Clash of the Hedge Fund Titans Pits Billionaire Mentor Against CEO Protégé

When troubled hedge fund Sculptor Capital Management accepted an offer in July to sell to Rithm Capital Corp., it should have been a done deal. 

But it was just the latest turn in an evolving multibillion-dollar Shakespearean drama that’s been playing out for more than six years between Sculptor founder Dan Och and his former protégé (and current CEO) Jimmy Levin, whose publicly disclosed compensation payouts amount to hundreds of millions since 2013 alone. Their soured relationship and years of infighting are now casting doubt on whether the deal to sell Sculptor will ever close. 

The upheaval, much of it documented in open letters to shareholders and investor disclosures, has had tongues wagging on Wall Street for years. It’s also drawn interest from three of the industry’s biggest players — Boaz Weinstein, Bill Ackman and Marc Lasry — who recently put in a competing offer against Rithm to buy Sculptor for slightly more money.

“It’s like watching high school seniors beat up on a freshman for getting more popular than his older brother,” one hedge fund founder not involved in the deal told The Messenger.

At the crux of the Sculptor saga is bribery and apparent betrayal. 

Levin joined what was then called Och-Ziff in 2006 — just three years after graduating from Harvard with a bachelor’s degree in computer science. As hedge fund legend has it, Levin first met Och as a counselor and water ski instructor at a summer camp attended by Och’s son.

The 62-year-old Och had founded Och-Ziff after leaving Goldman Sachs in 1994 and took it public in 2007. 

$280 Million Payout

The then-twentysomething Levin made a killing for his mentor as a credit trader during the chaos of the 2008 financial crisis. Och-Ziff was managing more than $50 billion by 2015 and Levin had become one of the most highly paid asset managers in the industry, with a $280 million pay package in 2016.

“Whatever Jimmy has done over there, the one thing everyone knows about him is how much he makes,” mused one hedge fund business development executive. “Hedge fund guys are capitalists, but some things are just tacky.”

In 2017, when Levin was just 33, he was promoted to chief investment officer, becoming Och’s clear successor — a protégé who could guide the fund for decades, it was widely reported at the time.

Bribery Scandal

However, a bribery scandal that wreaked havoc on the fund fractures their relationship. The fund agreed in 2016 to pay $412 million to settle criminal and civil bribery charges levied by the Justice Department and Securities and Exchange Commission.

As part of a deferred prosecution agreement, Och-Ziff admitted that executives obtained African mining rights by allegedly bribing the president of the Democratic Republic of Congo and secured an investment from Libya’s sovereign wealth fund by bribing officials in that nation. 

One of Och’s senior executives would end up in prison. Och himself was personally fined $2.2 million in an admission of a lack of control and oversight of his own company.

At the time, Levin supported a plan by Och-Ziff’s independent directors to restructure the fund in a way that would push Och out and try to cauterize any more damage from the bribery scandal, Levin told investors in a statement issued Nov. 1 that detailed the fallout and subsequent litigation. 

An incensed Och, who was still chairman and CEO, responded by squashing the restructuring and notifying investors that he had lost confidence in Levin’s ability to run the fund. He then installed an outsider, former Credit Suisse and Lehman Brothers executive Robert Shafir, to replace him at the helm in 2018. Somehow, Levin remained in the role of co-chief investment officer.

Och left the board entirely in March 2019 but held on to his 23.8% ownership stake of Sculptor's Class B shares that gives him a 12.9% controlling interest in the firm, according to the most recent proxy statement. Six months later, the board took Och’s name off the door altogether, renaming it Sculptor Capital Management in hopes of turning around worsening performance.

The Sculptor board replaced Shafir with Levin in June 2020, making him the CEO, CIO, and a voting member of the board. In 2021, Levin’s total compensation was $145.8 million, despite a beleaguered Sculptor only pulling in revenue of $626 million. That number raised eyebrows even among Levin’s professional peers, a group accustomed to multimillion-dollar paydays.

"It's okay to make a lot of money," said a fund of funds investor familiar with Sculptor. "But you can't make that much if you're not making money for your investors. That's not how this is supposed to work."

Och hasn’t let it go, and he's used Levin’s pay to challenge him in court, even though he paid Levin almost double that amount seven years ago. 

Dueling Threats

Och and four former Och-Ziff shareholders sued Sculptor in August 2022 over Levin’s compensation, alleging in the complaint that his former protégé "devoted himself to entrenching his position at the company, shaping the board of directors, and wielding that resulting leverage to extract ever-escalating pay packages."

Sculptor lashed out at Och’s own compensation in a response letter on Aug. 29, reminding its founder that he “took home $3.3 billion since 2007 while the Company’s stock price dropped by 96%.”

Och also obliquely mentioned in an October court filing a “personal issue” from Levin’s past that he said factored into his decision to pass Levin over for the CEO post five years prior. In response, Levin’s Nov. 1 statement to shareholders acknowledged that Och was referring to a complaint against him at Harvard 20 years ago when he was 19. Levin said he was “falsely accused of sexual misconduct” but had been exonerated by the university and disclosed the matter to the fund in 2015. Levin said he received the board's full support.

In November, Och and Sculptor settled their legal dispute. As part of the agreement, Levin and the board agreed to create a special committee to explore a sale of Sculptor, which currently has $34 billion in assets under management but was posting double-digit losses and facing redemptions. Och’s large stake in the fund gave him a seat on that committee. 

“I want nothing more than for Och to end this feud he continues to pursue,” Levin wrote in his Nov. 1 statement.

But Och does not appear to share that sentiment.

'Undervalues the Company'

The special committee accepted Rithm’s bid of $11.15 a share on July 24, pricing the deal at $639 million. At the time, the value of the deal was a premium to Sculptor’s share price. But almost immediately, Och opposed the sale.

“We believe that the transaction with Rithm substantially undervalues the company and penalizes all shareholders for the board of director’s breaches of fiduciary duty” Och wrote in an Aug. 16 letter signed by four other shareholders. 

Och also claimed there might have been other potential buyers who were excluded from the bidding that could pay more. 

A joint bid from a group led by Weinstein, Ackman and Lasry was rejected by the special committee — despite a higher offer of $12 per share, The Wall Street Journal reported last month. The three are some of the industry’s biggest power brokers. Weinstein founded mega-fund Saba Capital Management, which has $9.7 billion in assets under management; Ackman is the outspoken activist investor of Pershing Square Capital; and Lasry is the former owner of the Milwaukee Bucks and founder of Avenue Capital. All three are using their personal wealth, instead of assets in their funds, to make the potential acquisition.

Rithm’s offer also promised to keep Levin on as CEO of Sculptor. While the proposal from Weinstein’s group does not suggest removing Levin, the proxy statement that details the terms of deal outlines a plan to overhaul the fund’s leadership by creating an “Office of the CIO” in which Levin would share power with other executives picked by the new owners. 

At the very least, the proposal from the Weinstein group would significantly diminish Levin’s power while falling short of pushing him out altogether.

Levin, Och, Shafir, Weinstein, Ackman and Lasry did not respond to requests for comment.

In rejecting the deal, however, Sculptor seems to be worried less about Levin and more about the Weinstein group’s ability to actually seal the deal.

“Though this latest bid’s headline valuation is higher than the Rithm transaction, this proposal only includes committed financing for less than half of the amount required to consummate the transaction,” Sculptor said in an Aug. 20 statement.

But the mere involvement of three more high-octane billionaires was like throwing kerosene on an already raging fire.

“Those three guys getting involved is almost too good to be true,” mused one long-time hedge fund trader. “As if two billionaires fighting wasn’t enough, let’s make it five.”

One-time CEO Shafir, who still owns more than 6% of Sculptor, reentered the ring on Aug. 31 with an open letter to the board backing the Weinstein group’s bid over the Rithm offer.

That could be enough to kill the Rithm deal.

“Shafir and Och have almost 20% of the thing,” warned one hedge fund business development executive. “If they really want to kill the Rithm deal, Levin has a problem.”

Levin, however, holds enough Class A and Class B shares to give him 22.4% of the firm's voting power alone while Shafir and Och's stakes give them a combined 15.8% controlling interest in Sculptor, according to the firm's 2023 proxy statement.

Sweetening the Deal

Weinstein, Ackman and Lasry upped the ante last week to $12.75 a share, which might become key as Sculptor’s share price has climbed since the Rithm deal was announced.

They also sweetened the deal by bolstering their financing to rely less on debt and said they would pay a kill fee if they failed to close within a certain time frame.

“From what I can tell, Och has orchestrated this perfectly,” said the fund founder who framed the drama in high school terms. “He’s now got three guys, that hate to lose, actively involved in funding his vendetta. Levin can try anything he wants, but this is far from over.”

The latest salvo, in the form of a class action filed against Levin and Sculptor’s board on Monday, supports that theory.

Gilles Beauchemin, who claims to be a longtime Sculptor shareholder, is seeking an injunction from a Delaware court that would prevent Sculptor from closing the Rithm deal and would allow the Weinstein group to communicate directly with Sculptor shareholders regarding their bid.

The class action is not subtle about which potential owner it would like to see controlling Sculptor, claiming: “The keystone to the viable path is the Board exercising its fiduciary duties to declare that the [Weinstein group’s] bid is reasonably likely to lead to a Superior Proposal."