German insurance company Allianz will pay more than $6 billion and its investment subsidiary agreed to plead guilty to a securities fraud charge over the implosion of a group of hedge funds that wiped out the investments of public pensions, religious organizations, foundations and other investors.
The investment advisory firm at Allianz that had managed the hedge funds failed to stop a fraud scheme that came to light after the funds collapsed early in the pandemic, according to court files filed Tuesday by federal prosecutors.
Prosecutors said three former Allianz portfolio managers, including the funds’ former chief investment officer, misled the funds’ investors by hiding the risk they were running. The former director, Gregoire Tournant, was also accused of concealing the plan: he was indicted on a range of criminal charges, including conspiracy, securities fraud and obstruction of justice.
The two other portfolio managers, Stephen Bond-Nelson and Trevor Taylor, agreed in February to plead guilty to securities fraud, among other things, according to court documents released Tuesday.
Allianz said in response to his plea that it would no longer be allowed to advise certain types of funds in the United States, while also announcing that it had reached a preliminary agreement to transfer management of approximately $120 billion in assets. to a new partner. Allianz said it was in talks with Voya Financial, a New York-based company, and an agreement would be finalized in the coming weeks.
The investigation focused on the company’s Structured Alpha Funds, which lost about $7 billion at the start of the Covid-19 pandemic as stocks suffered severe losses.
But the seeds of that destruction had been planted years earlier, authorities said. Investigators said Allianz officials misled investors about the risk level of the funds and altered documents to make the funds look safer than they were.
Federal prosecutors and the Securities and Exchange Commission opened the investigation after the funds fell apart, and Allianz has been telling investors for months that it had set aside billions of dollars to solve the case.
Allianz agreed to pay more than $5 billion in refunds to investors and more than $1 billion to the government to resolve the SEC investigation, the regulator said.
The indictment against Mr. Tournant said he had tried to obstruct the SEC investigation and repeatedly instructed one of the former portfolio managers to lie to investigators.
Mr Tournant, 55, voluntarily surrendered to authorities in Denver on Tuesday morning, according to a spokesman for Damian Williams, the US attorney for the Southern District of New York. In a statement, Mr Tournant’s lawyers Dan Alonso and Seth Levine called the case an “undeserved and misguided attempt by the government to criminalize the impact of the unprecedented Covid-induced market disruption of March 2020.”
The lawyers said Mr Tournant was on medical leave at the time and had suffered losses from the “significant investment” he had made in the fund.
“While the losses are regrettable, they are not the result of a crime,” the lawyers said.
In a statement, Allianz said the misconduct was “limited to a handful of individuals” who were no longer employed by the company.
Company representatives were expected to appear in federal court to introduce the guilty plea for its investment arm. Mr. Bond-Nelson and Mr. Taylor, the portfolio managers who agreed to plead guilty to their role in the settlement, also agreed to settle with the SEC
“Allianz Global Investors has admitted to defrauding investors for several years, hiding losses and downside risks of a complex strategy and failing to implement key risk controls,” said SEC Chairman Gary Gensler. “The victims of this misconduct include teachers, clergy, bus drivers and engineers, whose pensions are invested in institutional funds to support their retirement.”
According to researchers, the misrepresentations to investors started as early as 2016. That helped the company generate $400 million in net profits from managing the funds and large bonuses for the former portfolio managers.
A statement of fact, which is part of the pleas from Allianz’s investment firm, said the company has made “false and misleading statements to current and prospective investors who significantly underestimate the risks taken by the funds, as well as the level of overestimate independent risk. supervision of the funds.”
An investor pitch book misrepresented the steps the fund had taken to hedge its investments against losses, authorities said. The portfolio managers have also ‘flattened’ the returns generated by the funds to make their performance more predictable.
