo”).
13 DOJ has rarely, if ever, sought restitution in a pure foreign bribery case that did not also involve other types of fraud and there do not appear to be any known cases where third-party restitution was ordered in an FCPA case over the objection of both the government and the defendant. However, DOJ has sought restitution in connection with bribery cases that also include other forms of fraud. See, e.g.,United States v. Tim Leissner, No. 18-439 (E.D.N.Y. Aug. 28, 2018), ECF 29-1 at 26 (acknowledging in the plea colloquy that restitution “is mandatory” and that the defendant “will be required to repay the full amount of the victims’ losses as determined at sentencing” in connection with the charged offenses for FCPA and money laundering stemming from the defendant’s role in the billion-dollar 1MDB bribery and embezzlement case); United States v. Victor Hugo Valdez Pinon, No. 4:16-cv-00409 (S.D. Tex. Feb. 23, 2017) (ordering restitution for the defendant’s illegal use of corporate funds in connection with the bribery scheme).
14 Order at 12.
15 Id. at 16-17.
16 Pursuant to the briefing schedule, the claimants and the government will file opening submissions by October 28, 2019; the defendant will file its responsive pleadings by December 4, 2019; and the claimants and the government will file their replies by December 20, 2019.
17 See Def’s Mot. For Reconsideration, United States v. OZ Africa Management GP LLC, No. 16-515, ECF Nos. 54-55 (arguing that the court apparently relied upon the claimant’s erroneous statement that Africo is a “defunct company” to support its ruling, when in fact Africo is actively registered in Canada).
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.