NEW YORK/FRANKFURT (May 17): A unit of Allianz SE agreed to plead guilty to fraud and pay US$5.8 billion in fines and restitution after a relatively low-risk group of investment funds collapsed in the wake of pandemic market gyrations.

Allianz Global Investors (AGI), a New York investment adviser wholly owned by the German insurance giant, will plead guilty to a single count of securities fraud and will pay, along with its parent company, more than US$5 billion to victims. The total payout, including a US$1 billion fine to the US Securities and Exchange Commission (SEC), is covered by provisions the company has already taken, it said.

Gregoire Tournant, a former executive with the firm, was taken into custody on Tuesday and charged separately for his role in the alleged scheme to defraud investors, Manhattan US Attorney Damian Williams said in a statement.

Tournant, the former chief investment officer and co-lead portfolio manager of the Structured Alpha Funds, and others overstated the level of independent oversight that AGI was providing, misrepresented hedging and other risk mitigation strategies and altered documents to hide the riskiness of the funds, according to prosecutors.

"As a result of this scheme to defraud, investors' funds were exposed to higher risk than promised, and investors were deprived of information about the true risks to which their investments were exposed," according to the Tournant's indictment.

The agreement, under which AGI will plead guilty to a single count of securities fraud, calls for the firm to forfeit US$463 million and pay US$3.2 billion in restitution to victims of the fraud as well as a US$2.3 billion penalty. It will get a credit for US$1.9 billion that has already been paid to victims.

Allianz had set aside €5.6 billion (US$5.9 billion) to resolve the lawsuits and government probes tied to the funds. The charges were a "fair estimate" of the exposure, the company said earlier this month. All charges announced on Tuesday are covered by the provisions, an Allianz spokesman said.

AGI is due to make the forfeiture payment on Wednesday and will make the restitution payments within a week into an escrow account that will be distributed to victims.

'Master cop'

"No one at AGI US or Allianz was verifying that Tournant and his colleagues were actually adhering to the investment strategies promised to investors," according to Tournant's indictment. "For example, no risk or compliance personnel at AGI US verified, attempted to verify, or were responsible for verifying that Tournant and his colleagues were purchasing hedging positions within the range that was represented to investors, or adhering to other agreed upon risk mitigation strategies, including those specifically promised to the funds' largest investor."

Tournant told investors that Allianz was "one of the largest and most conservative insurance companies in the world" and was monitoring every position that he took as a "master cop", according to the court filing.

The Structured Alpha hedge funds were designed to provide protection against a market crash yet incurred steep hits during the tumultuous early days of the pandemic. Following a controversial options strategy, the Florida-based funds lost between 49% and 97% of their value during the first quarter of 2020. Investors said they lost billions of dollars. Allianz liquidated two of the vehicles in March 2020 and has been unwinding the others.

Pension funds and other investors suing AGI claim that was far worse than at other funds hit hard by the start of the pandemic and said the firm breached its fiduciary duty by misleading them about how Structured Alpha was investing their money.

Attempt to obstruct

Prosecutors said Tournant also tried to obstruct a government probe.

"In or about the summer of 2020, after the onset of the pandemic and in order to avoid detection of the fraudulent scheme, Gregoire Tournant, the defendant, obstructed an investigation by the US Securities and Exchange Commission into the circumstances that led to the losses in March 2020. Among other things, Tournant repeatedly directed Stephen Bond-Nelson, a portfolio manager for the funds, to lie to the SEC."

In late 2015, Tournant was frustrated with the cost of hedging, which was eating into returns, the US said. The fund "abandoned the promised hedging strategy and instead began to purchase cheaper hedges that were further out of the money, and therefore less protective in the event of a market crash", according to the indictment. That change was not disclosed to investors, prosecutors allege.