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Och Ziff Refuses To Cooperate With Investigation

Apparently what is good enough for Greenlight, SAC, Citadel and Goldman, is not quite up to snuff for Och-Ziff. The 7 West 57th-based, $25.6 billion AUM, hedge fund believes that it should be exempt from responding in an ongoing investigation by the bankrupt Lehman estate, which is probing the abovementioned hedge funds whether they engaged in rumormongering that may have brought down Lehman Brothers. And Lehman is unhappy: in a filing from the Lehman bankruptcy docket, the state claims that “Och-Ziff, one of the world’s largest hedge funds, was involved with, or has information that pertains to, the “short-and distort” efforts.” If this is indeed true, it is not very surprising that “Och-Ziff has already begun stonewalling to attempt to prevent this information from seeing the light of day by interposing frivolous and dilatory objections to the Debtors’ Rule 2004 Subpoena.” As the Lehman examination has already proven to be a gold mine for illegal practices conducted by Wall Street, we would not be surprised if the most recent 2004 investigation uncovers some new and even more shocking results. To be sure, Zero Hedge has never been a fan of the “short selling raid” theory – fair value can and always will find a way to creep up to the surface, unless of course it doesn’t exist in the first place, like in Lehman’s case. Additionally, funds would have to be extra stupid to keep written evidence of this kind of complicit and illegal activity. Which is why Och-Ziff’s response is perplexing. And if the estate had credible reason to pursue Och-Ziff, we can only imagine the same must be true about Greenlight, SAC, Citadel and Goldman. Suddenly the Lehman bankruptcy case became interesting all over again.

Specifically, on page 3 of the complaint we read the basis for Lehman’s investigation:

1) Och-Ziff was either a possible source of, or a conduit for, a tleast on specific rumor circulated in 2008 concerning Lehman Brothers and

2) it was a prime broker for Lehman Brothers during the relevant period and thus may have been the target of efforts by competitors or short sellers urging Och-Ziff to withdraw business from Lehman Brothers at its most vulnerable point.

Och-Ziff has substantiated its unwillingness to respond claiming it would have to spend $3.3 million to produce 3.9 million electronic documents. It also said that it had nothing to gain by Lehman’s bankruptcy, which it said caused significant losses for Och-Ziff. If this is the case, it is odd to read in the estate’s complaint that “Och-Ziff has served offensive discovery upon Lehman – without the benefit of a Rule 2004 order or another procedural basis – attempting to learn what Lehman has thus far discovered about Och-Ziff’s possible wrongdoing.

It gets weirder:

One rumor involved Lehman’s effort to strengthen its financial condition during the financial turmoil of 2008 by reducing its gross and net leverage. In June of that year, false rumors circulated concerning the legitimacy of Lehman’s de-leveraging effort, inaccurately claiming that Lehman has improperly spin the debt off its balance sheet into two hedge funds created and controlled by Lehman. Through the privileged investigation, Lehman determined that Och-Ziff likely disseminated and/or was the recipient of this rumor. [Through a second] privileged investigation uncovered additional information and evidence corroborating what Lehman previously had learned. As a result of this second investigation, KBT&F identified a short list of 2004 targets [here is where Goldman falls]. The false rumors circulating about Lehman carried potentially devastating consequences. Beyond artificially driving down the price of Lehman stock, such rumors could have the effect of increasing the perceived risk to counterparties in transacting business with Lehman, discouraging counterparties from dealing with Lehman and increasing its costs of doing business.

The nature of the subpoena demands all documents created seven and a half months prior to the filing of Lehman’s bankruptcy petition and documents created in the three-and-a-half months after the filing. The time period “is intended to capture the realization of profits from any wrongful conduct towards Lehman and any regulatory or internal investigations or punishment of wrongdoing involving Lehman immediately following the filing of the bankruptcy petition.”

This line of investigation closely merits close pursuit, especially since Och-Ziff, traditionally a distressed player, appears to have no Lehman sub note exposure (there is no conflict of interest mentioned in the filing) which would be quite odd for a firm with a clean conscience.

Zero Hedge

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