The US Securities and Exchange Commission (SEC) today charged Allianz Global Investors (AGI) and three former senior portfolio managers with securities fraud linked to the options trading strategy they called Structured Alpha.
The regulator said AGI US had agreed to pay billions of dollars as part of an integrated, global resolution, including more than $1bn (€949m) to settle SEC charges and together with its parent, Allianz SE, over $5bn in restitution to victims.
At Allianz’s AGM earlier this month, chief executive officer Oliver Bäte had said the insurer was seeking a fast settlement and had set aside €3.7bn in 2021, causing net income for the last financial year to fall by €2.8bn.
AllianzGI today said it had entered into a memorandum of understanding with Voya Financial for it to take on specified investment teams and assets comprising most of its US business, in return for an up to 24% equity stake in the enlarged asset manager.
AGI US’s Structured Alpha strategy lost billions of dollars as a result of misconduct by the fund manager and the portfolio managers, with the COVID-19 market crash of March 2020 exposing the fraud, the SEC said.
“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 SEC chair 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.
“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.”
Report manipulation, ‘pattern of deceit’
The SEC’s complaint alleges that Structured Alpha’s lead portfolio manager, Gregoire P. Tournant, orchestrated the multi-year scheme to mislead investors who invested approximately $11bn in Structured Alpha and paid over $550m in fees.
It further alleges that, with assistance from his co-lead portfolio managers, Tournant manipulated numerous financial reports and other information provided to investors to conceal the magnitude of the options trading strategy’s true risk and the funds’ actual performance.
According to the SEC, defendants reduced losses under a market crash scenario in one risk report sent to investors from -42.1505489755747% to -4.1505489755747% – by simply dropping the single digit 2.
In another example, defendants “smoothed” performance data sent to investors by reducing losses on one day from -18.2607085709004% to -9.2607085709004% – this time by cutting the number 18 in half.
Gurbir S. Grewal, director of the SEC’s division of enforcement, said that following the crash of the structured alpha funds, the defendants continued a “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”.
AGI US admitted that its conduct violated the federal securities laws and agreed to a cease-and-desist order, a censure and payment of $315.2m in disgorgement, $34m in prejudgment interest, and a $675m civil penalty, a portion of which will be distributed to certain investors.
As a consequence of the guilty plea by AGI US and two of the portfolio managers, AGI 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 conducting these fund services.