The Justice Department announced that Michael Cohen, the former head of Europe, the Middle East, and Africa investments for hedge fund Och-Ziff Capital Management Group LLC, has been charged with investment adviser fraud and obstruction of justice in a ten-count indictment. The case arose from conflicted investment advice provided by Cohen, Och-Ziff, and OZ Management LP, an Och-Ziff subsidiary, to an unnamed U.K-based charity, according to a press release accompanying the newly unsealed indictment (U.S. v. Cohen October 5, 2017).
AUM and conflicted side deals. According to the indictment, Och-Ziff, through OZ Management, would invest $200 million in one of two funds (specifically, Africa Global Capital II (AGC II)) created by a joint venture with African Management LTD for the purpose of investing in African mining and oil interests. But a second purpose of the arrangement was for Och-Ziff to increase its assets under management after the hedge fund conducted an initial public offering.
The indictment explains that Cohen, Och-Ziff, and OZ Management advised the unidentified U.K. charity on a $200 million investment in AGC II. But other arrangements ensued regarding shares of another company, Strata Limited, with Cohen at the center of them unbeknownst to the charity. In one instance, Cohen arranged to conceal the identity of an unnamed co-conspirator (legally a "related party") who was to sell Strata shares to AGC II. In a second instance, Cohen acquired Strata shares from a John Doe and then transferred the shares back to John Doe (Cohen received a dividend from the shares). In a third instance, Cohen arranged for an unnamed co-conspirator to sell Strata shares to AGC II with $4 million of the proceeds coming back to Cohen for helping the co-conspirator to make financing payments on a yacht for which Cohen had loaned the co-conspirator $18 million.
The government’s case against Cohen emphasizes the repeated conflicts of interest that arose from Cohen’s dealings. The U.K. charity had executed a conflict waiver which suggested that AGC II was to acquire Strata shares from only two sellers: one of the co-conspirators and John Doe. The indictment lists a total of five conflicted aspects of the various transactions in Strata shares. As a result, the government based its conspiracy to commit investment adviser fraud and investment adviser fraud charges against Cohen on the broad prohibition of certain transactions contained in Investment Advisers Act Section 206. The government also cited the jurisdictional reach of the Investment Advisers Act under Section 214 and the possible penalties for willfull violations specified in Section 217 ($10,000 fine and/or imprisonment for up to five years).
Obstruction charges. Another key part of the government’s case against Cohen resides in a collection of charges alleging that Cohen engaged in conspiracy to obstruct justice, obstruction of justice, and that he made materially false statements. These charges partly have their foundation in responses by Och-Ziff and Cohen to SEC subpoenas for documents dating as far back as January 2005.
According to the indictment, Cohen instructed one of the unnamed co-conspirators to backdate a letter regarding the payment of the proceeds from the sale of Strata shares to Cohen regarding the yacht loan. Specifically, Cohen told the co-conspirator that the SEC was investigating Och-Ziff and the letter should be dated before the Strata stock sale and it should not mention the sale of Strata shares as part of the effort to repay Cohen. Cohen provided a copy of the letter to Och-Ziff so that Och-Ziff could respond to an SEC subpoena; Cohen later provided the letter to the SEC in response to a subpoena directed to him. Cohen also told a meeting of federal law enforcement officers that the letter was not backdated.
All told, Cohen is charged with 10 counts, some of them alleging conspiracy: two counts involving investment adviser fraud; five counts involving wire fraud; two counts involving obstruction of justice; and one count of making material false statements. The government also included a forfeiture allegation regarding the wire fraud and obstruction of justice counts.
The case is No. 17 CR 544.
Attorneys: Bridget M. Rohde, Acting United States Attorney for the Eastern District of New York, for the U.S.
Companies: Och-Ziff Capital Management Group LLC; OZ Management LP
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