The collapse of the Allianz Fund ended in a guilty plea, a $ 5.8 billion deal

A unit of Allianz SE has pleaded guilty to fraud and agreed to pay $ 5.8 billion after misrepresenting the risks posed by a group of hedge funds that collapsed in the midst of epidemic market turmoil.

The deal, announced Tuesday, marks the end of an embarrassing period for the German insurance giant, which has agreed to sell a majority stake in Allianz Global Investors US as part of a settlement with the Securities and Exchange Commission.

AGI US Structured Alpha Funds are designed to protect against market crashes. Instead, they lost $ 7 billion in the turbulent first days of the epidemic in 2020, with multiple lawsuits from pension plan investors.

Gregor Tournament, a former chief investment officer and co-lead portfolio manager of the fund, was arrested in Colorado and charged separately with fraud and conspiracy. Torrant, who is fighting the charges, was ordered released on 20 million bond at a hearing Tuesday afternoon, where his lawyer told the judge that prosecutors had been investigating for more than a year.

The other two executives with the fund have agreed to plead guilty and are cooperating with the authorities.

Rare criminal appeal

The Allianz unit’s guilty plea is one of several for the banking industry, which has often agreed to deal with prosecutors without admitting wrongdoing. In 2020 Goldman Sachs Group Inc. One of its units has pleaded guilty to its role in the 1MDB scandal.

The Structured Alpha Scheme was a “terrible, long-term and widespread fraud,” said Damien Williams, U.S. Attorney for the Southern District of New York. Tournant “traded on AGI’s reputation for careful risk management to keep investors comfortable,” and AGI’s “control environment was riddled with holes,” Williams said.

In addition to fines and reinstatements under the judiciary, the company has agreed to pay more than $ 1 billion to settle the SEC’s claims, including $ 675 million in civil fines, which Enforcement Director Gurbir Grewal Enron described as the second largest commission after WorldCom.

AGI spokesman John Wallace said in a statement: “We acknowledge our corporate responsibility for the isolated but serious misconduct of these three former employees of the formerly dissolved U.S. Structured Products Group.” “In particular, it has been important for Allianz and AllianzGI to reach a fair settlement with clients who have been misled and deceived by these individuals and have supported the US authorities for their justice.”

Allianz says that after the unit was banned from some of the country’s funding services for a decade, they relocated most of AGI’s U.S. portfolio to Voya Financial Inc. Is planning to sell to. The agency had earlier announced that it had set aside 5.6 billion euros ($ 5.9 billion) to settle lawsuits and government investigations.

Tournant’s lawyer, a 55-year-old equity-options whistleblower and one-time McKinsey & Co. consultant, called the lawsuit against him “an unworthy and unreasonable attempt by the government to criminalize the unprecedented, coveted-induced market influence” of March 2020. Displacement ”and he said he would fight it in court. He is due to file his application in New York on June 2.

Deep damage

Five of the Florida-based structured alpha funds lost between 49% and 97% of their value in the first quarter of 2020. Allianz left two cars in March 2020 and is releasing the others.

Tournant and two other AGIs have exceeded the level of independent oversight provided, misrepresented hedging and other risk-mitigation strategies, and altered documents to hide funding risks, according to the complaint.

According to Tournant, the funds were marketed as “providing broad market exposure while maintaining certain risk protections against losses in the event of a market crash”.

Read more: Top Wall Street Police Warn, ‘Call Us Before We Call You’

But towards the end of 2015, the tournament was frustrated with the cost of hedging, which was eating away at the returns. The fund “abandoned the promised hedging strategy and instead began buying cheap hedges that were out of money, and therefore less protective in the event of a market crash,” according to the complaint. The change was not disclosed to investors, prosecutors allege.

From 2016 to 2020, Tournant’s compensation was $ 51.3 million, according to the SEC complaint.

No ‘2 and 20’

Tournant, a dual US-French national, came to AGI as Oppenheimer Capital in the early 2000’s. He and his structured alpha team were inspired for extra income. Instead of applying the general formula for hedge fund fees – a combination of “2 and 20” of management charges and a cut in profits – they were compensated for performance only. Although Allianz kept the arrangement a secret, angry clients would later claim that it was a recipe for greater risk.

For its alleged activities between 2014 and March 2020, Tournant has faced two counts of securities fraud, two conspiracy theories and investment adviser fraud. If convicted, he could face up to 40 years in prison, although in reality he will probably get much less time.

“Greg Torrant has been unfairly targeted even though he was on extended medical leave during these market events, and the funds have been enriched under his leadership for the previous 14 years,” his lawyers said in a statement. “Events in this market have hurt sophisticated institutional investors – including Greg himself who has invested heavily in the fund.”

Under an agreement with New York prosecutors, Tournant will post five Colorado properties as security for its bonds, as well as a retirement account and a life insurance policy valued at $ 3.9 million. He limited his travels and was subject to a curfew from 10pm to 6am. He surrendered both his passports to federal authorities last summer, according to his lawyer Seth Levine.

‘Master Police’

AGI Securities will be found guilty of single count of fraud. The agreement calls for the firm to forfeit 463 million and recover $ 3.2 billion for fraud victims, as well as pay $ 2.3 billion in fines. It will receive credit for the 1.9 billion that has already been paid to the victims.

The other two portfolio managers, Stephen Bond-Nelson, 51, and Trevor Taylor, 49, pleaded guilty in March to conspiracy and fraud. Prosecutors allege that Tournant told Bond-Nelson to lie to the SEC.

Tournant told investors that Allianz was “one of the largest and most conservative insurance companies in the world” and that it was monitoring every position it took as a “master cop” according to court filings.

In fact, “neither AGI US nor Allianz has verified that the tournament and its affiliates are actually adhering to the investment strategies promised by investors,” the complaint said.

The lawsuit was filed in the U.S. v. Tournament, 22-cr-00276, U.S. District Court, Southern District of New York (Manhattan).

© 2022 Bloomberg

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