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NEW YORK/MUNICH (Reuters) -Germany’s Allianz (ETR:ALVG) SE agreed to pay more than $6 billion and its U.S. asset management unit will plead guilty to criminal securities fraud over the collapse of its Structured Alpha funds early in the COVID-19 pandemic.
Allianz’s settlements with the U.S. Department of Justice and U.S. Securities and Exchange Commission are among the largest in corporate history, and dwarf earlier corporate settlements obtained under President Joe Biden’s administration.
Gregoire Tournant, the former chief investment officer who created and oversaw the now-defunct Structured Alpha funds, is also being indicted for fraud, conspiracy and obstruction, while two portfolio managers entered related guilty pleas.
Once with more than $11 billion of assets under management, the Structured Alpha funds lost more than $7 billion as the spread of COVID-19 roiled markets in February and March 2020.
Prosecutors said Allianz Global Investors US LLC misled teacher pension funds, clergy, bus drivers, engineers and other investors by understating the funds’ risks, and displayed “significant gaps” in its monitoring of the funds.
Investors were told the funds employed options that included hedges to protect against market crashes, but prosecutors said the fund managers repeatedly failed to buy those hedges.
The managers also inflated fund performance to boost their own pay, collecting 30% of excess returns over relevant benchmarks as a performance fee, prosecutors said.
Tournant’s pay was the highest or second-highest in his unit from 2015 to 2019, including $13 million in 2019, court papers show.
At a news conference, U.S. Attorney Damian Williams in Manhattan said more than 100,000 investors were harmed, and that while U.S. prosecutors rarely bring 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,” he said. “Those promises were lies…. Today is the day for accountability.”
BLAME COVID, DEFENDANT’S LAWYERS SAY
Also known for its insurance operations, Allianz is among Germany’s most recognizable brands and an Olympic sponsor.
Its namesake arena near its Munich headquarters, meanwhile, houses Bayern Munich, one of world’s best-known soccer teams.
Tuesday’s settlement calls for Allianz to pay a $2.33 billion criminal fine, make $3.24 billion of restitution and forfeit $463 million, court papers show.
Williams said the fine was significantly reduced because of the compensation Allianz offered to investors.
Even so, the payout is close to twice the $3.3 billion that the Justice Department collected in corporate penalties for all of 2021.
Allianz also agreed to a $675 million civil fine to settle with the SEC, one of that regulator’s largest penalties since the implosions of Enron Corp and WorldCom Inc two decades ago.
The company previously set aside enough money to cover the settlement. While the debacle had frustrated shareholders and prompted some top Allianz managers to cut their own pay, the group’s shares closed up 1.7% in Germany after the total payout broadly matched its provisions.
Two former Structured Alpha portfolio managers, Stephen Bond-Nelson and Trevor Taylor, agreed to plead guilty to fraud and conspiracy charges and entered cooperation agreements.
Tournant, who joined Allianz in 2002 and founded the funds three years later, surrendered to authorities on Tuesday morning in Denver, and according to his lawyers will fight the charges.
“Greg Tournant has been unfairly targeted,” his lawyers Seth Levine and Daniel Alonso said in a joint statement. “We have faith that the justice system will reject this meritless and ill-considered attempt by the government to criminalize the impact of the unprecedented, COVID-induced market dislocation.”
Lawyers for Bond-Nelson and Taylor declined immediate comment.
VOYA PARTNERSHIP
Allianz’s guilty plea carries a 10-year ban on Allianz Global Investors’ providing advisory services to U.S.-registered investment funds.
As a result, Allianz agreed to move about $120 billion of investor assets to Voya Financial (NYSE:VOYA) Inc, in exchange for up to a 24% stake in Voya’s investment management unit.
Regulators said the misconduct included a situation where he and Bond-Nelson altered more than 75 risk reports before sending them to investors, to reduce projected losses in market-stress scenarios.
The SEC said projected losses in one market crash scenario were changed to 4.15% from the actual 42.15%, simply by removing the “2.”
Allianz’s alleged oversight lapses included a failure to ensure that Tournant was using his promised hedges, though only people in his group knew of the misconduct before March 2020.
“No compliance system is perfect, but the controls at AGI didn’t even stand a chance,” Williams said.
Bond-Nelson, at Tournant’s direction, also lied to Allianz’s in-house lawyers after the company learned about the altered reports and the SEC probe, prosecutors added.
“Unfortunately, we’ve seen a recent string of cases in which derivatives and complex products have harmed investors across market sectors,” SEC Chair Gary Gensler said in a statement.
Investors have also filed more than two dozen lawsuits against Allianz over the Structured Alpha funds.
