Allianz agrees $6bn settlement over scandal-hit US funds

German insurer Allianz has agreed a $6bn settlement with US authorities under which its investment arm will plead guilty to securities fraud after a scandal at its funds business left investors nursing billions of dollars worth of losses.

Gregoire Tournant, formerly chief investment officer and co-lead portfolio manager for the arm’s so-called Structured Alpha funds, has also been indicted on charges of conspiracy to commit securities fraud, investment adviser fraud and obstruction of justice over the affair, while two other fund managers have pleaded guilty to similar charges, according to legal filings. All three have been dismissed by Allianz.

US authorities on Tuesday said Allianz’s US funds business had “engaged in a scheme to defraud investors” at the funds, which had more than $11bn under management at their height.

In particular, the government said in filings, it made “false and misleading statements to current and prospective investors that substantially understated the risks being taken by the funds, and also overstated the level of independent risk oversight over the funds”.

“The victims of this misconduct include teachers, clergy, bus drivers, and engineers, whose pensions are invested in institutional funds to support their retirement,” said Gary Gensler, chair of the US Securities and Exchange Commission.

The guilty plea will mean the US funds unit is disqualified for a decade from advising US-registered mutual funds and certain types of pension funds, after a temporary relief period, but the censure should not affect Allianz subsidiaries Pimco, the fund manager, or Allianz Life, the insurer said.

To comply with the ban, the German group has entered into a memorandum of understanding with US investment firm Voya Financial to take over managing $120bn worth of assets — in return for Allianz Global Investors taking a stake of up to 24 per cent in what it called a “strategic partnership”.

Allianz put the total bill from the settlement and other costs with the SEC and US Department of Justice at $5.8bn. Some $5bn has been paid or will be paid to investors as compensation, and the entire amount has been provisioned for, it said.

“These settlements fully resolve the US governmental investigations of the Structured Alpha matter for Allianz,” the insurance group said.

Investors hit Allianz with lawsuits after heavy losses suffered by the funds during the market turmoil in 2020 created by the coronavirus pandemic. The Arkansas Teacher Retirement System, one of the investors, accused Allianz’s funds arm of employing a “reckless strategy” that abandoned risk controls.

The DoJ alleged the fund managers had “repeatedly failed to purchase the hedging positions that investors were promised” that were at the core of its risk management, and “fraudulently altered” data requested by investors in a way that understated investment risks.

The office of Damian Williams, US attorney for the southern district of New York, said it had accepted a guilty plea from Stephen Bond-Nelson, one of the Structured Alpha fund managers, for counts including securities fraud and investment adviser fraud. The total maximum prison sentence for the counts is 35 years, it said. Trevor Taylor, another of the fund managers, pleaded guilty to counts that carry a maximum term of 30 years. They are co-operating with the government.

The authorities disclosed ways that data was allegedly altered by the managers, including “smoothing” performance figures, to reduce the magnitude of gains and losses. The managers also changed worksheets with the effect of making “the portfolio seem better hedged against a market downturn, and therefore less risky”, authorities alleged.

When one potential investor was sent holdings data for a fund, authorities alleged that “Tournant took the accurate holdings data and changed 31 of the fund’s 576 open positions from short positions to long positions, and then sent this fraudulent data to the potential investor”.

The government said the managers were able to carry on the fraud for years partly because the US asset management arm “lacked sufficient internal controls and oversight for the funds”, even while Tournant allegedly described the group to one investor as a “master cop” that closely monitored his activity.

Williams called the case “one of the most significant corporate prosecutions in history”. He said much of the alleged fraud “was made possible because AGI’s control environment was riddled with holes” and “completely inadequate to police” this part of the business.

Lawyers for Tournant said he had been “unfairly targeted” despite being on “extended medical leave” during the market volatility of 2020, adding the losses investors suffered at the time were not “the result of any crime”. They added the government’s attempts to criminalise this market turmoil were “meritless” and that Tournant would be “vigorously defending himself” in court.

A lawyer representing Bond-Nelson declined to comment, while a lawyer for Taylor did not immediately respond to requests for comment.

Allianz announced on the eve of its first-quarter results earlier this month that it had set aside another €1.9bn for payouts over the scandal, taking the total to €5.6bn. Its share price is down 7 per cent over the past year, having recovered ground after the group first warned on profits in August.

In its own civil complaint, the SEC alleged Tournant, Taylor and Bond-Nelson lied to investors about their investment strategy from at least January 2016 to March 2020. The regulator also alleged the defendants “engaged in multiple efforts to conceal their misconduct from the SEC”, including Tournant urging Bond-Nelson to give the agency a false testimony and meeting Taylor in an empty construction site to discuss how to reply to government investigators’ queries.

Authorities said the investigation had not found any evidence that anyone outside of the structured-products group, or within the wider business, was aware of the misconduct.