Fund managers accuse Allianz of paying $6 billion in US fraud case

NEW YORK / MUNICH, May 17 (Reuters) – The German company Allianz (ALVG.DE) It has agreed to pay more than $6 billion and the US asset management unit will plead guilty to securities fraud due to the collapse of Alpha Structured Funds early in the COVID-19 pandemic.

Allianz’s settlements with the US Department of Justice and the US Securities and Exchange Commission are among the largest in corporate history, and dwarf previous corporate settlements obtained under President Joe Biden’s administration.

Gregoire Tournant, the former chief investment officer who created and supervised the now-defunct Structured Alpha funds, has also been charged with fraud, conspiracy and obstruction, while two portfolio managers have filed related guilty pleas.

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With just over $11 billion in assets under management, Alpha structured funds lost more than $7 billion as COVID-19 hit the markets in February and March 2020.

Prosecutors said Allianz Global Investors US LLC misled teachers’ pension funds, clergy, bus drivers, engineers and other investors by downplaying the funds’ risk, and exposed “significant loopholes” in its monitoring of funds. Read more

Investors were told that the funds used options included hedges to protect against a market crash, but the plaintiffs said fund managers repeatedly failed to buy out those hedges.

Prosecutors said the managers also inflated the funds’ performance to boost their pay, charging 30% of returns in excess of relevant benchmarks as performance fees.

Court papers showed Tournant’s pay was the highest or second in his unit from 2015 to 2019, including $13 million in 2019.

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At a news conference, US Attorney Damian Williams said in Manhattan that more than 100,000 investors were affected, and that while prosecutors rarely bring criminal charges against companies, it was “the right thing to do.”

He said investors “received the promise of a relatively safe investment with strict risk controls designed to weather a sudden storm, such as a massive crash in the stock market.” “Those promises were lies… Today is the day of accountability.”

Blame defense lawyers said

Also known for its insurance operations, Allianz is among Germany’s most popular brands and Olympic sponsor.

Meanwhile, the square of the same name near its headquarters in Munich, Bayern Munich, houses one of the most famous football teams in the world.

Tuesday’s settlement showed Allianz will pay a criminal fine of $2.33 billion, $3.24 billion in compensation and forfeiture of $463 million, court papers show.

Williams said the fine has been significantly reduced due to the compensation offered by Allianz to investors.

However, the compensation is nearly double the $3.3 billion that the Justice Department collected in corporate fines for the whole of 2021.

Allianz also agreed to a civil fine of $675 million for its settlement with the Securities and Exchange Commission, one of the largest penalties imposed by that regulator since the collapse of Enron Corp and WorldCom Inc two decades ago.

The company previously set aside sufficient funds to cover the settlement. While the disaster frustrated shareholders and prompted some of Allianz’s top managers to cut their salaries, group shares closed 1.7% higher in Germany after total payouts broadly matched their provisions.

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Two former Alpha portfolio managers Stephen Bond-Nelson and Trevor Taylor have agreed to plead guilty to fraud and conspiracy charges and entered into cooperation agreements.

Tornant, who joined Allianz in 2002 and founded the trusts three years later, surrendered to authorities Tuesday morning in Denver and, according to his attorney, will resist the charges.

“Greg Tornant has been unfairly targeted,” his attorneys, Seth Levine and Daniel Alonso, said in a joint statement. “We have faith that the justice system will reject this ill-considered and ill-considered attempt by the government to criminalize the impact of the unprecedented market disruption caused by the coronavirus.”

Bond’s lawyers, Nelson and Taylor, declined to comment immediately.

VOYA Partnership

Allianz’s guilty plea includes a 10-year ban on Allianz Global Investors providing advisory services to US-registered investment funds.

As a result, Allianz agreed to transfer about $120 billion in investor assets to Voya Financial Inc (VOYA.N)for a stake of up to 24% in Voya’s investment management unit.

Regulators said the misconduct included a situation in which he and Bond-Nelson altered more than 75 risk reports before sending them to investors, to reduce expected losses in market stress scenarios.

The Securities and Exchange Commission said the expected losses in a single market crash scenario were changed to 4.15% from the actual 42.15%, simply by removing “2.”

Alleged censorship lapses by Allianz included not making sure Tournant was using his promised hedges, even though only people in his group knew about the misconduct prior to March 2020.

“No compliance system is perfect, but the controls at AGI didn’t even stand a chance,” Williams said.

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Prosecutors added that Bond-Nelson, at Tornant’s direction, also lied to Allianz’s internal lawyers after the company learned of the revised reports and the SEC investigation.

“Unfortunately, we have recently seen a series of cases in which derivatives and complex products have harmed investors across market sectors,” SEC President Gary Gensler said in a statement.

Investors have also filed more than two dozen lawsuits against Allianz over Alpha Structure Funds.

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Additional reporting by Jonathan Stempel in New York, Tom Sims and Alexander Hubner in Munich; Additional reporting by Luke Cohen in New York. Editing by Chizu Nomiyama and Thomas Janowski

Our criteria: Thomson Reuters Trust Principles.

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