NEWS | AMERICAS
Allianz hit by US$6bn SEC fine, Structured Alpha managers charged A recent string of cases in which derivatives and complex products harmed investors across market sectors have seen fines handed out. Gensler also noted that ‘a recent string of cases in which derivatives and complex products have harmed investors across market sectors’. The SEC’s complaint, filed in the federal district court in Manhattan, alleges that Structured Alpha’s lead portfolio manager, Gregoire P. Tournant (right), orchestrated the multi-year scheme to mislead investors who invested approximately $11 billion in Structured Alpha, and paid the defendants over $550 million in fees.
The US Securities and Exchange Commission (SEC) has charged Allianz Global Investors US (AGI US) and three former senior portfolio managers with ‘a massive fraudulent scheme that concealed the immense downside risks’ of its options trading strategy Structured Alpha. According to the regulators, after the Covid 19 market crash of March 2020 exposed the fraudulent scheme, the strategy lost billions of dollars. The Allianz subsidiary which marketed and sold the strategy to approximately 114 institutional investors, including pension funds, has agreed to pay more than US$1 billion to settle SEC charges and together with its parent, Allianz SE, over US$5 billion in restitution to victims. ‘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 (right-below). ‘This case once again demonstrates that even the most sophisticated institutional investors, like pension funds, can become victims of wrongdoing.’
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Tournant is a portfolio manager, a managing director and CIO US Structured Products with Allianz Global Investors, which he joined in 2002. He was also head of the structured products team, which he created in 2005, and was the lead portfolio manager for all strategies managed by this team. LIES EXPOSED According to the court documents, Tournant ‘manipulated numerous financial reports and other information provided to investors to conceal the magnitude of Structured Alpha’s true risk and the funds’ actual performance’ with assistance from co-lead portfolio manager, Trevor L. Taylor, and portfolio manager, Stephen G. Bond-Nelson. The three individuals left Allianz in mid-December after the allegations of misconduct. Cour documents also show that the ‘defendants reduced losses under a market crash scenario in one risk report sent to investors from negative 42.1505489755747% to negative 4.1505489755747% -- by simply dropping the single digit 2.’ In another example, the portfolio managers ‘smoothed’ performance data sent to investors by reducing losses on one day from negative
18.2607085709004% to negative 9.2607085709004% -- this time by cutting the number 18 in half. ‘When the 2020 Covid-related market volatility revealed that AGI US and the defendants had misled investors about the fund’s level of risk, the fund suffered catastrophic losses and investors lost billions; the defendants all the while profited from their deception,’ stated the SEC complaint. Tournant (right), Taylor and BondNelson then made multiple, ultimately unsuccessful, efforts to conceal their misconduct from the regulator, ‘including false testimony and meetings in vacant construction sites to discuss sending their assets overseas’. ‘While they were able to solicit over US$11 billion in investments by the end of 2019 and earn over US$550 million in fees as a result of their lies, they lost over US$5 billion in investor funds when the market volatility of March 2020 exposed the true risk of their products,’ said Gurbir S. Grewal (pictured), director of the SEC’s Division of Enforcement. The subsidiary of the German insurer admitted the charges and agreed to a cease-and-desist order, a censure and payment of US$315.2 million in disgorgement to the US Department of Justice as part of an integrated, global resolution; US$34 million in prejudgment interest; and a US$675 million civil penalty, a portion of which will be distributed to certain investors. In a parallel criminal proceeding, the US Attorney’s Office for the Southern District of New York has announced criminal charges for similar conduct against the firm, and the three executives.
