Allianz to pay $6 billion in US fraud case, fund managers charged

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NEW YORK/MUNICH, May 17 (Reuters) – Germany’s Allianz SE (ALVG.DE) has agreed to pay more than $6 billion and its U.S. asset management unit will plead guilty to criminal securities fraud following to the collapse of its Structured Alpha funds earlier this year. Covid19 pandemic.

Allianz’s settlements with the U.S. Department of Justice and the U.S. Securities and Exchange Commission are among the largest in the company’s history and eclipse previous corporate settlements achieved under the president’s administration. Joe Biden.

Grégoire Tournant, the former chief investment officer who created and oversaw the now defunct Structured Alpha funds, is also being charged with fraud, conspiracy and obstruction, while two portfolio managers have pleaded guilty.

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With over $11 billion in assets under management, Structured Alpha funds lost over $7 billion as the spread of COVID-19 rocked markets in February and March 2020.

Prosecutors said Allianz Global Investors US LLC misled pension funds for teachers, clergy, bus drivers, engineers and other investors into underestimating the funds’ risks and posted ” significant shortcomings” in its monitoring of funds. Read more

Investors were told that the funds used options that included hedges to protect against stock market crashes, but prosecutors said fund managers had repeatedly failed to buy those hedges.

Managers also inflated fund performance to increase their own compensation, collecting 30% of excess returns over relevant benchmarks as a performance fee, prosecutors said.

Tournant’s salary was the highest or second highest in his unit from 2015 to 2019, including $13 million in 2019, according to court documents.

At a news conference, U.S. Attorney Damian Williams in Manhattan said more than 100,000 investors had been harmed and that while U.S. prosecutors rarely bring criminal charges against companies, it was “the right things to do”.

Investors “have been promised a relatively safe investment with tight risk controls designed to weather a sudden storm, such as a massive stock market crash,” he said. “These promises were lies…Today is the day of accountability.”

BLAME COVID, SAY DEFENDANT’S LAWYERS

Also known for its insurance operations, Allianz is one of Germany’s best-known brands and an Olympic sponsor.

Its namesake arena near its Munich headquarters, meanwhile, is home to Bayern Munich, one of the most well-known football teams in the world.

Tuesday’s settlement calls for Allianz to pay a criminal penalty of $2.33 billion, compensate $3.24 billion and relinquish $463 million, according to court documents.

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

Even so, the payout is nearly double the $3.3 billion the Justice Department collected in fines for businesses for all of 2021.

Allianz also agreed to a $675 million civil penalty to be settled with the SEC, one of the largest penalties from that regulator since the implosions of Enron Corp and WorldCom Inc two decades ago.

The company had previously set aside enough money to cover the settlement. While the debacle frustrated shareholders and prompted some top Allianz executives to cut their own pay, the group’s shares closed 1.7% higher in Germany after the total payout more than matched its provisions.

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

Tournant, who joined Allianz in 2002 and founded the funds three years later, turned himself in to authorities Tuesday morning in Denver and, according to his lawyers, will fight the charges.

“Greg Tournant has been unfairly targeted,” his attorneys Seth Levine and Daniel Alonso said in a joint statement. “We are confident that the justice system will reject this unwarranted and reckless 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 results in a 10-year ban on Allianz Global Investors from providing advisory services to US-registered investment funds.

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

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

The SEC said the projected losses in a stock market crash scenario have been changed to 4.15% from the actual 42.15%, simply by removing the “2”.

Allianz’s alleged oversight failures included failure to ensure Tournant used its promised covers, although only those in its group were aware of the misconduct before March 2020.

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

Bond-Nelson, under Tournant’s direction, also lied to Allianz’s in-house attorneys after the company became aware of the amended reports and the SEC investigation, prosecutors added.

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

Investors have also filed more than two dozen lawsuits against Allianz regarding Structured Alpha funds.

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Reporting by Jonathan Stempel in New York and Tom Sims and Alexander Huebner in Munich; Additional reporting by Luc Cohen in New York; Editing by Chizu Nomiyama and Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.

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