Over the collapse of a group of investment funds early in the COVID-19 pandemic, Germany’s Allianz SE agreed to pay more than $6 billion and its U.S. asset management subsidiary pled guilty to felony securities fraud.
The settlements reached by Allianz with the US Department of Justice and the US Securities and Exchange Commission are among the largest in corporate history, dwarfing previous settlements reached by President Joe Biden’s administration.
Gregoire Tournant, the former chief investment officer who founded and ran the now-defunct Structured Alpha funds, was also charged with fraud, conspiracy, and obstruction, and two other former portfolio managers pleaded guilty to related charges.
The Structured Alpha funds, which had more than $11 billion in assets under management until COVID-19 roiled markets in February and March 2020, lost more than $7 billion.
Allianz Global Investors US LLC has been accused of understating the risks of pension funds for teachers, bus drivers, engineers, religious groups, and others, as well as having “serious holes” in its governance.
Investors were promised that the funds used options such as hedges to protect against market crashes, but prosecutors claim that the fund managers neglected to buy the hedges on many occasions.
According to prosecutors, the managers faked fund outcomes to raise their pay through performance fees, with Tournant, 55, earning $13 million in 2019 and becoming his unit’s highest or second-highest-paid employee from 2015 to 2019.
The deceptions began in 2014, according to investigators, and enabled Allianz to earn more than $400 million in net profit.
U.S. Attorney Damian Williams stated at a news conference in Manhattan that more than 100,000 investors had been injured and that while American prosecutors rarely prosecute corporations, it was “the appropriate thing to do.”
“Investors were offered a relatively safe investment with rigorous risk controls meant to withstand a sudden storm, such as a large stock market collapse,” he explained. “Those assurances were false… Today is the day to take responsibility.”
COVID BLAMING
Allianz is a well-known German brand and an Olympic sponsor, well known for its insurance business.
Bayern Munich, one of the best-known soccer clubs in the world, is housed in its namesake stadium near its Munich headquarters.
According to court documents, Allianz will pay a $2.33 billion criminal fine, $3.24 billion in restitution, and forfeit $463 million as part of the settlement.
Because of Allianz’s restitution to investors, Williams said the penalties were drastically lowered.
Nonetheless, the payment is nearly double the $3.3 billion in corporate fines obtained by the Justice Department in 2021.
At a hearing before U.S. District Judge Loretta Preska in Manhattan, an Allianz lawyer submitted a guilty plea.
The SEC also imposed a $675 million civil fine on Allianz, one of the highest since Enron Corp and WorldCom Inc went bankrupt two decades ago.
In Germany, Allianz shares rose 1.7 percent, with the payout about matching the company’s previous reserves.
On Tuesday morning, Tournant, of Basalt, Colorado, surrendered to authorities.
The dual US-French citizen appeared briefly in federal court in Denver before being released after posting a $20 million bond. In New York, an arraignment has been scheduled for June 2.
Seth Levine and Daniel Alonso, Tournant’s lawyers, claimed the investment losses were “regrettable,” but not the result of a crime.
In a joint statement, the lawyers stated, “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 upheaval.”
Stephen Bond-Nelson, 51, of Berkeley Heights, New Jersey, and Trevor Taylor, 49, of Miami, decided to plead guilty to fraud and conspiracy and work with prosecutors. Their lawyers declined to react right away.
PARTNERSHIP WITH VOYA
Allianz Global Investors has been barred from providing advisory services to US-registered investment funds for the next ten years as a result of its guilty plea.
As a result, Allianz expects to transfer around $120 billion in investor assets to Voya Financial Inc in exchange for up to a 24% share in Voya’s investment management unit. It aims to reach a final agreement within the next few weeks.
Tournant and Bond-Nelson allegedly manipulated more than 75 risk papers before giving them to investors, according to regulators.
The SEC noted that by deleting the “2,” anticipated losses in one market meltdown scenario were reduced to 4.15 percent from 42.15 percent.
Prosecutors say only persons in Tournant’s group were aware of the misconduct before March 2020, and that Allianz’s control failings included failing to verify Tournant was hedging.
“No compliance system is perfect,” Williams said, “but the controls at AGI didn’t stand a chance.”
Bond-Nelson also misled Allianz’s in-house lawyers after the business heard about the tampered reports and the SEC investigation, according to prosecutors.
In a statement, SEC Chair Gary Gensler said, “Unfortunately, we’ve seen a recent string of cases in which derivatives and sophisticated products have hurt investors across market sectors.”
Over two dozen lawsuits have been brought against Allianz over the Structured Alpha funds by investors.
