The Pay War on Wall Street

It's time for Jerome Powell's least favorite activity of the month: hiking (and probably public speaking too, at this point). On every single FOMC rate hike so far this year, the markets have dumped at 2PM EST when the rate hike came out and rallied at 2:30PM EST when Powell spoke. Today, we're talking about others who were recently dumped: two hedge fund managers and their aggressively public spat-turned-lawsuit.

Bottom Line Up Front

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• Amazon closed below $1 trillion in market value for the first time since 2020 yesterday.

• The Fed is set to deliver a fourth 75 bps hike today, raising the target range for the Fed Funds rate to 3.75-4%. 

• The cost of borrowing pound sterling against collateral is trading 43 bps below the Bank of England's rate. That’s a record discount, after excluding quarter- and year-end aberrations.

But first, a quick note from The BAD Investment Company.

Tired of ESG Bullsh*t? Fortunately, there's a money manager that decided that B-A-D might be the better acronym for investors.The BAD ETF (NYSE: BAD) launched last December and is taking a different stance in this green washed world focusing on 3 industries for which the ticker represents – B-A-D. 

• Betting – Casinos, gaming, and online gaming operations – 33%

• Alcohol – Alcoholic beverage manufacturing and distribution – 23%

• Drugs – Pharmaceutical and biotechnology product development and manufacturing – 33% (Cannabis cultivators & distributors - 10%) 

The case for these BAD industries remains strong for a simple yet important reason – they have historically offered attractive risk-adjusted returns. In addition to these industries overcoming government scrutiny, these industries have shown resilience during economic downturns because people tend to indulge in their vices, or what some call hobbies.  

As a result, we believe these asset classes are typically underappreciated and therefore under-valued but the reality is that people will continue to consume alcohol, gamble, and need medicine in good times, and in BAD.  

In regards to the betting and cannabis aspects, as these industries become more widely accepted socially and legally, they may offer investors additional growth as more states look to legalize those industries for additional tax revenues.

Learn more about the BAD ETF fund details and sign up for our mailing list to get the latest fund insights and information.

Deep Dive: The Pay War on Wall Street

In 2016, billionaire hedge fund manager Daniel Och paid $2.2M to settle charges that he had broken US laws against bribing foreign government officials. Now, he’s suing his old fund for two hundred times that. Because of the protégé he appointed.  

This is the latest in a long-running drama between Och, his ex-fund Sculptor Management and its new CEO, Jimmy Levin. According to reports, Levin joined the company in 2006 and was groomed for years as Och's protégé and intended replacement. But when Och watched from afar as Levin rose to fame, he wanted in. 

The Origin Story 

The cornerstone of Sculptor began decades before its founding, in the halls of Goldman Sachs’ former headquarters. Daniel Och, a New Jersey native who graduated from Wharton (shocker), joined Goldman on the risk arbitrage desk in 1982. He went on to head proprietary trading, staying with the firm for more than a decade. 

Och “retired” from Goldman in 1994 after starting a relationship with the family that had founded the Ziff Davis media empire. The Ziffs bankrolled and shared naming rights for Och’s first hedge fund. Och initially focused on what he knew: merger deals. 

Och soon thought bigger. His goal was to manage the capital of institutions like public pension funds and endowments. At this time, institutions funneled little, if any, money away in hedge funds. 

Success followed quickly. By 2005, Och-Ziff Capital had $50 billion in assets. It went public two years later, making it one of the first hedge funds to IPO. But Och wasn’t about to give up too much control. He ensured the deal was structured so that he kept a majority of the voting shares. The IPO made him a billionaire, and he still got to determine the firm’s direction.

The Protégé 

Enter: Jimmy Levin. 

Och first Levin at his sons’ summer camp in Wisconsin, where Levin was a counselor and water skiing instructor. Och became a longtime mentor to Levin, hiring him in 2006 as a distressed analyst. Levin thrived in the wake of the financial crisis, scooping up structured credit assets tied to the U.S. housing market and in 2013 received $119 million. He was given a 10-year pay deal in 2014 that was renegotiated into a better agreement in 2017.

Och shocked Wall Street in 2017 with big announcements on the firm’s leadership. That February, he elevated Levin to co-chief investment officer and awarded him an incentive package worth $280 million. The move effectively positioned him as the heir atop the company and the man to take over as CEO.

Taking over Turmoil

Despite the riches being handed out, the firm was in turmoil. Assets, which had reached almost $50 billion in 2015, were declining and the stock was sinking. A Och-Ziff unit had pled guilty to a conspiracy charge as part of a settlement of the government’s long-running probe into bribes paid to gain lucrative business in Africa. 

Levin’s elevation was seen as a way to reverse the position.

Och, US regulators said, had been warned by his own lawyer and his chief financial officer not to do business with an "infamous" Israeli businessman who regularly paid bribes to public servants of the Democratic Republic of Congo. Och did so anyway.

The settlement came from a major investigation into Och’s nuanced, far-reaching bribery schemes to secure special access from officials in Libya, Chad, Niger and beyond. His schemes resulted in $413M of fines for the company, a jail sentence for one of its executives, and the reported loss of one third of its assets.

Soon after the scandal, Och-Ziff Capital Management rebranded to “Sculptor Capital Management” in an effort to rid itself of the bribery taint. These were dark times for Sculptor. By the time Levin took the throne, the company was in its sixth straight year of losing more assets than it gained as clients pulled a total of about $30B out of the fund in the wake of its bribery scandal. The fund’s Glassdoor reviews during this period convey the morale appropriately: 

Today’s Turbulence

Just months after anointing Levin as his heir apparent, Och sent a letter to clients saying Levin would not be getting the top job. In January 2018, the firm said Robert Shafir, the former chairman of the Americas at Credit Suisse Group AG, would take the role.

As part of his bribery settlement, Och left the company in 2019. A billionaire, Och built his family office. Back at now-Sculptor Management, the board voted to make Levin CEO in 2020, who was given another renegotiated pay package. The CEO shakeup agitated the departure of William Barr (yes, *that* Donald Trump's attorney general) and inflamed the Sculptor ranks. Levin officially became CEO of Sculptor in April 2021. 

But it’s not the position Och is now scathing over. It’s the pay. Levin has approximately 20.7% of outstanding shares in Sculptor, a ratio exceeding that of the founders of “significantly larger” firms such as Apollo Global Management, Blackstone and KKR. 

By the end of Levin’s first year, Sculptor’s profits lagged behind investors' expectations, even though its assets had increased. So Daniel Och mounted a lawsuit against his former firm, accusing it of poor corporate governance. At the same time, one of Sculptor's board members resigned over what he described as "governance failures" that led to Levin being given a "staggering award" despite "numerous warning flags". The board member was coincidentally the only one appointed by Och, whom he enjoys close ties with as the president of his family wealth management office.

In Och’s complaint, he lambasts that Sculptor's "less than mediocre" performance and annual revenue of $626m "cannot possibly justify" Levin's 2021 compensation package of $145.8M. If accurate, that would put him a pay grade above Apple's Tim Cook or JPMorgan Chase's Jamie Dimon.

What Now

If anyone knows how to fight dirty, it’s bulls. And it has gotten personal. 

Wondering why Och would U-turn around appointing his decades-long mentee as CEO? In last week’s most recent court filings, Och cited a “personal issue” from Levin’s past that gave Och “concerns about elevating Mr. Levin to the role of CEO.” 

It wasn’t exactly just personal or just an issue. For at least a decade, Och and his executives at the then-Och-Ziff Capital knew that Levin had been accused in 2002 of sexually assaulting a female classmate at Harvard. A restraining order filed against him in 2002 was vacated after a court review and the case was sealed several months later at the request of the woman and Levin. Levin’s case was one that sparked the “Our Harvard Can Do Better” campaign. 

Sculptor’s independent directors confirmed “Mr. Och has long been aware of the facts, including when he championed Mr. Levin and promoted him to senior ranks of the firm.” Och originally learned of the allegation against Levin following media inquiries. At the time there was the backdrop of a broader Education Department investigation into Harvard’s handling of assault claims on campus. 

In a pay war that erupted because a board member and former CEO felt “frozen out” of the compensation process, it is still developing what other news Sculptor has frozen out.  

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