Germany’s Allianz SE agreed to pay more than $6 billion and its U.S. asset management unit will plead guilty to criminal securities fraud over the collapse of its Structured Alpha funds early in the COVID-19 pandemic.
Allianz’s settlements with the U.S. Department of Justice and U.S. Securities and Exchange Commission are among the largest targeting a global financial institution.
Gregoire Tournant, the former chief investment officer who created and oversaw the now-defunct Structured Alpha funds, is also being indicted for fraud, conspiracy and obstruction, while two portfolio managers entered related guilty pleas.
Once with more than $11 billion of assets under management, the Structured Alpha funds lost more than $7 billion as the spread of COVID-19 roiled markets in February and March 2020.
Prosecutors said the U.S. unit, Allianz Global Investors US LLC, misled teacher pension funds, clergy, bus drivers, engineers and other investors by understating the funds’ risks and overstating how well they were being monitored.
Investors were told the funds employed options that included hedging positions designed to protect against market crashes, but prosecutors said the individual defendants repeatedly failed to buy the promised hedges.
The defendants also inflated fund performance to boost their own pay, collecting 30% of excess returns over relevant benchmark indexes, prosecutors said.
Tournant’s pay was the highest or second-highest at the Allianz unit from 2015 to 2019, including $13 million in 2019, court papers show.
Tuesday’s settlement calls for Allianz to pay a $2.33 billion criminal fine, make $3.24 billion of restitution and forfeit $463 million, court papers show.
Allianz also agreed to a $675 million civil fine to settle with the SEC.
Two former Structured Alpha portfolio managers, Stephen Bond-Nelson and Trevor Taylor, agreed to plead guilty to fraud and conspiracy charges.
“Even the most sophisticated institutional investors, like pension funds, can become victims of wrongdoing,” SEC Chair Gary Gensler said in a statement. “Unfortunately, we’ve seen a recent string of cases in which derivatives and complex products have harmed investors across market sectors.
Lawyers for the individual defendants declined immediate comment. Tournant surrendered to authorities in Denver, Colorado, the Justice Department said.
Allianz’s guilty plea carries a 10-year ban on Allianz Global Investors’ providing advisory services to U.S.-registered investment funds.
As a result, Allianz agreed to move about $120 billion of investor assets to Voya Financial Inc., in exchange for up to a 24% stake in Voya’s investment management unit.
Allianz said it previously set aside enough money to cover the settlement. The debacle had frustrated shareholders and prompted some top managers to cut their own pay, as well as reducing Allianz’s earnings.
Shares of Allianz were up 1.2% in late afternoon trading in Germany.
Tournant had joined Allianz in 2002 and founded the funds three years later.
Regulators said the misconduct included a situation when he and Bond-Nelson altered more than 75 risk reports before sending them to investors, to reduce projected losses in market-stress scenarios.
The SEC said potential losses in one market crash scenario were changed to 4.15% from the actual 42.15%, simply by removing the “2.”
Allianz suffered from “significant gaps” in its oversight, including a failure to ensure that Tournant used his promised hedging strategies, though only people in his group knew of the misconduct before March 2020, the Justice Department said.
Bond-Nelson, at Tournant’s direction, also lied to Allianz’s in-house lawyers after the company learned about the altered reports and the SEC began probing for alleged misconduct, the Justice Department added.
Allianz, also known for its insurance operations, is among Germany’s most recognizable brands and an Olympic sponsor. The Allianz Arena near its Munich headquarters is home to Bayern Munich, one of world’s best-known soccer teams.
Investors have filed more than two dozen lawsuits against Allianz over the Structured Alpha funds’ collapse.
(Reporting by Jonathan Stempel in New York and Tom Sims and Alexander Huebner in Munich; additional reporting by Luc Cohen in New York; editing by Chizu Nomiyama and Tomasz Janowski)