Posted by on July 24, 2017 10:45 pm
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Categories: Business Corruption Daniel Och Department of Justice Economy federal government Finance Hedge fund Investment Market Conditions money Och-Ziff Och-Ziff Capital Management Securities and Exchange Commission SWIFT US Federal Reserve Ziff

Och-Ziff Capital Management put a five-year-long investigation by Department of Justice and Securities and Exchange Commission to rest last year when it agreed to pay a $412 million fine to settle allegations that its Africa unit violated the Foreign Corrupt Practices Act by paying more than $100 million in bribes to corrupt government officials. But even after slashing its management fee following a wave of customer redemptions, the publicly traded hedge fund is in rough shape. Its shares are languishing around $3, well below their peak of $26, and investors have pulled nearly a third of their assets from the fund, which had $32 billion AUM in May, down from more than $50 billion at its peak in 2015.

With the firm in dire need of rebranding, Dan Och, CEO and chairman of his eponymous firm, announced a major management shakeup back in February hoping it would help revive the firm’s battered image. While Och retained his titles, much of the firm’ day-to-day operations would be handled by Jimmy Levin, the former star of its credit business, who would take over as co-chief investment officer. Och personally contributed 30 million of his shares – about one-third – to Levin’s $280 million incentive package, a massive sum that Bloomberg noted is a rarity in Wall Street today.

Jimmy Levin

But in a profile of the newly minted hedge-fund heavyweight published Monday, Bloomberg questions whether Levin’s appointment was a calculated bet, or a reckless gamble by Och, who is struggling to win back investors’ trust after the federal government accused him personally of ignoring red flags that could’ve prevented the corruption scandal.

“Inside the firm, some seethed. Outside, they sneered; the move smelled a bit of desperation. Five months later, that remains the burning question: Is this a Hail-Mary stab by Och to win back his seat of dominance in the hedge-fund universe or a stroke of genius?

‘It’s a bet he’s making, just as he was making on any of his investments,’ said Adam Kahn, a managing partner at the executive-search firm Odyssey Search Partners. ‘Dan probably likes the risk-reward in the package he’s giving to Jimmy,’ who has become ‘for all intents and purposes the succession plan’ at Och-Ziff.”

Levin is facing a “sizable” challenge in trying to turn around Och-Ziff. However, there’s at least one item on Levin’s resume that would appear to justify the promotion: Levin previously helped run the firm’s credit business. And while that might not seem like a sensible path to leadership at a firm known for its equities expertise, Levin’s appointment comes as Och-Ziff is rapidly transforming into a fixed-income shop, according to Bloomberg.

“The challenge Levin faces is sizable: to reverse the merciless bleeding of assets – and defections of personnel — triggered by Och-Ziff’s misconduct in the Democratic Republic of Congo, Libya and other African countries. If Levin makes it happen, it’ll be because he’s successful in his push to remake Och-Ziff, a firm long dominated by equity trades, into something of a fixed-income shop. The firm now has half of its $32 billion in assets tied to credit, including dedicated funds that have cropped up in just the past few years.

‘We certainly weren’t known as a credit shop when I first met with clients,’ Levin said recently from an Och-Ziff conference room overlooking Central Park, recalling when he was a twenty-something on the road trying to convince investors to part with their money. “Those early meetings weren’t the easiest in the world.”

Levin made his first big play in the aftermath of the financial crisis, when he convinced his then-boss and now co-CIO David Windreich, to bet on battered mortgage-backed securities, and, later, Spanish regional debt, that paid off big for the firm. Under Levin, the firm’s main credit fund has notched average gains of 13 percent since its 2011 inception. In 2012, Levin’s credit trades accounted for $2 billion – more than half of the firm’s total gains that year, according to Bloomberg. Levin was named global head of credit in 2013.

Dan Och

Of course, Levin’s gains sound less extraordinary when one remembers that they coincided with an extraordinary bull run in credit that’s persisted since shortly after the crisis. As a trader during normal market conditions, to which the Fed is promising a swift return, Levin is largely untested, which begs the question, what portion of Levin’s achievements should be ascribed to luck?

Levin’s peers appear uncomfortable with the question, perhaps for fear it could reflect poorly on their own returns.

“Was it luck? I don’t know, maybe, I’m not sure it really matters,” said Mike Rosen, chief investment officer at Angeles Investment Advisors, who has put money into Och-Ziff’s credit-opportunities fund. “I do want to invest in lucky people – that’s better than investing with unlucky people.”

As for whether Levin deserves such an exorbitant pay package, his peers appear to have embraced the logic that, if Dan Och thinks he’s worth it, then he probably is.

“The $280 million pay package is, of course, a vote of confidence. “You pay people for what they’ve done, but you also pay people for what you think they’re going to do,” Rosen said. It’s also an important sign to investors that Dan Och is willing to do what it takes to keep Levin on board, according to Odyssey’s Kahn.

Of course, Och Ziff wasn’t just paying Levin for his talents; they were paying for his loyalty, too. Levin knew his hand when he bargained for the $280 million pay day amid a rash of employee defections, including the loss of three senior executives in March.

By taking payment in the company’s battered shares, Levin is making a gamble of his own. And thanks to his incentive pay, if he can help push the company’s share price closer to $7 over the next three years, he stands to receive a potentially massive bonus.

“The deal: Levin was granted 39 million shares tied to performance; he has to stay for three years and the stock has to return 125 percent, including dividends, for him to score the full payout. If the shares rise the minimum of 20 percent, he’ll make $50 million.”

Still it remains to be seen if there’s anything the firm can do to reclaim its reputation as an industry powerhouse following the scandal, which also saw Och pay a personal fine of $2.2 million. Furthermore, some of the firm’s investors have questioned whether Levin was the right pick, complaining about his lack of experience and depth.

Levin brushes off these criticisms, saying he prefers to focus on investing.

“It’s not worth spending time wallowing,” he said. “It’s definitely been a challenging time, but to move forward we’re just focused on what we can influence, and that’s our investing.”

Whether Levin is sufficiently qualified for a leadership role at one of the world’s largest hedge funds is something only time will tell. But at the very least, thanks to his massive stock grants, Levin’s financial interests are 110% aligned with the firm’s. Levin’s incentive-pay package looks attractive, but where will those shares be when they vest?

The company’s other shareholders are probably wondering the same thing.

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