NEW YORK–(BUSINESS WIRE)–Sculptor Capital Management, Inc. (“Sculptor” or the “Company”) (NYSE: SCU) today responded to the Section 220 Demand for Inspection (“Section 220”) letter sent by Daniel S. Och, Harold Kelly, Richard Lyon, James O’Connor, and Zoltan Varga (the “Och Group”) dated August 22, 2023.
Below is a cover letter and a Section 220 response letter delivered to the Och Group today.
Cover Letter
August 29, 2023
via Email
Daniel S. Och
Harold Kelly
Richard Lyon
James O’Connor
Zoltan Varga
c/o Andrew J. Levander, Esq.
Dechert LLP
Three Bryant Park
1095 Avenue of the Americas
New York, NY 10036
[email protected]
Re: Letter Seeking Inspection of Books and Records of Sculptor Capital Management, Inc.
Dear Messrs. Och, Kelly, Lyon, O’Connor, and Varga:
We write to you (the “Och Group”) on behalf of Sculptor Capital Management, Inc. (“Sculptor” or the “Company”) in response to your letter dated August 22, 2023 to the Special Committee of the Board of Directors (the “Letter”) and Section 220 Demand for Inspection (the “Demand”). As set forth in the enclosed response to the Demand, the Company believes that your requests are improper as they continue to propagate and rely upon a false narrative as a cover for your true motives: to disparage the Company, its Board of Directors and management, and to make self-interested demands. This is demonstrated by the following points which are further detailed in our response:
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The Demand appears to be improperly motivated by Mr. Och’s longstanding resentment from his having been exited from the Company.
While ostensibly requesting information about the sales process described in the Company’s preliminary proxy statement, your Demand for books and records is set against historical context that makes clear that purpose is pretextual, and that the true purpose is the continuation of what the company views as Mr. Och’s well-publicized, years’ long smear campaign against the Company’s management. The Company believes that campaign has been fueled by Mr. Och’s longstanding animus arising from his having been exited from the Company following the Africa bribery scandal that almost put the Company out of business seven years ago and for which Mr. Och personally paid $2.2 million to resolve a related SEC enforcement action. The Company believes that the Demand is just the latest salvo in Mr. Och’s efforts to seek retribution, which in recent years alone has included him, by all indications, engineering the noisy resignation of his Board designee, J. Morgan Rutman, on the basis of a misleading diatribe regarding management compensation, followed by a books-and-records lawsuit publicizing yet more false and disparaging information under the guise of seeking information that, in any event, Mr. Och already possessed.
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The Och Group’s professed concern for public stockholders cannot be reconciled with Mr. Och’s repeated efforts to undermine the Special Committee’s sales process.
Moreover, your stated concerns about seeking to “protect the interests of all [Company] stockholders” in respect of the Company’s sales efforts rings particularly hollow considering all that you have done in recent months that seemed to undermine those efforts. After pledging to support the Special Committee’s sales process, you then dragged your feet for months on signing a standard non-disclosure agreement, depriving yourself of the facts. At the same time, you publicized baseless attacks about the process on Schedule 13D, seemingly ignoring contrary information provided to you in correspondence from the Special Committee and its counsel. And even worse, after signing the non-disclosure agreement, following what the Company viewed as disruptive behavior by you, a potential transaction for $12 per share with Bidder D.
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In negotiations with Rithm Capital Corp. (“Rithm”), the Och Group’s focus seems to have been on self-interested demands.
Your professed concerns for the Company’s public stockholders is also belied by your more recent interactions with Rithm in which you appear to have focused on maximizing your own economic interests. For example, you requested that, as part of any closing, Rithm agree to accelerate tens of millions of dollars as a prepayment at a favorable discount rate of the Tax Receivable Agreement and pay you an additional $5.5 million in cash for your legal expenses supposedly incurred in connection with the Company’s sales process, including costs for counsel that were negotiating for your own economic benefits. The transaction under discussion between the Och Group and Rithm would have included the option for a rollover in order to allow you to avoid recognizing significant taxable gain received in the transaction. Notably missing from those discussions were meaningful concessions by any of you for the benefit of public stockholders.
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We believe that Mr. Och’s purported concern for public stockholders is in stark contrast to his record when running the Company.
Mr. Och took home $3.3 billion since 2007 while the Company’s stock price dropped by 96%. [Please see accompanying chart]
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The Och Group’s attacks on the Special Committee process are rebutted by the facts of the robust and independent process the Special Committee ran.
The Company believes that the criticisms you seek to level against the Special Committee’s sales process do not have even the slightest merit. The Special Committee ran a robust sales process supported by world-class legal and financial advisors. They reached out to seventy potential acquirors and bidders, and management were appropriately instructed not to engage in any negotiations regarding management’s go-forward employment until principal terms had been agreed.
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The Och Group’s misguided criticisms of the Rithm transaction are based upon distortions and misrepresentations.
Furthermore, the attacks on the Rithm transaction are equally misplaced. The suggestion that there were other credible bids that provided greater value and certainty of closing, with or without current management, is distorted – no such bid exists. Nor does Rithm’s bid crystallize supposed losses from the adoption of Mr. Levin’s compensation package. Mr. Levin has also agreed to substantial reductions in his compensation to support a Rithm transaction.
For all of these reasons and the others set forth in the response to the Demand, it is clear that you lack the proper purpose mandated by Delaware law to be entitled to books and records from the Company. To the contrary, we believe that you are abusing the process accorded to stockholders under Delaware law as a means of presenting false narratives about the Company while shielding your own undisclosed conflicts which put you at odds with the public stockholders. While this would justify the Company refusing your requests in full, in the interest of avoiding yet more unnecessary litigation, as set forth in additional detail in the Company’s response, we are prepared to meet and confer with you regarding the production of the limited set of materials typically subject to requests under Section 220. This letter is without prejudice to the rights of the Company and the Board, all of which are preserved.
Very truly yours,
Jonathan Pickhardt
cc: Michael Carlinsky
Blair Adams
Brendan Carroll
Brock E. Czeschin
Full Response Letter
August 29, 2023
via Email
Andrew J. Levander, Esq.
Dechert LLP
Three Bryant Park
1095 Avenue of the Americas
New York, NY 10036
[email protected]
Re: Letter Seeking Inspection of Books and Records of Sculptor Capital Management, Inc.
Dear Mr. Levander:
We write on behalf of Sculptor Capital Management, Inc. (“Sculptor” or the “Company”) in response to the August 22, 2023 demand (the “Demand”) from your clients, Daniel S. Och, Harold Kelly, Richard Lyon, James O’Connor, and Zoltan Varga (the “Och Group”), to inspect Company books and records pursuant to 8 Del. C. § 220 (“Section 220”) in regard to the proposed acquisition of the Company by Rithm (“Merger”) as detailed in the preliminary proxy statement filed by the Company on August 21, 2023 (the “Preliminary Proxy”).
The Och Group does not have any valid grounds under Section 220 to inspect Company books and records. While they profess to make the Demand in order to “protect the interests of all [Company] stockholders,” the Och Group’s well-documented history makes clear that their actual motivations are otherwise and inappropriate. In reality, the Demand is nothing more than a pretext for Mr. Och and his colleagues to continue their years’ long campaign against the Company’s current management while masking their own conflicts in having repeatedly demanded economic benefits for themselves.
The Company believes this campaign was borne out of Mr. Och’s resentment at being exited from the Company’s helm following a highly-publicized Foreign Corrupt Practices Act (“FCPA”) bribery scandal that nearly destroyed the Company seven years ago. Since then, Mr. Och has orchestrated a series of public attacks against the Company’s management, the Demand being but the latest chapter. This included the January 2022 noisy resignation of Mr. Och’s designee to the Company’s Board of Directors (“Board”), J. Morgan Rutman, a long-time employee of Mr. Och’s, regarding the compensation paid to the Company’s CEO, James Levin, who seems to have been Mr. Och’s primary target ever since Mr. Levin supported the independent directors’ effort to exit Mr. Och from the Company. Later in 2022, notwithstanding Mr. Och’s already-extensive knowledge of Mr. Levin’s compensation arrangements, the Och Group initiated a Section 220 demand purportedly to obtain information about those arrangements, as well as follow-on litigation that served no apparent purpose other than to attack the Company, its Board and management despite the obvious potential for injury to the Company’s business and prospects.
Now the Och Group has returned to the same playbook, seeking once again to use Section 220 as a rhetorical platform to attack the Company and its sale process, while masking the economic self-interest and personal vendettas that the Company believes motivate Mr. Och’s behavior, and presenting a false narrative to the Company’s stockholders. Once again, the Och Group has no real need for the information demanded as they have been receiving information about the sales process for months from the Special Committee and its advisers pursuant to a non-disclosure agreement. This access included meeting with each of the two bidders that the Special Committee determined to have presented the best overall offers for purchase of the Company.1 Had Mr. Och actually had legitimate concerns about the process, including whether steps were taken to favor management (when, to be clear, no such steps were actually taken), he could have simply asked the bidders with whom he met. Given the multiple weeks of negotiation afforded Mr. Och with these bidders, he had multiple opportunities to raise his concerns. However, the Section 220 demand does not even make mention of an attempt by him to learn the facts. Instead, his Demand relies only on unfounded allegations stemming from purported conversations with third parties whose identities he has consistently withheld.
To the extent Mr. Och’s focus has extended beyond his continuing vendetta against the Company and Mr. Levin, it has been to negotiate for Mr. Och’s own economic interests stemming from his years running the Company. For example, Mr. Och proposed as a condition of supporting any transaction that Rithm provide him with acceleration of tens of millions of dollars as a prepayment at a favorable discount rate of a lucrative Tax Receivable Agreement (“TRA”) asset structured by members of the Och Group at the time of the Company’s IPO. The Och Group also sought to structure any transaction to permit them to delay hundreds of millions of dollars of taxable income that they have already delayed for more than a decade and a half. In addition, the Och Group demanded payment of $5.5 million to cover legal fees incurred by them in connection with actions taken against the Company. The Och Group also sought, among other things, enhanced credit protection. It was only when Rithm refused to accede to Mr. Och’s demands that he chose to oppose the deal.
Moreover, the criticisms that the Och Group levels at the Special Committee’s process and the Rithm transaction itself are flatly false. As described in detail in the Preliminary Proxy, the Special Committee—comprised of two unassailably independent directors—implemented and ran a robust sales process that was supported and validated by world-class financial and legal advisors. The suggestion of any interference in the process to entrench management and protect their supposedly outsized compensation has it exactly backwards. Nothing about the process required or even encouraged the retention of management which was entirely up to the bidders. Further, existing management—especially Mr. Levin—made significant concessions in support of obtaining a deal with Rithm that would maximize benefits to stockholders. This included Mr. Levin agreeing to accept a cap on his annual compensation that would leave him earning less than what Mr. Och regularly paid him when Mr. Och was CEO of the Company—and a small fraction of what Mr. Och routinely paid himself. Indeed, the only current or former management stakeholders involved in the discussions who failed to provide meaningful concessions to improve the benefits of the Rithm transaction for stockholders are the Och Group members, who have not only proposed their personal stakes being paid in full but who have, in fact, sought preferential treatment.
As explained in further detail below, these considerations demonstrate that the Demand is pretextual, lacks a proper purpose and otherwise fails to comply with the requirements of Section 220.
1. The Demand Is Improperly Motivated by Longstanding and Well-Documented Animus.
Under Delaware law, a showing that a Section 220 demand is motivated by animus establishes an improper purpose. Compare Highland Select Equity Fund, L.P. v. Motient Corp., 906 A.2d 156, 167 (Del. Ch. 2006), aff’d sub nom. Highland Equity Fund, L.P. v. Motient Corp., 922 A.2d 415 (Del. 2007) (denying Section 220 demand where stockholder’s purported purpose in bringing the demand was a “ruse” and instead motivated by a desire to “derive[] utility from the demand itself as a rhetorical platform”), with Grimes vs. DSC Communications Corp., 724 A.2d 561 (Del. Ch. 1998) (ordering production of materials in response to Section 220 demand where “there is nothing in the record to date suggesting that [the demand] is motivated by some improper animus”).
Here, the Demand is just the latest installment in Mr. Och’s historical effort to harm the Company, its Board and its management. The genesis of Mr. Och’s animus has nothing to do with the transaction at issue or its terms, but rather traces back to the events leading up to his departure from the Company, when it was known as Och-Ziff. Mr. Och, as Chairman, CEO and controlling stockholder, built Och-Ziff into a hedge fund behemoth, but its success was squandered when, in September 2016, Och-Ziff was required to enter a Deferred Prosecution Agreement (“DPA”) with the U.S. Department of Justice (a serious sanction effectively serving as a form of probation for its multi-year duration) and its Africa subsidiary was forced to plead guilty to a criminal charge for conspiracy to violate the Foreign Corrupt Practices Act for a bribery scandal that took place in the Democratic Republic of Congo (the “DRC”) and Libya. The Securities and Exchange Commission brought related charges. In total, the Company was ordered to pay $412 million to resolve the matter. Mr. Och himself paid $2.2 million to resolve a related SEC enforcement action in which the SEC found Mr. Och had “caused violations in two Och-Ziff transactions in the [DRC]” and detailed how he had been “aware of the risk of corruption in the transactions with [Och-Ziff’s] DRC Partner” and “approved the use of Och-Ziff investor funds in those transactions” even though proceeding with the transactions was “contrary to the recommendation of his legal and compliance team.” Faced with massive capital withdrawals in the wake of the scandal and restrictive regulatory penalties that barred the Company from key investor channels, the Company had no choice but to attempt to distance itself from Mr. Och, including by ultimately rebranding as Sculptor.
In December 2017, the independent directors of the Board unanimously voted to recommend that Mr. Och be removed as CEO. Mr. Och refused to recognize the idea that his continued presence at the Company was detrimental to its future success. Instead, he became enraged by the perceived disloyalty of Company executives and Board members who made this decision. Chief among those whom Mr. Och blamed for his exit from the Company is Mr. Levin, its current chief executive and chief investment officer, whom Mr. Och had previously anointed as his heir-apparent. Mr. Och contemporaneously instructed a group of his allies, including certain members of the Och Group and Mr. Rutman: “We have to make clear that I/we will be the winning team” and that “Jimmy [Levin] cannot be the winning team.”
Since that time, Mr. Och has repeatedly taken steps that have disrupted Sculptor’s business. These actions have peaked over the past eighteen months. Among other things, by all indications Mr. Och caused Mr. Rutman—his hand-picked board representative and longtime president of Mr. Och’s family office (that manages his personal wealth) and to whom he has paid millions of dollars—to noisily resign from the Board in stated protest of a compensation package agreed with Mr. Levin at the end of 2021 (“2021 Compensation Package”). As part of his resignation, Mr. Rutman sent the Board a seven-page, single-spaced letter containing a diatribe against the Company’s corporate governance process and decisions, including numerous disparaging remarks about the Company, its Board, and its officers. Mr. Och and Mr. Rutman were both well aware that Sculptor would be forced to disclose a letter of this type. The public resurgence of a dispute with Mr. Och had its obvious effect, negatively impacting Sculptor’s publicly traded share price and causing meaningful disruption among Sculptor’s clients and to its capital-raising efforts.
Mr. Och then used Mr. Rutman’s resignation letter as a basis to demand books and records from the Company regarding the Board’s process for approving Mr. Levin’s 2021 Compensation Package. The books-and-records requests were themselves a charade, largely targeting Board materials to which Mr. Och already had access through Mr. Rutman. While the Company was in the midst of diligently producing the requested documents, and without any warning or notice to the Company, Mr. Och used the books-and-records demand as an excuse to publicly file an unnecessary lawsuit filled with additional disparaging statements that were not even relevant to the demand for books and records. Although Mr. Och did not provide Sculptor with any advance notice of the Complaint, it seems he had his media relations team aggressively push it to the press.
Faced with Mr. Och’s disruptive and injurious behavior, the Company worked to find a solution. In mid-November, the Company was able to finally reach an agreement with Mr. Och to dismiss the books-and-records lawsuit in exchange for some additional documents in conjunction with the Board also announcing publicly that a Special Committee of the Board (which had been established months earlier) had been created to explore potential transactions (which could include a sale of the Company). Sculptor only agreed to announce the Special Committee’s ongoing exploration of potential transactions publicly because Mr. Och represented he would approach the process in good faith and without conditioning his consideration on any particular structure (such as the exclusion of existing management). This commitment was reflected in the public statement accompanying the agreement, where he stated: “we will be supportive of a vigorous, independent, and thorough process that puts shareholders first.”
Unfortunately, Mr. Och did not honor his commitments. Shortly after settling the Section 220 litigation, the Company sent Mr. Och a proposed non-disclosure agreement so that it could share information with him regarding the sale process. Mr. Och did not even provide comments on the draft for almost two months. Instead, Mr. Och used the interim period to spread a false narrative that the Special Committee was not running an open and transparent sales process. For example, Mr. Och filed a Schedule 13D containing materially incorrect statements such as that the Special Committee was “implying to potential buyers that management’s approval is effectively necessary for any deal” and that the Special Committee was discouraging bidders from presenting certain types of offers for the Company. (January 27, 2023 Schedule 13D.) Mr. Och finally responded to the draft non-disclosure agreement—showing his first interest in learning the actual facts—on January 28, 2023, the day after he filed this Schedule 13D. That agreement was eventually signed on February 15, 2023.
As disclosed in the Preliminary Proxy, the Company believes that Mr. Och was also responsible for the collapse of a potential transaction with Bidder D earlier this year. By March 2023, the Special Committee was in advanced discussions with Bidder D, having agreed on price, a draft merger agreement, and all material conditions. As of March 27, 2023, the key gating item standing in the way of a definitive merger agreement with Bidder D was Bidder D’s desire to secure the Och Group’s support for the transaction. Mr. Och sent two letters refusing to support the transaction without even engaging with Bidder D. Once Mr. Och eventually allowed his representative (Mr. Rutman) to meet with Bidder D, Bidder D became concerned that Mr. Och did not intend to engage in a constructive dialogue. Then, in the midst of the Company’s discussions with Bidder D, Mr. Och wrote to the Special Committee on April 5, 2023, contending that the Company should abandon the sales process altogether—even though he had publicly pledged support just a few month earlier. A few weeks later, with no change in Mr. Och’s actions, Bidder D walked away, relaying to the Special Committee’s advisors that they had no appetite to engage further with the Och Group.
2. The Och Group’s Supposed Concern for Protecting Stockholder Value Is Belied by Its Self-Interested Demands.
Given the experience with Bidder D, the Special Committee sought to re-engage with potential acquirors willing to consider a transaction that would not be conditioned on Mr. Och’s support. In late May 2023, Rithm provided an updated proposal to the Special Committee and confirmed that it did not intend to condition the signing or closing of the potential transaction on the support of Mr. Och. Through June 2023, the Special Committee negotiated with Rithm to improve its proposal (while also engaging with other potential bidders). In late June 2023, Rithm indicated that it wanted to have discussions with Mr. Och about the potential transaction before proceeding to execute a definitive merger agreement.
On July 6, 2023, the Och Group entered into a confidentiality agreement with Rithm so they could discuss a potential transaction. Over the next two weeks, Rithm responded to extensive requests for information from the Och Group and engaged with them on a number of issues they raised as conditions for supporting any transaction.
Contacts
Sculptor – Shareholder Services
Ellen Conti
Sculptor
212-719-7381
[email protected]
Sculptor – Media Relations
Jonathan Gasthalter
Gasthalter & Co.
212-257-4170
[email protected]
