German insurance and asset management giant Allianz has agreed to pay around $6 billion over the collapse of its Structured Alpha funds early in the Covid-19 pandemic, and its US asset management unit will plead guilty to criminal securities fraud.
The settlements of subsidiary Allianz Global Investors U.S. LLC (AGI) with the US Department of Justice (DoJ) and US Securities and Exchange Commission (SEC) are among the largest in corporate history.
The DoJ said Allianz’s former chief investment officer Gregoire Tournant has been charged “with conspiracy, securities fraud, investment adviser fraud, and obstruction of justice offenses in connection with a scheme to defraud investors.”
The DoJ unsealed guilty pleas from portfolio managers Trevor Taylor and Stephen Bond-Nelson “in connection with their respective roles in the scheme.”
Both are cooperating with the US Government.
Damian Williams, United States Attorney for the Southern District of New York, Lisa Monaco, Deputy Attorney General of the United States, and Daniel Brubaker, Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service, also announced a plea agreement in which “AGI will plead guilty to securities fraud in connection with this fraudulent scheme, and pay more than $3 billion in restitution to the innocent victims of this fraud, pay a criminal fine of approximately $2.3 billion, and forfeit approximately $463 million to the Government.”
Williams said: “As alleged, Gregoire Tournant and his co-conspirators lied to investors and secretly exposed them to substantial risk in order to line their own pockets and those of their employer, AGI.
“Pension funds for so many retirees, religious organizations, and essential workers – from laborers in Alaska, to teachers in Arkansas, to bus drivers and subway conductors here in New York City – invested with AGI because they were promised a relatively safe investment with strict risk controls.
“But AGI, the ‘master cop’ that Tournant claimed was watching over his shoulder, making sure that he adhered to his promises, was asleep on the beat.
“And when the storm came in March 2020, when the COVID crash hit, these investors got soaked and lost billions.
“Today’s actions are further evidence that this office is not asleep on the beat and that with our law enforcement partners we will act swiftly to protect investors and bring white collar criminals to justice.”
The DoJ said: “As alleged, Tournant and his co-conspirators misled these investors into believing that the funds were protected from a sudden stock market crash with particular hedges.
“But in late 2015, as the cost of those promised hedges increased, Tournant decided to lie and secretly buy cheaper hedges that provided much less protection to investors.
“As alleged, Tournant and his co-conspirators also provided investors with altered documents that were sent to investors to hide the true riskiness of the funds’ investments, including that they were buying cheaper hedges.
“In March 2020, following the onset of market dislocations brought on by the Covid-19 pandemic, the funds lost in excess of $7 billion in market value, including over $3.2 billion in principal, faced margin calls and redemption requests, and ultimately were shut down.
“More than 100 institutional investors, representing more than one hundred thousand individuals, were victims of this scheme.
“These institutional investors included, among others, pension funds for teachers in Arkansas, laborers in Alaska, bus drivers and subway conductors in New York City, as well as religious organizations, engineers, and other individuals, universities, and charitable organizations across the United States.
“The scheme alleged was an egregious, long-running, and extensive fraud that went undetected for years.
“It occurred at a very profitable component of AGI – one that accounted for 25% of AGI’s revenue in recent years, which amounted to hundreds of millions of dollars.
“As alleged, one of the ways Tournant carried out the fraud was by marketing the fact that he worked for a well-respected financial institution, AGI, which is a part of the Allianz SE family.
“Allianz is one of the world’s largest financial services companies and one of the world’s largest insurance companies.
“Tournant touted the protections provided by the funds’ position within the global Allianz corporate structure, calling Allianz a ‘master cop’ that would ensure that Tournant followed the risk guidelines promised to investors.
“Despite Tournant’s claim that Allianz acted as a ‘master cop’ looking over his shoulder, no one at AGI or Allianz was verifying that Tournant and his colleagues were actually adhering to the investment strategies promised to investors.
“No risk or compliance personnel at AGI verified, attempted to verify, or were responsible for verifying that Tournant and his colleagues were purchasing hedging positions within the range that was represented to investors.
“Much of this historic fraud was made possible because AGI’s control environment was not designed to verify that Tournant and his co-conspirators were telling investors the truth.
“Because AGI, a registered investment adviser, failed to provide meaningful oversight, Tournant and his co-conspirators were able to deceive investors about the risks they were taking with their money.
“In addition, as alleged, in the summer of 2020, after the onset of the pandemic and in order to cover up the fraudulent scheme, Tournant attempted to obstruct an investigation by the U.S. Securities and Exchange Commission (the SEC) into the circumstances that led to the losses in March 2020.”
Allianz said: “Allianz SE announces that its indirect subsidiary Allianz Global Investors U.S. LLC (AGI U.S.) today has entered into settlements with the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) in connection with the Structured Alpha matter.
“Pursuant to the DOJ resolution, AGI U.S. will plead guilty to one count of criminal securities fraud, and the SEC resolution establishes that AGI U.S. violated relevant U.S. securities laws.
“These settlements fully resolve the U.S. governmental investigations of the Structured Alpha matter for Allianz.
“The Statement of Facts accompanying the DOJ resolution states that the criminal misconduct regarding the Structured Alpha funds was limited to a handful of individuals in the Structured Products Group of AGI U.S. who are no longer employed by the company, and that the DOJ’s investigation did not otherwise find any knowledge of, or participation in, the misconduct at Allianz SE or any other entity of the Allianz Group.
“The guilty plea will result in the disqualification of AGI U.S. from advising U.S. registered mutual funds and certain type of pension funds after expiry of a temporary relief period.
“Allianz expects the SEC to issue waivers later today that will ensure that AGI U.S.’s resolution with the DOJ does not impact PIMCO and Allianz Life’s business activities.
“Allianz SE has signed a Memorandum of Understanding to enter into a long-term strategic partnership including a transition of AGI U.S.’s investment management activities with currently appr. USD 120 billion in assets under management in scope to a new partner in the U.S.
“The transferred activities do not include any part of the Structured Products Group, which has previously been dissolved.
“As consideration for the transfer, Allianz Global Investors would receive a stake in the enlarged entity and long-term, global, cross-distribution agreements.
“Execution of definitive agreements is targeted within the next weeks.
“In connection with the settlements AGI U.S. will pay forfeiture of USD 174.3 million to the DOJ, and USD 675 million as a penalty to the SEC that may be used in some part as compensation for investors.
“Other monetary obligations addressed by the DOJ and the SEC have been or will be satisfied by the approximately USD 5 billion in compensation paid to Structured Alpha investors.
“Any such amounts payable and the USD 5 billion of compensation have already been reflected in the provisions set for 2021 and Q1 2022.”