By Tom Sims, Alexander Hübner and Jonathan Stempel
NEW YORK/MUNICH (Reuters) -Germany’s Allianz SE agreed to pay more than $6 billion and its U.S. asset management unit pleaded guilty to criminal securities fraud over the collapse of a group of investment 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 in corporate history, and dwarf earlier settlements obtained under President Joe Biden’s administration.
Gregoire Tournant, the former chief investment officer who created and oversaw the now-defunct Structured Alpha funds, was also indicted for fraud, conspiracy and obstruction, while two other former 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 COVID-19 roiled markets in February and March 2020.
Prosecutors said Allianz Global Investors US LLC misled pension funds for teachers, bus drivers, engineers, religious groups and others by understating the funds’ risks, and had “significant gaps” in its oversight.
Investors were told the funds employed options that included hedges to protect against market crashes, but prosecutors said the fund managers repeatedly failed to buy those hedges.
Prosecutors said the managers also inflated fund results to boost their pay through performance fees, with Tournant, 55, collecting $13 million in 2019 and becoming his unit’s highest or second-highest-paid employee from 2015 to 2019.
Investigators said the misrepresentations began as early as 2014, and helped Allianz generate more than $400 million of net profit.
At a news conference, U.S. Attorney Damian Williams in Manhattan said more than 100,000 investors were harmed, and that while American prosecutors rarely bring criminal charges against companies, it was “the right thing to do” in this case.
Investors “were promised a relatively safe investment with strict risk controls designed to weather a sudden storm, like a massive collapse in the stock market,” he said. “Those promises were lies…. Today is the day for accountability.”
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Also known for its insurance operations, Allianz is among Germany’s most recognizable brands and an Olympic sponsor.
Its namesake arena near its Munich headquarters, meanwhile, houses Bayern Munich, one of world’s best-known soccer teams.
The 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.
Williams said the fine was significantly reduced because of compensation Allianz offered to investors.
Even so, the payout is close to twice the $3.3 billion that the Justice Department collected in corporate penalties for all of 2021.
An Allianz lawyer entered the guilty plea at a hearing before U.S. District Judge Loretta Preska in Manhattan.
Allianz also accepted a $675 million civil fine imposed by the SEC, one of that regulator’s largest penalties since Enron Corp and WorldCom Inc imploded two decades ago.
Shares of Allianz closed up 1.7% in Germany, with the payout broadly matching reserves that the company previously set aside.
Tournant, of Basalt, Colorado, surrendered to authorities on Tuesday morning in Denver.
His lawyers Seth Levine and Daniel Alonso said the investor losses were “regrettable” but did not result from a crime.
“Greg Tournant has been unfairly targeted [in a] meritless and ill-considered attempt by the government to criminalize the impact of the unprecedented, COVID-induced market dislocation,” Levine and Alonso said in a joint statement.
The other Structured Alpha portfolio managers – Stephen Bond-Nelson, 51, of Berkeley Heights, New Jersey; and Trevor Taylor, 49, of Miami – agreed to plead guilty to fraud and conspiracy charges and cooperate with prosecutors.
Lawyers for Bond-Nelson and Taylor declined immediate comment.
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 plans to move about $120 billion of investor assets to Voya Financial Inc in exchange for a stake of up to 24% in Voya’s investment management unit, with a final agreement to be reached in the coming weeks.
Regulators said the misconduct included when Tournant and Bond-Nelson altered more than 75 risk reports before sending them to investors.
The SEC said projected losses in one market crash scenario were changed to 4.15% from the actual 42.15%, simply by removing the “2.”
Allianz’s alleged oversight lapses included a failure to ensure that Tournant was using his promised hedges, though only people in his group knew of the misconduct before March 2020.
“No compliance system is perfect, but the controls at AGI didn’t even stand a chance,” Williams 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 probe, prosecutors added.
“Unfortunately, we’ve seen a recent string of cases in which derivatives and complex products have harmed investors across market sectors,” SEC Chair Gary Gensler said in a statement.
Investors have also filed more than two dozen lawsuits against Allianz over the Structured Alpha funds.
(Reporting by Jonathan Stempel in New York and Tom Sims and Alexander Huebner in MunichAdditional reporting by Luc Cohen in New YorkEditing by Chizu Nomiyama, Tomasz Janowski and Matthew Lewis)