Allianz to plead guilty and pay $5.8bn for fund collapse

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Allianz to plead guilty and pay $5.8bn for fund collapse

An Allianz affiliate has agreed to plead guilty to fraud and pay $5.8 billion in penalties and restitution after a group of relatively low-risk mutual funds collapsed in the wake of market gyrations during the pandemic.

Allianz Global Investors USAa New York investment adviser wholly owned by the German insurance giant, will plead guilty to a single count of securities fraud and pay, along with its parent company, more than $5 billion to victims. The full payment, including a $1 billion fine to the US Securities and Exchange Commission, is covered by provisions the company has already taken, he said.

Gregoire Tournant, a former executive at the firm, was arrested Tuesday and charged separately for his role in the alleged scheme to defraud investors, Manhattan US Attorney Damian Williams said in a statement.

Tournant, the former chief investment officer and co-portfolio manager of Structured Alpha Funds, and others exaggerated the level of independent oversight AGI was providing, misrepresented hedging and other risk-mitigation strategies, and altered documents to hide the funds’ risk, according to reports. tax.

“As a result of this scheme to defraud, investors’ funds were exposed to greater risk than promised, and investors were deprived of information about the true risks to which their investments were exposed,” according to Tournant’s indictment. .

The agreement, under which AGI will plead guilty to a single count of securities fraud, requires the company to forfeit $463 million and pay $3.2 billion in restitution to victims of the fraud, as well as a $2.3 billion fine. . It will obtain a credit for US$1.9 billion that has already been paid to the victims.

Allianz had set aside $5.9 billion to settle lawsuits and government investigations linked to the funds. The charges are a “fair estimate” of exposure, the company said earlier this month. All of the charges announced Tuesday are covered by the provisions, an Allianz spokesman said.

AGI is due for the forfeiture payment on Wednesday and will make restitution payments within a week into an escrow account to be distributed to victims.

‘Master Police’

“No one at AGI US or Allianz was verifying that Tournant and his colleagues were actually adhering to the investment strategies promised to investors,” according to Tournant’s indictment. “For example, no risk or compliance personnel at AGI US verified, attempted to verify, or were responsible for verifying that Tournant and his colleagues were buying hedging positions within the range that was represented to investors, or adhering to other risk mitigation strategies. agreed risks, including those specifically promised to the largest investor in the funds.

Tournant told investors that Allianz was “one of the largest and most conservative insurance companies in the world” and was monitoring every position he assumed as a “master police officer,” according to the court filing.

Structured Alpha hedge funds were designed to provide protection against a market downturn, but they took a heavy hit during the tumultuous early days of the pandemic. Following a controversial options strategy, the Florida-based funds lost between 49% and 97% of their value during the first quarter of 2020. Investors said they lost billions of dollars. Allianz liquidated two of the vehicles in March 2020 and has been undoing the others.

The pension funds and other investors suing AGI say it fared worse than other funds hit by the start of the pandemic and say the company breached its fiduciary duty by misleading them about how Structured Alpha was investing their money.

attempt to obstruct

Prosecutors say Tournant also tried to obstruct a government investigation.

“In the summer of 2020, after the start of the pandemic and to avoid detection of the fraudulent scheme, Gregoire Tournant, the defendant, obstructed a US Securities and Exchange Commission (the ‘SEC’) investigation into the circumstances leading to the losses in March 2020. Among others, Tournant repeatedly directed Stephen Bond-Nelson, a portfolio manager for the funds, to lie to the SEC.”

In late 2015, Tournant was frustrated with the cost of hedging, which was hurting returns. The fund “abandoned the promised hedging strategy and instead began buying cheaper hedges that were more out of the money and therefore less protective in the event of a market downturn,” the indictment says. That change was not disclosed to investors, prosecutors allege.

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