Another investor, the board of a pension fund run by the International Brotherhood of Electrical Workers, filed a lawsuit in 2020 that purported to identify what went wrong. Email notifications are only sent once a day, and only if there are new matching items. Making Sense of the NAIC Risk Oversight Landscape, For This HNW Firm, It's Crunch Time for Estate Planning, 20 Cities With the Most Ultra-Wealthy Residents, What to Do When Generations Clash Over Philanthropy, Former Head of Fidelity Billionaires Family Office Leaves Firm. Even so, the payout is close to twice the $3.3 billion in corporate penalties that the Justice Department collected for all of 2021. Browse an unrivalled portfolio of real-time and historical market data and insights from worldwide sources and experts. 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 multi-year scheme to mislead investors who invested approximately $11 billion in Structured Alpha, and paid the defendants over $550 million in fees. Four billion dollars wrong so far, with outside estimates that it could grow much larger. Tournant, who is fighting the charges, was ordered released on a $20 million bond at a hearing Tuesday afternoon, where his lawyer told the judge that prosecutors had been investigating for more than a year. Mr Tournant and Mr Taylor worked together well over a decade ago when they were at Structured Alphas predecessor, Options Management, which had a similar strategy. The industry leader for online information for tax, accounting and finance professionals. Instead of employing the usual formula for hedge-fund fees the 2 and 20 mix of management charges and a cut of profits they were compensated for one thing alone: performance. Russia takes its war with Ukraine to Londons High Court as battle begins over a soured $3bn bond deal, Worlds top insurers to face aircraft leasers in High Court mega trial over planes seized by Russia. That change was not disclosed to investors, prosecutors allege. All of the reward, very little risk. Investor lawsuits and settlements have piled up. The SEC appreciates the assistance of the U.S. Attorneys Office for the Southern District of New York and the U.S. Instead of being part of the companys planned expansion to waterfront offices, Frenkel ended up helping liquidate the business. What goes up, must come down unless a portfolio manager simply fudges the numbers, sometimes simultaneously with comically simple math and a dizzying number of decimals. It turns out that Tournant and other fund managers behind Structured Alpha including longtime colleague Trevor Taylor previously ran into trouble during the 2008 financial crisis, with strategies that also involved options. Two other executives with the funds agreed to plead guilty and are cooperating with authorities. These institutional investors included, among others, pension funds for teachers in Arkansas, laborers in Alaska, bus drivers and subway conductors in New York City, as well as religious organizations, engineers, and other individuals, universities and charitable organizations across the United States. The Department stands ready to keep bringing these kinds of charges to assure the public thatno one is above the law.. Mr Tournants group used equity-based options to market what he said was an all-weather strategy that would protect investors from losses in good times and bad. Feb. 17 Allianz says it will set aside 3.7 billion euros ($3.90 billion) to deal with investigations and lawsuits. An indictment was unsealed today in the Southern District of New York charging Gregoire Tournant, the Chief Investment Officer and co-lead Portfolio Manager for a series of private investment funds managed by Allianz Global Investors U.S. LLC (AGI), with securities fraud, investment adviser fraud and obstruction of justice offenses in connection with a scheme to defraud investors. Our Standards: The Thomson Reuters Trust Principles. Those products would even turn a profit when markets went nowhere, according to product marketing materials. While regrettable, the losses are not the result of any crime, they said. For the second time in under a month, the Department has brought charges in connection with a sophisticated Wall Street scheme that cost victims billions of dollars. $L% x-GU f*na"WHn^>EmI`*f@eKh rH}={q3P3B"27Uh*_.~IJ@2H_,@S.)(|s vwA\r[9S8R`'ow\5&Lx`LUC^-rHAeh0x*od{dt" {+PsCBjT0b1F|=]dK2D"`7e >a\!M/69TS.lKk`4.Gz6NEfI:LX.wS06;.>k"j7v1r.>0t`1VJ>?=[yE Investors allege Allianz and Structured Alpha abandoned risk controls and turned a challenging situation into a disaster by doubling down on a bad strategy. A .gov website belongs to an official government organization in the United States. Neil Weinberg, Alex Wittenberg and Will Louch, Analysis It all came crashing down in the early, panicked days of COVID-19, when wild market swings upended an options strategy that was marketed as aiming to generate alpha regardless of market waves. During the first quarter of 2020, five Structured Alpha funds lost between 49% and 97% of their value, performance that investors contend in legal filings was far worse than similar strategies. Think Archegos, Long-Term Capital Management and the hedge funds whose collapse led to the demise of Bear Stearns. The funds writedown will put a costly end to what Allianz once described as a third way for investors to harvest sustainable alpha.. 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. Allianz is still grappling with the fallout. Much of this historic fraud was made possible because AGIs control environment was not designed to verify that Tournant and his co-conspirators were telling investors the truth. They included dozens of public and private pension plans for the likes of Blue Cross & Blue Shield and New Yorks Metropolitan Transportation Authority. "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," the lawyers said in a joint statement. The cooperation of Mr Taylor and Mr Bond-Nelson was not assured. At the center of the debacle is Greg Tournant, 55, an equity-options whiz and one-time McKinsey & Co. consultant. The board alleged that when the pandemic started fueling wild volatility in February, Structured Alpha made a fateful bet against further market declines. 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, a portion of which will be distributed to certain investors, with the amount of disgorgement and prejudgment interest deemed satisfied by amounts it paid to the U.S. Department of Justice as part of an integrated, global resolution. Investigators said the misrepresentations began in 2014, and helped Allianz generate more than $400 million of net profit. It fired Tournant and another fund manager, Stephen Bond-Nelson, in December, accusing them of violating compliance policies, according to public records filed with the Financial Industry Regulatory Authority. In the complaint, the SEC describes Tournant as a resident of Miami, Florida except he also is a resident of Basalt, per reports in the Washington Post and The (Colorado Springs) Gazette. They included dozens of public and private pension plans for the likes of Blue Cross & Blue Shield and New Yorks Metropolitan Transportation Authority. 371 (Count One), United States v. Stephen Bond-Nelson, 22 Cr. After that firm failed during the financial crisis, they regrouped and were eventually acquired by Allianz, with its global brand and vaunted internal controls. Allianz Fires 2 Asset Managers Who Ran Group of Collapsed Investment Funds Two years after the spectacular collapse of the insurance giants Structured Alpha hedge funds, a low-profile business registered in Florida, 5,000 miles from the Munich headquarters, the shock waves continue to reverberate. The 55-year-old investment manager now faces up to 40 years in prison on five separate counts of fraud and conspiracy to obstruct justice. While Mr Tournants funds might have sounded too good to be true, Allianz Global Investors US assured clients that its risk-management system had three lines of defence. And when the storm came in March 2020, when the COVID-19 crash hit, these investors got soaked and lost billions. The result was a massive fraud that cost investors $US7 billion ($10 billion), they say. Disaster struck in 2008 when the collapse of Lehman Brothers rocked global finance, freezing up markets and with them, Innovative Options trades. Access unmatched financial data, news and content in a highly-customised workflow experience on desktop, web and mobile. Share sensitive information only on official, secure websites. 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. Instead of being part of the companys planned expansion to waterfront offices, Frenkel ended up helping liquidate the business. Disaster struck in 2008 when the collapse of Lehman Brothers rocked global finance, freezing up markets and with them, Innovative Options trades. Thats according to the Arkansas Teacher Retirement System, which in February settled a suit over its Structured Alpha losses for $643 million. Valuation, Fundamentals, Momentum: The Case for Mid-Cap Value Stocks, Bond Fund Yields: What Investors Need to Know, How to Build Your Ultimate Marketing Plan. Those funds ultimately collapsed, leading to billions of dollars of investor losses. Allianz Global Investors US pleaded guilty to one count of securities fraud and agreed to pay about $US6 billion to resolve the case. Between 2014 and 2020, Gregoire Tournant, the defendant, was the Chief Investment Officer of a set of private funds at AGI known as the Structured Alpha Funds. Every single time we greatly benefited from the higher levels of volatility and were able to generate much higher returns in the following two or three months after the draw-down, Tournant said in a 2016 marketing video. Please tell us what we can do to improve this article. Allianz Global Investors U.S. LLC Also Charged with Securities Fraud, Agrees to Plead Guilty. Tournant, with Allianz Global Investors since 2002, founded the so-called Structured Alpha funds in 2005. But AGI, the master cop that Tournant claimed was watching over his shoulder, making sure that he adhered to his promises, was asleep on the beat. Soon, he decided to cooperate and assist the SEC staff in understanding the Structured Alpha fraud, according to the agency complaint. Because AGI, a registered investment adviser, failed to provide meaningful oversight, Tournant and his co-conspirators were able to deceive investors about the risks they were taking with their money. According to the 54-page SEC complaint filed with the Department of Justice which did not return an inquiry for comment by presstime Tuesday the U.S. subsidiary of the Germany-headquartered Allianz SE (among the worlds largest financial-advisory and insurance companies) essentially cost mostly American investors more than $5 billion in March 2020. He earned a grade of A+, which is not easy in my class. Marketing material describes the funds as a tested & proven solution and consistently above target. They are marketed as a confident strategy with an insurance spirit.. Aug. 1 Allianz publicly discloses the DOJ investigation and says it could take a financial hit. The over-the-counter spreads were so great, they couldnt close positions, said Frenkel, who was chief compliance officer for Innovative Options. This case is being handled by SDNYs Securities and Commodities Fraud Task Force. According to an initial report by Bloomberg, the trio used to manage the Structured Alpha funds, but all left the company in December 2021, per company filings. They were marketed in particular to typically conservative U.S. pension funds, from those . At the center of the debacle is Greg Tournant, 55, an equity-options whiz and one-time McKinsey & Co. consultant. guidelines." According to Tournant, Allianz SE was a "master cop" that closely monitored the Structured Alpha Funds' "every single move." 11. "No compliance system is perfect, but the controls at AGI didn't even stand a chance," Williams said. Also unsealed today are the guilty pleas of Trevor Taylor and Stephen Bond-Nelson in connection with their respective roles in the scheme. Tournant, the former chief investment officer who created and oversaw Allianz's now-defunct Structured Alpha funds, was indicted in May on fraud, conspiracy and obstruction charges and. Mr Tournant, 55, now faces charges that are upending his career and could send him to prison for a decade or more if he is convicted. Attorneys Margaret Graham, Gina Castellano, Nicholas Folly and Richard Cooper are in charge of the prosecution. To avoid disruptions to these funds and for the protection of the fund investors, the SEC will allow a brief transition period solely to transition these services to another investment adviser. "Those promises were lies. Today is the day for accountability.". During the first quarter of 2020, five Structured Alpha funds lost between 49% and 97% of their value, performance that investors contend in legal filings was far worse than similar strategies. surge" that had occurred in February 2018, Allianz said that "Structured Alpha's option portfolio is positioned for a strong improvement in the event of another February 2018-type move." Unfortunately for ATRS, Allianz departed from the Alpha Funds' investment mandate and disregarded the risk management protocols it was required to . Copyright 2023 by Wells Media Group, Inc. Allianz Fires 2 Asset Managers Who Ran Group of Collapsed Investment Funds, Allianz Sets Aside $4.2B to Handle Probes, Lawsuits After Collapse of Investment Funds, NFL Prospect Injured in Fatal Car Crash in Alabama, Global Insured Losses Estimated at $15B in Q1, With Economic Price Tag of $63B: Aon, Miami Homeowner Charged with Defrauding Citizens by Claiming Old Damage, Florida Roofing Company Owners Plead Guilty to More Than $1M in Tax Evasion. Taylor and Bond-Nelson also agreed to associational and penny stock bars. July 21 Allianz publishes a paper saying that losses were not the result of any failure in the portfolios investment strategy or risk management processes. It has since been removed from the web. The Securities and Exchange Commission (SEC) today 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. AGI US marketed and sold the strategy to approximately 114 institutional investors, including pension funds for teachers, clergy, bus drivers, engineers, and other individuals. Reuters provides business, financial, national and international news to professionals via desktop terminals, the world's media organizations, industry events and directly to consumers. After the COVID-19 market crash of March 2020 exposed the fraudulent scheme, the strategy lost billions of dollars as a result of AGI US and the portfolio managers misconduct. Regulatory filings show that both Greg Tournant and Stephen Bond-Nelson were removed from their positions as managers of Allianz Global Investors Structured Alpha hedge funds in December for 'violation of firm policies designed to ensure compliance with industry regulations and standards relating to the preparation and provision of client communications', and 'violation of firm compliance . Authorities had accused Aliianz's U.S. unit, Allianz Global Investors US LLC, of misleading pension funds and having "significant gaps" in its oversight. These funds were marketed largely to institutional investors, including pension funds for workers all across America. ", 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. The industry leader for online information for tax, accounting and finance professionals. Former colleagues have turned on him, as has Allianz. Gregoire Tournant, 55, Trevor Taylor, 50, and Stephen Bond-Nelson, 51, all were charged with a massive fraudulent scheme, as described in an SEC press release. The trade proved disastrous for the Allianz fund managers when the index tanked in late February, and global markets experienced their largest single-week declines since the height of the 2008 financial crisis, the board claimed. Exclusive news, data and analytics for financial market professionals, Reporting by Jonathan Stempel in New York and Tom Sims and Alexander Huebner in Munich This material may not be published, broadcast, rewritten, or redistributed. News on Tuesday that the US unit of the German insurance giant was admitting guilt over the collapse of its Structured Alpha group of hedge funds leaves many questions unanswered, including a big one: Will Mr Tournant, who had told investors Structured Alpha would do well whether markets went up or down, end up in prison? Investors allege Allianz and Structured Alpha abandoned risk controls and turned a challenging situation into a disaster by doubling down on a bad strategy. Its every investors dream: Make money when markets go up, and when markets go down, and even when markets go practically nowhere. Get alerted any time new stories match your search criteria. He was at the top of the class, and his work was excellent in all respects. The insurer warned last month that ongoing probes by the Justice Department and SEC are at a sensitive stage and it couldnt yet predict the final price tag from regulatory settlements and private litigation. Instead of laddering with strike distances from -10% to -25% as represented to investors, the portfolio management team, at Tournants direction, generally purchased cheaper put options with significantly lower strike prices, the SEC complaint notes. Deep-pocketed investors piled in. Structured Alphas performance was solid. March 4 Allianzs annual report discloses that Allianz Chief Executive Oliver Baete earned 9% more in 2021 despite a cut in his bonus for the funds saga. An official website of the United States government. More than 100 institutional investors, representing more than 100,000 individuals, were victims of this scheme. Investors are also told chief fund manager Tournant had been ill for weeks, according to lawsuits. An arraignment was set for June 2 in New York. He was arrested in Colorado though not by local authorities, according to officials from the Pitkin County Sheriffs Office, Aspen Police Department and Basalt Police Department and subsequently released on $20 million bond, per reporting from Bloomberg. Allianz is still grappling with the fallout. Tournant surrendered to Postal Inspectors in Denver, Colorado, this morning and is expected to be presented later today. But Tuesdays indictments are indicative of a harder line from the Justice Department regarding high-level fraud schemes. Required fields are marked *. The funds writedown will put a costly end to what Allianz once described as a third way for investors to harvest sustainable alpha.. When the 2020 COVID-related market volatility revealed that AGI US and the defendants had misled investors about the funds level of risk, the fund suffered catastrophic losses and investors lost billions; the defendants all the while profited from their deception. U.S. Attorney Damian Williams for the Southern District of New York and Inspector-in-Charge Daniel B. Brubaker of the New York Office of the U.S. Feb. 18 Allianz announces bonus cuts for its CEO and board, and a settlement with a vast majority of investors. Prosecutors say that although Mr Tournant assured big investors safety was his top priority, he secretly took huge, undisclosed risks. Washington D.C., May 17, 2022 . Allianz Global Investors US LLC was accused of misleading pension funds for teachers, bus drivers, engineers, religious groups and others by understating the funds' risks, and having "significant gaps" in its oversight. Files are available under licenses specified on their description page. (Reporting by Tom Sims; editing by Tomasz Janowski). "Greg Tournant has been unfairly targeted despite the fact that he was on extendedmedical leave during thesemarket events, and the funds had thrived under his leadership for the previous 14 years. The conviction carried a 10-year ban on Allianz Global Investors providing advisory services to U.S.-registered investment funds. Allianz, which has denied wrongdoing, said earlier this month that independent advisers its hired to dig into what happened have thus far found no breaches of duty by the insurers management board. Allianz, which also owns bond powerhouse Pacific Investment Management Co., has resolved some of its legal woes, including a February settlement with a majority of investors for undisclosed terms. Catch up on the week's most-read stories. The Commission stands ready to use all appropriate tools to protect investors, including upholding prohibitions against certain activities by the guilty parties. There was a problem saving your notification. 149 (DLC), Conspiracy to commit securities fraud, investment adviser fraud, and wire fraud, 18 U.S.C. Share & Print. The group still operates 25 funds in its Structured Alpha family. At Allianz Global Investors U.S., Tournant and his Structured Alpha team were incentivized to pursue outsized returns. Tournant himself was heavily invested in the funds he managed and lost money along with clients, according to a person familiar with the matter. In March 2020, following the onset of market dislocations brought on by the COVID-19 pandemic, the funds lost in excess of $7 billion in market value, including over $3.2 billion in principal, faced margin calls and redemption requests, and ultimately were shut down. Allianz in February set aside $4.1 billion for the disaster, but the final reckoning is still due and could cost plenty more. The insurer continues to pick up the pieces. I previously warned that the Department of Justice would crack down on corporate crime, without regard to size, salary or other privilege, said Deputy Attorney General Lisa O. Monaco. See here for a complete list of exchanges and delays. L@IW$',Bt^[J[>}+$"j|\,/cmhyqyRdY'yD,1. R&qr`$."Eb+[#iw}|`9 pT(G!t'm As alleged, Gregoire Tournant and his co-conspirators lied to investors and secretly exposed them to substantial risk in order to line their own pockets and those of their employer, AGI, said U.S. Attorney Damian Williams in a statement. A lock (LockA locked padlock) or https:// means youve safely connected to the .gov website. 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. It all came crashing down in the early, panicked days of Covid-19, when wild market swings upended an options strategy that was marketed as aiming to generate alpha regardless of market waves.. Reuters, the news and media division of Thomson Reuters, is the worlds largest multimedia news provider, reaching billions of people worldwide every day. Allianz also accepted a $675 million civil fine from by the SEC, one of that regulator's largest penalties since Enron Corp and WorldCom Inc imploded two decades ago. See here for a complete list of exchanges and delays. The case has been assigned to U.S District Court Judge Laura Taylor Swain. In a parallel criminal proceeding, the U.S. Attorneys Office for the Southern District of New York today announced criminal charges for similar conduct against AGI US, Tournant, Taylor, and Bond-Nelson. In early March of 2020, as he was grappling with the pandemics effect on his funds, Tournant went on medical leave for undisclosed reasons, the person said. All structured data from the file namespace is available under the Creative Commons CC0 License; all unstructured text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By December 2019, Structured Alpha had grown to more than $10 billion, according to a person familiar with the matter. Japan's Nissan Motor on Tuesday unveiled a new electric sport-utility vehicle (SUV) at the Shanghai auto show as it pledged its commitment to the Chinese auto market, which it said was likely to continue to pioneer the rise of electric cars. The multiyear, multibillion-dollar scheme was simple in concept but complicated in practice, especially for those uninitiated with Wall Street. The U.S. Megan Tackett is the editor for the Aspen Daily News. March 11, 2022 at 01:54 PM For instance, say an investment fund actually performs with a -30.8197078741882% return, but the investor is told that the actual number is -15.4098539370941882% as Allianz Global Investors U.S. LLC told its investors in a month-end March 2018 income deposit security, or IDS, report. Roman Frenkel was a first-hand witness to the Structured Alpha teams earlier failure when he worked at Innovative Options Management, the small Miami firm that Taylor founded and Tournant helped run briefly while continuing to manage money for Allianz. 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. 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," said Gurbir S. Grewal, Director of the SECs Division of Enforcement. :7iH#+w|R42>/.Y/V_^h"XX>.2XGCcp. Allianz was confident enough in Tournants team that it let them charge a performance fee alone of 25% to 30% of net capital appreciation above a benchmark. Allianz SE has agreed to pay more than $6 billion in restitution through a settlement with federal prosecutors and AGI U.S. will plead guilty to criminal securities fraud. Its Alpha U.S. Equity 250 fund posted average annual returns of 10.9% between early 2005 and June 2018, compared with the S&P 500s 8.7% average annualized return over the same period, according to a 2018 marketing document. At the center of the debacle is Greg Tournant, 55, an equity-options whiz and one-time McKinsey & Co. consultant. Regulators said the misconduct included when Tournant and Bond-Nelson altered more than 75 risk reports before sending them to investors. Allianz Global Investors also failed to keep watch over Tournant, the New York prosecutors said, as they claimed the firm was asleep on the beat while the fund manager and his co-conspirators lined their own pockets by misleading pension funds. March 13 The investment consultant Aon warns Structured Alpha investors in a flash report that it put the Structured Alpha funds on review. Our Standards: The Thomson Reuters Trust Principles. You have permission to edit this article. In another example, defendants smoothed performance data sent to investors by reducing losses on one day from negative 18.2607085709004% to negative 9.2607085709004% -- this time by cutting the number 18 in half. Also known for its insurance operations, Allianz is among Germany's most recognizable brands and an Olympic sponsor. Here is timeline of key events in the saga, based on court documents, corporate disclosures, archived websites, public statements, and minutes of investor meetings: Allianzs U.S. asset management arm establishes the so-called Structured Alpha funds under manager Greg Tournant. The comments come after Allianzs $11bn Structured Alpha funds racked up $6bn in losses at the start of the pandemic, as its risky options strategy faltered in the face of stock market volatility at the start of Covid-19. And its far from the only time the defendants performed such egregious manipulations of the numbers when it came to selling and managing a fund known as Structured Alpha. And when the storm came in March 2020, when the COVID-19 crash hit, these investors got soaked and lost billions. Both are cooperating with the government. 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