Allianz subsidiary pleads guilty to defrauding investors in $6 billion settlement
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The U.S. investment divisions have pleaded guilty and agreed to pay about $6 billion in fines and restitution for a scheme to defraud investors in funds that imploded in the March 2020 market sell-off.
Allianz Global Investors US pleaded guilty to one count of securities fraud and admitted it lacked internal controls and oversight for a series of private investment funds and made false and misleading statements to investors , according to a plea agreement reached with federal prosecutors in New York. The US subsidiary has also settled civil fraud claims brought by the Securities and Exchange Commission.
The $6 billion will resolve the government’s criminal and civil claims, as well as those of defrauded investors. The agreement is among the most significant criminal resolutions between a financial institution and the Department of Justice in recent years.
Settlements draw a line under one of the biggest early casualties of the market crash caused by the Covid-19 pandemic. Investors, including the pensions that ran the retirement plans for Arkansas teachers and New York City subway workers, lost billions on the funds.
Allianz, in a statement, pointed to the Justice Department’s findings that the criminal misconduct was limited to a handful of individuals who were no longer with the company. He said the Justice Department investigation found no misconduct in other parts of Allianz.
Three former employees of Allianz Global Investors have also been charged in the scheme. Two pleaded guilty.
Grégoire Tournant, who led the investment group responsible for the funds’ large losses, has been charged with several counts, including securities fraud and investment adviser fraud. Mr. Tournant surrendered to authorities in Denver on Tuesday morning.
Lawyers for Mr. Tournant said he was unfairly targeted and was on extended sick leave during the relevant market events. “We are confident that the justice system will reject this unwarranted and reckless attempt by the government to criminalize the impact of the unprecedented COVID-induced market dislocation of March 2020,” they said in a statement.
Trevor Taylor, co-lead portfolio manager of Mr Tournant’s funds, along with a third group fund manager, Stephen Bond-Nelson, have agreed to plead guilty to charges of conspiracy to commit securities fraud securities, as well as securities fraud and investment-advisor fraud. Mr Bond-Nelson also agreed to plead guilty to a charge of conspiracy to obstruct justice.
The SEC also sued the three men and charged them with civil securities fraud.
A lawyer for Mr Bond-Nelson declined to comment. A lawyer for Mr. Taylor did not respond to requests for comment.
The case centered on Allianz Global Investors’ Structured Alpha funds, which bet heavily on stock options that effectively sold insurance to other investors who were protecting themselves against a possible market sell-off. The strategy had been profitable during the quiet market period and Allianz executives had assured investors that they had hedged their own trades in case markets turned volatile.
“When there’s a catastrophic event, we may have to pay, much like an insurance company,” Tournant said in a May 2016 marketing video. protect against these catastrophic shocks, you might call them reinsurance.”
As of 2020, Mr. Tournant’s Structured Alpha funds managed over $11 billion in assets.
The strategy faced a serious test in March, when the coronavirus swept the world and sparked market panic over the effects of the pandemic on the economy. Stocks fell sharply, credit markets seized up and volatility hit an all-time high.
As options contracts changed dramatically, Allianz executives scrambled to restructure their deals. They struggled to keep up; the stock market was collapsing at a rate managers had not expected.
Structured Alpha funds lost more than $7 billion in March 2020, according to the government. On March 25 of that year, Allianz informed investors that two of its funds would be liquidated.
Within months, investors in the funds began suing Allianz, and the SEC had launched an investigation into the losses.
On Tuesday, Allianz said it would transfer most of Allianz Global Investors’ U.S. business to Voya Investment Management in exchange for a 24% stake in the combined fund manager.
Following the transaction, Allianz Global Investors would no longer operate as an investment adviser for US mutual funds, a spokeswoman said. A separate unit will continue to advise on private funds in the United States, she said. Allianz has also agreed to distribute Voyait is
funds outside the United States
Allianz said his guilty plea would disqualify Allianz Global Investors from advising US mutual funds and certain pensions. The company said it expects the SEC to issue waivers on Tuesday ensuring the deal will not affect Allianz Life or its other U.S. fund manager, Pacific Investment Management Co.
Prosecutors said the Allianz scheme lasted from at least 2014 to March 2020, with Mr. Tournant collecting more than $60 million in compensation during that time. He and his team misled investors about the risks the funds took and how they produced their returns, prosecutors alleged. Structured Alpha managers also misrepresented the hedging strategies they used to protect fund assets, prosecutors said.
The government also alleged that Mr. Tournant sought to obstruct the SEC’s investigation into the losses by ordering Mr. Bond-Nelson to lie to the regulator.
The SEC, in its case, alleged that Messrs. Bond-Nelson and Tournant had manipulated portfolio stress test reports sent to clients that showed their estimated losses in certain dire scenarios. In one instance, Mr. Tournant cut the projected loss under a stock market crash simulation from -42.15% to -4.15%, according to the SEC.
The men also misrepresented daily performance results sent to some investors, making returns look better than they were, the SEC said.
Allianz said last week it had set aside an additional $2 billion for legal costs related to settlements with investors and discussions with the US government. This was in addition to the roughly $4 billion it had already provisioned.
—Dave Michaels contributed to this article.
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