Germany’s Allianz SE (ALVG.DE) accepted to pay over $6 billion and its U.S. asset management unit accepted charges of criminal securities fraud over the collapse of a group of investment funds early in the COVID-19 pandemic.
Allianz’s settlements with the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) are some of the largest in corporate history, and the smallest earlier settlements acquired under President Joe Biden’s leadership.
Gregoire Tournant, the former chief investment officer who created and managed the now-defunct Structured Alpha funds, was also charged with conspiracy, fraud, and obstruction, while two other previous portfolio managers placed related guilty pleas.
Formerly with assets exceeding $11 billion under management, the Structured Alpha funds registered a loss of more than $7 billion as COVID-19 disrupted markets in February and March 2021.
Allianz Global Investors US LLC was blamed for misleading pension funds for teachers, religious groups, engineers, bus drivers, and others by downplaying the funds’ risks and having “significant gaps” in its oversight.
Investors were told that the funds used options that involved hedges to protect against market collapses, but prosecutors said the fund managers constantly failed to buy those hedges.
Prosecutors said the managers also increased fund results to raise their pay through performance fees, with Tournant, 55, fetching $13 million in 2019 and becoming his unit’s best or second-best -paid employee from 2015 to 2019.
Investigators said the cover-ups started in 2014 and helped Allianz make more than $400 million of net profit.
U.S. Attorney Damian Williams in Manhattan said during a news conference that more than 100,000 investors were hurt, and that while American prosecutors hardly submit criminal charges against companies it was “the right thing to do.”
“Investors were promised a relatively safe investment with strict risk controls designed to weather a sudden storm, like a massive collapse in the stock market. Those promises were lies… Today is the day for accountability.”
Also popular for its insurance operations, Allianz is among Germany’s most distinguishable brands and an Olympic sponsor.
The Allianz arena close to its Munich headquarters, meanwhile, houses Bayern Munich, one of the world’s renowned soccer teams. The settlement demands Allianz to make $3.24 billion of restitution, pay a $2.33 billion criminal fine, and forfeit $463 million, court papers show.
Williams said the fine was greatly lowered because Allianz compensated the investors. However, the payout is almost double the $3.3 billion in corporate penalties that the Justice Department collected for the entire 2021.
The guilty plea was entered by an Allianz lawyer at a hearing before U.S. District Judge Loretta Preska in Manhattan. Allianz also agreed to a $675 million civil fine from by the SEC, one of that regulator’s biggest penalties since WorldCom Inc and Enron Corp collapsed two decades ago.
The company’s shares closed with a 1.7% increase in Germany, with the payout generally equal to the reserves that the company previously put aside. Tournant, of Basalt, Colorado, turned himself in to the authorities on Tuesday morning.
The U.S.-French citizen appeared shortly after in Denver federal court and was set free after accepting to post a $20 million bond. A trial was set for June 2 in New York.
Lawyers of Tournant, Daniel Alonso and Seth Levine, said the investor losses were “regrettable” but did not stem from a crime.
The lawyers commented in a joint statement:
“Greg Tournant has been unfairly targeted [in a] meritless and ill-considered attempt by the government to criminalize the impact of the unprecedented, COVID-induced market dislocation.”
The other two portfolio managers – Trevor Taylor, 49, of Miami, and Stephen Bond-Nelson, 51, of Berkeley Heights, New Jersey – owned up to the charges of conspiracy and fraud, and agreed to cooperate with prosecutors. Their lawyers refused to issue an immediate comment.
Allianz’s guilty plea bears a 10-year ban on Allianz Global Investors’ giving advisory services to U.S.-registered investment funds.
As a result of this fiasco, Allianz intends to move close to $120 billion of investor assets to Voya Financial Inc (VOYA.N) in return for a stake of up to 24% in Voya’s investment management unit. It looks forward to a final agreement in the coming weeks.
Regulators said the misconduct included an incident where Bond-Nelson and Tournant altered more than 75 risk reports before forwarding them to investors. The SEC said estimated losses in one market collapse scenario were changed from the actual 42.15% to 4.15%, simply by removing the “2.”
Allianz’s reported oversight lapses included negligence to confirm Tournant was hedging, though prosecutors said only people in his group were aware of the misconduct before March 2021.
“No compliance system is perfect, but the controls at AGI didn’t even stand a chance.”
Bond-Nelson, at Tournant’s instruction, also misled Allianz’s in-house lawyers after the company came to know about the SEC probe and the altered reports, prosecutors added.
SEC Chair Gary Gensler said in a statement:
“Unfortunately, we’ve seen a recent string of cases in which derivatives and complex products have harmed investors across market sectors.”
Investors have also submitted more than twelve lawsuits against Allianz over the Structured Alpha funds.