The Securities and Exchange Commission (SEC) charged Allianz Global Investors U.S. (AGI US) and three former senior portfolio managers with a fraudulent options trading scheme.
The SEC said the company and the portfolio managers concealed the downside risks of this complex options trading strategy they called “Structured Alpha.” AGI US marketed and sold the strategy to approximately 114 institutional investors, including pension funds for teachers, clergy, bus drivers, engineers, and other individuals. Overall, these groups invested approximately $11 billion in Structured Alpha and paid the defendants over $550 million in fees. AGI US has agreed to pay billions of dollars in penalties, including more than $1 billion to settle SEC charges and over $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,” SEC Chair Gary Gensler said. “The victims of this misconduct include teachers, clergy, bus drivers, and engineers, whose pensions are invested in institutional funds to support their retirement. This case once again demonstrates that even the most sophisticated institutional investors, like pension funds, can become victims of wrongdoing. Unfortunately, we’ve seen 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, orchestrated the scheme to mislead investors. With assistance from Co-Lead Portfolio Manager Trevor L. Taylor and Portfolio Manager Stephen G. Bond-Nelson, 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, the SEC alleges.
The SEC said the defendants reduced losses under a market crash scenario in one risk report sent to investors from negative 42.1505489755747 percent to negative 4.1505489755747 percent by simply dropping the single digit 2. In another example, the SEC said the defendants “smoothed” performance data sent to investors by reducing losses on one day from negative 18.2607085709004 percent to negative 9.2607085709004 percent, cutting the number 18 in half.
When the 2020 COVID-related market crash occurred, it revealed that AGI US and the defendants had misled investors about the fund’s level of risk as the fund suffered catastrophic losses and investors lost billions. The complaint further alleges that Tournant, Taylor, and Bond-Nelson then made several efforts to conceal their misconduct from the SEC, including false testimony and meetings in vacant construction sites to discuss sending their assets overseas.
“From at least January 2016 through March 2020, the defendants lied about nearly every aspect of a highly complex investment strategy they marketed to institutional investors, including pension funds managing the retirement savings of everyday Americans. While they were able to solicit over $11 billion in investments by the end of 2019 and earn over $550 million in fees as a result of their lies, they lost over $5 billion in investor funds when the market volatility of March 2020 exposed the true risk of their products,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said. “Following the crash of the Structured Alpha Funds, the defendants continued their pattern of deceit by lying to SEC staff, and their fraud would have gone undetected if it weren’t for the persistence of SEC lawyers who pieced together the full scope of the massive fraud.”
AGI US admitted that its conduct violated the federal securities laws and agreed to a cease-and-desist order, a censure, and payment of $315.2 million in disgorgement, $34 million in prejudgment interest, and a $675 million civil penalty.
Also, the SEC is seeking permanent injunctions, disgorgement plus interest, and penalties against Tournant, Taylor, and Bond-Nelson. In addition, the complaint seeks an officer and director bar against Tournant. Taylor and Bond-Nelson have agreed to the entry of partial judgments against them in which they consent to injunctive relief with monetary relief to be determined by the court in the future. Taylor and Bond-Nelson also agreed to associational and penny stock bars.
Further, AGI US is disqualified from providing advisory services to U.S. registered investment funds for the next 10 years, with a brief period to transition these services to another investment adviser.
In a parallel criminal proceeding, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges for similar conduct against AGI US, Tournant, Taylor, and Bond-Nelson. AGI US, Taylor, and Bond-Nelson have agreed to guilty pleas.