Hedge fund rivals Fortress and Och-Ziff have locked horns in an ugly legal battle involving an iconic Manhattan property — and $1 billion is at stake

Hedge fund rivals Fortress and Och-Ziff have locked horns in an ugly legal battle involving an iconic Manhattan property — and $1 billion is at stake

An iconic New York City real-estate development is once again at the center of a legal battle by Wall Street investors looking to score big.

The largest apartment complex in Manhattan, Stuyvesant Town-Peter Cooper Village is a sprawling, 11,200-unit development on the island’s east side, and over the past decade a slew of investors have been tussling over the billions in value tied up in those red-brick buildings.

The latest battle is shaping up to be an ugly one: Hedge-fund rivals Fortress Investment Group and Och-Ziff Capital Management are tangled up in dueling lawsuits over the fate of some $1 billion in fees stemming from the management of the StuyTown property and its commercial debt after its default in 2010 and eventual sale in 2015 to Blackstone Group for $5.3 billion.

At the essence, according to court documents and conversations with people familiar with the litigation, the arguments boil down to this:

  • Cobalt, a vehicle Och-Ziff invested in that owns StuyTown debt, says a little-known firm controlled by Fortress called CWCapital Asset Management should have shared with creditors the colossal horde of fees it earned managing the housing development, but instead orchestrated self-serving arrangements to keep all the money to itself.
  • Fortress and CWCapital, meanwhile, say they collected fees outlined and in accordance with the contract. They say Och-Ziff bought into the investment years after the alleged breaches occurred, with sole intention of filing a lawsuit via Cobalt and claiming financial injury after the fact. Moreover, they say, Och-Ziff fraudulently misrepresented itself when purchasing its stake, a deal CWCapital says it otherwise would have nixed.
  • The twin lawsuits are currently awaiting oral arguments in New York County Court.

Och-Ziff hasn’t previously been publicly connected to the litigation.

When the initial action against Fortress was filed in December 2017, Och-Ziff was nowhere to be found in the suit. Rather, Cobalt, the issuer of the passive investment vehicle in which Och-Ziff bought a stake in 2016, filed the claim.

But subsequent court filings allege Och-Ziff orchestrated the lawsuit after taking a stake in Cobalt. Both entities were represented by Quinn Emanuel Urquhart & Sullivan, though in Fortress’ countersuit Och-Ziff is represented by Latham & Watkins.

Cobalt lawyers deny the entity is acting as a “puppet” of Och-Ziff.

Fortress is represented by Venable.

The legal claims at play are complex, even by the standards of commercial-real-estate litigation, according to Scott Tross, a partner at the law firm Herrick Feinstein and an expert in commercial-real-estate litigation and disputes.

“They’re not plain vanilla cases,” Tross said. “They’re the product of two very creative law firms.”

Tross said there may be some merit to the notion that CWCapital, as the “special servicer” managing the property for creditors, should have shared fees, a practice he said has become widespread over roughly the past five years.

But it’s not clear if Och-Ziff will be permitted to make the claim through the investment vehicle, given it arrived so late to the party and seemingly with the express purpose of filing suit. The investment vehicle it bought into in 2016 — a Cayman Islands-based shell company that buys up mortgage securities and issues notes to investors as a collateralized debt obligation, or CDO — has been around for more than a decade.

“The CDO has been around for a long time,” Tross said. “After almost a decade of being in existence, they all of a sudden show up and want to assert claims based on conduct that occurred really well before they had any financial stake. It’s a serious issue whether they will have financial standing to assert the claims they are asserting.”

Och-Ziff may have come late to the party, but if they wind up with any substantial portion of the $1 billion in fees at stake in the litigation, it would be a giant boon to the firm, which, like many hedge funds, has fallen on hard times of late.

Profits have cratered, and Och-Ziff was in danger in late 2018 of being delisted from the New York Stock Exchange as its stock threatened to dip below $1 a share.

For Fortress, which was acquired by SoftBank in 2017, this is just the latest in a series of legal salvos it’s faced connected to its subsidiaries’ handling of the StuyTown development.

Spokespeople and lawyers for the competing parties declined to comment for this story.

The backstory

It’s helpful to understand how the StuyTown property, which was built in the 1940s and catered toward returning World War II veterans, has changed hands in the past decade to better grasp what these two hedge funds are fighting over.

In 2006, near the peak of the real-estate bubble, Tishman Speyer and BlackRock bought StuyTown for $5.4 billion, then the largest real-estate deal in US history. But the investment went belly-up as plans to juice revenues met roadblocks and the global property market nosedived, and the investors defaulted on the $3 billion securitized mortgage in 2010.

CWCapital was tapped as the special servicer in charge of managing the property and representing the myriad creditors who were scrambling to recoup their money following the default. Fortress acquired CWCapital that same year for $300 million.

Eventually, as Manhattan property prices soared and rental income from StuyTown increased, CWCapital brokered a deal to sell the development to Blackstone in 2015 for $5.3 billion.

Along the way, CWCapital earned hundreds of millions on the special-servicing assignment from a variety of fees, according to court filings, including $615 million in penalty interest between the default in 2010 and the sale five years later. Such fees are contractual and normal, according to Tross, though they’re eye-popping in this case given the size and circumstances of the deal.

Trouble with Och-Ziff began brewing a year later.

Och-Ziff enters the fray

In August 2016, Och-Ziff bought a minority stake in a CDO called Cobalt VR, which was set up as a passive investment fund with no employees in 2007. It was managed by CWCapital and held $3.4 billion in commercial mortgage-backed securities, including a substantial portion of junior StuyTown debt. (Och-Ziff had also previously bought senior notes in the CDO when it was initially launched in 2007, which had been repaid, according to court filings.)

As the collateral manager for the CDO, CWCapital was essentially its investment adviser and had the ability to appoint the lucrative special-servicer jobs, which it gave to its similarly named affiliates. This arrangement was established from the outset in 2007 and agreed upon by all investors in the CDO, according to Fortress’ court arguments.

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In December 2017, not long after Och-Ziff bought notes from Cobalt — which over the course of the previous 10 years hadn’t raised complaints about CWCapital’s actions — the CDO issuer filed suit seeking a portion of the $1.1 billion CWCapital reaped from StuyTown, as well as some other properties, among other claims.

The complaint, originally filed in federal court and dismissed for lack of jurisdiction, was refiled in New York County Court last summer.

“Had CWC Manager been acting to benefit Cobalt Vr (rather than to line its own pockets), most of those funds would have rightfully gone to Cobalt Vr,” the complaint reads. In addition to damages, it wants to kick CWCapital out as the representative that designates a special servicer and install a new one.

Fortress says in court documents that CWCapital’s actions complied with the design and covenants of the CDO and that Cobalt filed the suit 10 years after inception only at the behest of Och-Ziff, writing: “This is a hedge fund litigation play … It would be inequitable to allow an after-the-fact litigation play to rewrite the terms of a deal that closed in 2007 and has been administered since then in accordance with the plain terms of those deals, as understood and interpreted by all the relevant parties.”

Lawyers for Cobalt deny accusations that it’s “a mere puppet of Och-Ziff.”

Fortress then filed a suit of its own in the spring of 2018 against Cobalt and Och-Ziff, arguing the hedge fund’s 2016 purchase should be rescinded because, among other claims, it “fraudulently concealed its true intentions” to flout the covenants of the CDO and that it was in compliance with US laws, when it was in the process of settling multimillion-dollar violations with the US government.

Fortress says in the suit it never would have given its consent for the deals otherwise; Och-Ziff says in its motion to dismiss that the claims are meritless.

Last July, a judge denied Cobalt’s motion for preliminary injunction, noting in the ruling that “issues abound as to Cobalt’s authority.” The Appellate Division affirmed that ruling last week.

While that ruling doesn’t necessarily foreshadow the final outcome of these cases, the court’s analysis didn’t favor Cobalt’s claim, Tross said, adding that Cobalt’s standing in the case remains a significant issue.

Both of the cases are awaiting oral arguments.

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