On September 14, 2018, a federal judge in the Southern District of New York certified as a class action a securities fraud suit against hedge fund Och-Ziff Capital Management Group LLC (“Och-Ziff”) and two of its executives. Shortly after the decision certifying the class, the parties informed the court that they had reached an agreement in principle to settle the case, which had gone forward on the basis of allegations that Och-Ziff had failed to make adequate disclosures related to its knowledge of the investigation.
In September 2016, Och-Ziff entered into a deferred prosecution agreement with the Department of Justice (“DOJ”) to resolve the Department’s investigation into its violations of the Foreign Corrupt Practices Act (“FCPA”). Under that deferred prosecution agreement, Och-Ziff agreed to pay a $213 million criminal fine and retain a compliance monitor for three years. As part of the resolution with the DOJ, an Och-Ziff subsidiary pled guilty to conspiracy to violate the anti-bribery provisions of the FCPA. According to the DOJ, Och-Ziff’s case marked the first time a hedge fund had been held accountable for violating the FCPA. Och-Ziff also agreed to pay nearly $200 million to settle FCPA charges with the Securities and Exchange Commission (“SEC”).
The plaintiffs in the securities fraud suit first filed the case in May 2014, following news reports of government investigations into possible violations of the FCPA by Och-Ziff in connection with its business dealings in Libya and the Democratic Republic of Congo. As is often the case, the securities fraud litigation against Och-Ziff was closely tied to the FCPA investigations. The only claims in the litigation that ultimately survived to the class certification stage related not to disclosures about Och-Ziff’s conduct itself but rather to its disclosures about the government investigations into that conduct, highlighting the collateral issues that frequently accompany such investigations. While the court conceded that it might eventually have to deal with the issue of whether plaintiffs’ damages calculation method differentiated between the price drop resulting from Och-Ziff’s failure to disclose its FCPA violations and the price drop resulting from the company’s alleged misstatements about the impact of the government investigations, the court deferred the issue for consideration at a later stage in the litigation.
After Och-Ziff’s settlements with the DOJ and SEC, the investors filed an amended complaint incorporating and citing extensively to the deferred prosecution agreement and the SEC order. Och-Ziff successfully moved to dismiss claims in the amended complaint based on a number of alleged misstatements and omissions, including those concerning its (1) failure to disclose its FCPA violations; (2) statements about its compliance program; (3) failure to disclose the potential financial impact of the government investigations on its financial statements; and (4) Sarbanes-Oxley certifications, which allegedly were false because of the FCPA violations. Significantly, the court accepted defendants’ argument that plaintiffs could not adopt the SEC’s allegations as their own without also incorporating the SEC’s exculpatory finding that Och-Ziff’s CEO and CFO lacked actual knowledge of bribery. That finding undermined plaintiffs’ scienter allegations, although it did not preclude defendants’ liability entirely. The court permitted plaintiffs to proceed on claims based on Och-Ziff’s statements in public filings between 2012 and 2014 that it was not facing any government investigations that it expected to have a material impact on its business, when its CEO and CFO allegedly knew in 2011 of the investigations by the DOJ and SEC.
The District Court’s Recent Decision
The district court granted plaintiffs’ motion to certify a class consisting of investors who bought Och-Ziff securities from February 2012 to August 2014. Och-Ziff had argued that plaintiffs’ damages model did not differentiate between the price drop resulting from the company’s failure to disclose its FCPA violations—which was a theory of liability that the court had dismissed—and the price drop resulting from the company’s alleged misstatements about the impact of the government investigations. The court conceded that it might eventually have to deal with that issue, which went to the merits of whether plaintiffs could prove that their damages were caused by the alleged fraud as opposed to other factors. Nevertheless, the court determined that the question went beyond the class certification inquiry.
At a high level, the Och-Ziff case is a reminder of the potential collateral consequences of FCPA investigations. While the court ultimately dismissed securities fraud claims based purely on disclosures about the underlying conduct, Och-Ziff still faced substantial litigation risk as a consequence of how it disclosed the investigations into that conduct. The court’s unwillingness to address, until the merits stage, Och-Ziff’s argument that plaintiffs’ damages model failed to account for theories of liability that had been dismissed was significant, since securities fraud cases rarely make it to trial, and ultimately led to the parties settling the litigation.
 Menaldi v. Och-Ziff Capital Mgmt. Grp. LLC, No. 14 Civ. 3251, 2018 WL 4378445 (S.D.N.Y. Sept. 14, 2018).
 DOJ Press Release, Och-Ziff Capital Management Admits to Role in Africa Bribery Conspiracies and Agrees to Pay $213 Million Criminal Fine (Sept. 29, 2016), https://www.justice.gov/opa/pr/och-ziff-capital-management-admits-role-africa-bribery-conspiracies-and-agrees-pay-213.
 SEC Press Release, Och-Ziff Hedge Fund Settles FCPA Charges (Sept. 29, 2016), https://www.sec.gov/news/pressrelease/2016-203.html.
 Menaldi v. Och-Ziff Capital Mgmt. Grp. LLC, 277 F. Supp. 3d 500 (S.D.N.Y. 2017).