The Securities and Exchange Commission (SEC) charged Allianz Global Investors U.S. LLC (AGI US) and three former senior portfolio managers with a massive fraudulent scheme that concealed the immense downside risks of a complex options trading strategy they called “Structured Alpha.”
Allianz Global Investors U.S. and three portfolio managers concealed immense downside risks of a complex options trading strategy that was sold to more than 100 institutional investors, according to the SEC and the U.S. Attorney’s Office for the Southern District of New York. Those risks became all too real after the Covid-19 market crash of March 2020, during which the strategy cratered, authorities said.
Photographer: Nathan Laine/Bloomberg“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, such as a massive crash in the stock market…But when the storm came, those investors got soaked,” Damian Williams, U.S. Attorney for the Southern District of New York, said during a press conference.
Allianz said that the criminal misconduct regarding the options strategy was limited to a handful of individuals who are no longer employed by the company.
The SEC and the U.S. Attorney’s Office filed civil and criminal charges against the firm and three portfolio managers, one of whom was among the highest paid employees at Allianz Global Investors, authorities said.
Approximately $5 billion of Allianz Global Investors’ penalty will go to victims of the alleged fraud scheme, the SEC said.
The firm’s options trading strategy, called Structured Alpha, was designed to generate profits by using a portfolio of debt or equity securities as collateral to purchase and sell options. Allianz Global Investors sold 17 Structured Alpha funds; they held approximately $11 billion in assets as of December 2019, according to the SEC. The funds generated $550 million in fees for Allianz, the regulator said.
From 2016 to March 2020, the firm and portfolio managers misrepresented the risks associated with the strategy, according to the SEC. The regulator says Structured Alpha’s Lead Portfolio Manager, Gregoire P. Tournant, engaged in additional misconduct, including misrepresenting the levels at which hedging positions were put in place. Tournant also served as chief investment officer of the Structured Alpha Funds.
As a result of market volatility in March of 2020, the funds suffered massive losses of up to 90%, the SEC says.
The portfolio managers fabricated risk reports, altered spreadsheets, and misrepresented data in order to conceal the fraud, Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said. “They lied about the riskiness of the funds and the steps they were taking to mitigate that risk. The lies continued year after year,” Grewal said.
The SEC says the portfolio managers also lied to the commission during its investigation.
Tournant’s attorneys, Seth Levine and Daniel R. Alonso, said their client would vigorously defend himself in court. Tournant was on medical leave in March 2020 when the funds took a hit, the attorneys said in a statement.
“The losses resulting from these market events were suffered by sophisticated institutional investors—including Greg himself who had a considerable investment in the fund,” the attorneys said. “While the losses are regrettable, they are not the result of any crime. The government’s attempt to characterize them as such is not only unfairly damaging to Greg’s reputation and livelihood, but extremely dangerous to the market as a whole.”
Authorities faulted Allianz Global Investors’ compliance procedures for failing to catch Tournant’s yearslong alleged misconduct.
“Year after year, AGI failed to provide meaningful oversight over Tournant and the funds,” Williams said. “Much of this historic fraud was made possible because AGI’s compliance environment was riddled with holes.”
Tournant has been charged with conspiracy to commit securities fraud, investment adviser fraud, and other misconduct, according to the U.S. Attorney’s office.
In addition to monetary penalties, the SEC said Allianz Global Investors is “automatically and immediately disqualified from providing advisory services to U.S. registered investment funds for the next ten years, and will exit the business of conducting these fund services.”
The SEC said it will grant Allianz Global Investors a brief transition period to hand these services off to another investment adviser. The transition period will be ten weeks for the U.S. mutual funds that AGI U.S. sub-advises and four months for the U.S. closed-end funds that AGI U.S. advises, the SEC said.
Allianz said in a statement that it expects the SEC to issue waivers that will ensure that AGI U.S.’s resolution with the Department of Justice does not impact its Pimco investment management business and its Allianz Life business. The German financial services firm said it will transition its Allianz Global Investors’ investment management activities, which represent about $120 billion in assets under management, to a new partner in the U.S.
The two additional portfolio managers named—Trevor L Taylor, 50, and Stephen Bond-Nelson, 51—have pleaded guilty to securities fraud and are cooperating with the government, according to the U.S. Attorney’s Office and the SEC. The regulator said both men ultimately cooperated with its investigation. The agency barred Taylor and Bond-Nelson from the industry.
In its civil complaint, the SEC is seeking permanent injunctions and penalties against Tournant, Taylor, and Bond-Nelson.
In its civil complaint, the SEC is seeking permanent injunctions and penalties against Tournant, Taylor, and Bond-Nelson.
Miami-based Tournant, 55, was discharged from Allianz Dec. 13, 2021, according to BrokerCheck, a public database maintained by industry self-regulator Finra. He had been registered with the company since 2001.
Tournant surrendered to authorities in Denver, Colorado Tuesday morning, according to the U.S. Attorney’s Office.
This should be warning for others too.