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Oz Africa Management, LLC (Oz Africa), a wholly-owned subsidiary of New York-based hedge fund manager Och-Ziff Capital Management Group, LLC (Och-Ziff), has had a key ruling made against it by U.S. District Court Judge Nicholas G. Garaufis as it seeks final resolution of the plea deal arising from both companies' $412 million Foreign Corrupt Practices Act (FCPA) settlement with the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in 2016.
Oz Africa has formally asked Judge Garaufis to reconsider his Aug. 29, 2019 ruling granting victim status to around fifty former shareholders in Canadian mining company Africo Resources Ltd (Africo) under the Mandatory Victims Restitution Act, 18 U.S.C. §3663A (MVRA) for losses arising from a mining venture in the Democratic Republic of Congo (DRC). Judge Garaufis' ruling, unsealed on September 3, relates to events occurring over 10 years ago when agents related to Oz Africa bribed Congolese judges to secure favorable court rulings as it sought control over the Kalukundi copper and cobalt mine over which Africo held exclusive rights in the DRC. The former investors claim to be owed up to $1.8 billion in restitution, arguing that the FCPA settlement has failed to hold Och-Ziff fully accountable for their losses. The application for restitution was opposed by both Och-Ziff and the Government and further complicates the final resolution of the deal reached between Och Ziff, Oz Africa and U.S. prosecutors over three years ago.
Africo first unwittingly lost control over the mine in 2006, when its interest was sold without notice to a local DRC mining company, Akam Mining SPRL (Akam), in satisfaction of a $3 million ex parte default judgment obtained by a former Africo employee. After learning that its mining rights had been lost, Africo launched court action in 2007 to set aside the earlier default judgment. At around this time, Oz Africa had entered into a partnership with Israeli billionaire Dan Gertler and agreed to help him acquire Africo's interest in the mine via a special-purpose entity to be funded by Och-Ziff and controlled by Gertler. (Gertler who was not named in the original settlement documents was named by Judge Garaufis in his ruling.) In order to be successful in the takeover they needed to ensure that Africo believed it would lose its court case against Akam — an outcome that was secured by Gertler's in-country agent paying bribes to the DRC judges hearing the case. Unware of the scheme, in June 2008 Africo shareholders voted to accept the takeover, giving control of the mine to Gertler. With US sanctions imposed on Gertler in December 2018, he has continued to deny any wrongdoing in the DRC. The mine remains undeveloped today.
Under the MVRA victim is defined as "a person directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered including, in the case of an offense that involves as an element a scheme, conspiracy, or pattern of criminal activity, any person directly harmed by the defendant's criminal conduct in the course of the scheme, conspiracy, or pattern." The judge ultimately agreed with the shareholders argument that they fell within this definition, quoting their position summarized as follows in the ruling:
"… [Considering] that the defendant has admitted to bribing a court of law to delay and change a judicial ruling in order to obtain an asset — one that rightfully belonged to the Africo Owners and that the defendant otherwise could not obtain from the Africo Owners — the Africo Owners were obviously directly harmed, and harmed significantly. Indeed, that was precisely the goal of the defendant and its accomplices."
Judge Garaufis agreed that restitution was an appropriate remedy in these circumstances, finding that "the MVRA defines victims broadly" such as to include the shareholders as holders of intangible property rights who had in this case "lost a promising opportunity." He also found that the Africo shareholders' vote to accept the takeover by Gertler was made under duress given they could not have been aware of the bribery scheme underlying it. The ruling also disagreed with Oz Africa's argument that the court was barred from ordering restitution having accepted its guilty plea, as it had not yet accepted the parties' plea agreement. Also rejected were arguments that the loss was too speculative to calculate, with the Judge finding that while it would be a difficult calculation, that did not preclude the Africo shareholders from being victims under the MVRA.
The ruling left the question of valuation undetermined, asking the parties to submit additional filings on that point. While the former investors' expert report argued that they are entitled to as much as $1.8 billion in restitution on the basis that Africo would have held onto its interest and developed the mine as planned, the Och-Ziff parties rejected that amount as fanciful. In an early indication of his position on this issue, Judge Garaufis stated in a footnote that "the court does not believe that Claimants are entitled to a restitution award based on the full projected value of the Kalukundi Mine as if it had been developed. The property in question here is the misappropriated Kalukundi mining rights themselves, not a working mine on the site (although the two are linked)."
An analysis of the restitution amount, should the case proceed to that point, will be a complex exercise, with the court asking the parties for further information on, among other things, how to assign fault to the Och-Ziff parties as opposed to Gertler and corrupt DRC officials and how to determine which losses were caused by wrongful conduct "as opposed to the multitude of other potential problems with Congolese mining." Notably, under the MVRA restitution can be avoided if the process imposes too heavy a burden on the sentencing process.
The case is U.S. v. OZ Africa Management GP LLC, in the U.S. District Court for the Eastern District of New York (No. 1:16-cr-00515). Och-Ziff has recently announced plans to change its name to Sculptor Capital Management, effective Sept. 12, 2019.
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— Juliet Gunev, Mayer Brown LLP
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