Allianz Global Investors is paying billions to settle charges related to the blow-up of its structured alpha products following 2020’s Covid-19 market crash.
On Tuesday, the Securities and Exchange Commission charged the Allianz division and three former senior portfolio managers with “a massive fraudulent scheme” that resulted in major losses on the volatility trading strategy for 114 asset owners.
According to the SEC, AGI US has agreed to pay more than $1 billion to settle the charges. With its parent company Allianz SE, it will pay more than $5 billion in restitution to victims.
Allianz is also offloading much of its United States asset management business — about $120 billion in assets under management — to Voya Investment Management in return for up to a 24 percent stake in the firm. This is the result of a provision of the SEC settlement, which prohibits the firm from providing advisory services to U.S. registered investment funds over the next ten years.
The SEC alleges that the three ex-portfolio managers not only misrepresented the risk profile of the fund to institutional investors but also that they attempted to hide their misconduct from the SEC through false testimony.
AGI and the three ex-portfolio managers also faced criminal charges from the U.S. Attorney’s Office for the Southern District of New York, the Department of Justice announced Tuesday. AGI and two of those ex-managers — Stephen Bond-Nelson and Trevor Taylor — pleaded guilty to those charges. The third manager, Gregoire Tournant, who led the portfolio, is still facing charges.
The alleged fraud affected investors including Raytheon Technologies’ corporate pension fund, the Blue Cross Blue Shield Association National Employee Benefits Committee, the Teamster Members Retirement Plan, Lehigh University, and the Arkansas Teacher Retirement System, all organizations that filed lawsuits against the firm. The SEC’s announcement did not specify whether Allianz will pay these organizations specifically.
“For years, these pension funds and others invested with AGI because they were promised a relatively safe investment with strict risk controls designed to weather a sudden storm like a massive collapse in the stock market,” Damien Williams, the U.S. attorney for the SDNY, said at a press conference. “But when the storm came in March 2020, when the Covid crash suddenly hit, those investors got soaked. They lost billions. And they were shocked.”
The SEC alleges that the three portfolio managers manipulated financial reports and information AGI provided to investors, misrepresenting the fund’s true risk and performance.
For instance, in one risk report, the three allegedly reduced potential losses in a market crash scenario from 42.15 percent to 4.15 percent. In another, they “smoothed” performance data by reducing one-day losses from 18.26 percent to 9.25 percent, the SEC’s announcement said.
In addition, according to an SEC order, the portfolio management team never closed its funds at the capacity limit it set — $9 billion. Eventually, the managers allegedly acquired more than $12 billion in assets as of December 2019.
“Much of this historic fraud was made possible because AGI’s control environment was riddled with holes,” Williams said.
In sum, Allianz is paying $174.3 million to the Department of Justice, $675 million to the SEC, and up to $5 billion in restitution to investors.