Allianz Global Investors has admitted defrauding investors in a scam that only came to light following the Covid-induced March 2020 market crash.
The case involves three portfolio managers employed by AllianzGI US: lead manager Gregoire Tournant, along with Trevor Taylor and Stephen Bond-Nelson.
Between January 2016 and March 2020, they “materially misled” investors about the significant downside risks associated with the firm’s Structured Alpha funds. These complex options trading strategies were designed to generate profits by using a portfolio of debt or equity securities as collateral to purchase and sell options, primarily on the S&P 500.
The team sold at least 17 Structured Alpha funds to roughly 114 institutional investors. As of December 2019, they collectively held £11bn in AUM. Among the investors were pension funds for teachers, clergy, bus drivers and engineers.
According to the SEC, the defendants “manipulated numerous financial reports” to conceal the true risks associated with the funds, as well as their performance.
But Tournant went one step further and materially misrepresented to investors the levels at which hedging positions were put in place for the funds, the US watchdog added. He then pushed the team not to implement a risk mitigation programme he had agreed with its largest investor.
Failed attempts to cover it up
The funds performed relatively well until March 2020, when Covid-19 hit the markets and the backdrop soured. Investors lost billions, with some funds haemorrhaging 90%.
Each of the defendants received millions of dollars in bonuses over the course of the scam. AllianzGI US netted more than $550m in fees over the period.
As the dust settled, the trio attempted to cover their tracks. Tournant urged Bond-Nelson to lie to SEC investigators and plotted with Taylor about how best to deflect the unwanted regulatory attention.
Those efforts ultimately failed and, after initially working to confound the investigation, Bond-Nelson and Taylor cooperated with the SEC.
Scope of ‘massive fraud’ revealed
“Allianz Global Investors admitted to defrauding investors over multiple years, concealing losses and downside risks of a complex strategy, and failing to implement key risk controls,” said Gary Gensler, chair of the SEC.
“This case once again demonstrates that even the most sophisticated institutional investors, like pension funds, can become victims of wrongdoing. Unfortunately, we’ve seen a recent string of cases in which derivatives and complex products have harmed investors across market sectors.”
Gurbir Grewal, director of the SEC’s division of enforcement, added: “From at least January 2016 through March 2020, the defendants lied about nearly every aspect of a highly complex investment strategy they marketed to institutional investors, including pension funds managing the retirement savings of everyday Americans.
“While they were able to solicit over $11bn in investments by the end of 2019 and earn over $550m in fees as a result of their lies, they lost over $5bn in investor funds when the market volatility of March 2020 exposed the true risk of their products.
“Following the crash of the Structured Alpha funds, the defendants continued their pattern of deceit by lying to SEC staff and their fraud would have gone undetected if it weren’t for the persistence of SEC lawyers who pieced together the full scope of the massive fraud.”
10-year ban
AllianzGI US has admitted it violated federal securities laws and has agreed to a cease-and-desist order, a censure and penalties. It will pay $315.2m in disgorgement, $34m in prejudgement interest and a $675m penalty, a portion of which will be paid to victims.
In addition, and together with its parent Allianz SE, it will pay over $5bn in restitution to victims.
In parallel, criminal charges have been brought by the US attorney’s office for the southern district of New York against AllianzGI US, Tournant, Taylor and Bond-Nelson.
Of the four, Tournant is the only one not to agree to a guilty plea.
The SEC is seeking permanent injunctions, disgorgement plus interest, and penalties against Tournant, Taylor and Bond-Nelson. It is also seeking an officer and director bar against Tournant.
As a consequence of its guilty plea, AllianzGI US is automatically and immediately disqualified from providing advisory services to US registered investment funds for the next 10 years and will exit the business of doing so. It has been given 10 weeks to transfer its existing business to another provider.
