Allianz Global Investors Hit With $5 Billion Fraud Federal Charges

By - May 19, 2022
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Small businesses and nonprofit organizations around the country lost at least $5 billion when a stock market collapse related to COVID-19 pummelled private investment companies linked to Allianze Global Investors. That’s when a massive fraud was exposed.

US Attorney Damian Williams said this week that his office took the unusual step of bringing federal criminal charges against the New York City-based investment advisor. The charges were brought by the feds in part because the investment firm didn’t reveal a long-running financial fraud before the SEC stumbled on it.

Williams said in a press conference that it’s important that financial companies reach out to the SEC when something fishy is going on. You don’t want to wait until the SEC calls you, he noted. At that point, serious federal charges are likely.

Allianz Global Investors US Agreed To Plead Guilty To 2014-2020 Fraud

As part of a plea deal with federal attorneys, the investment advisor agreed to plead guilty to its part in a fraud that ran from 2014 to 2020. It also will pay $3 billion in restitution, a $2.5 billion fine, and forfeit $365 million.

Federal prosecutors say it is one of the biggest corporate resolutions in US history. AGI US is a subsidiary of Allianz SE, one of the biggest financial service and insurance companies in the world. The firm is based in Munich, Germany.

The federal government also announced securities fraud, conspiracy, and obstruction of justice federal charges against Gregoire Tournant, 55, from Basalt, Colorado. He is the former chief investment officer for several funds at AGI US that was worth over $11 billion at one time.

Two other men who are being blamed for the financial fraud are pleading guilty and are cooperating with the feds, Williams added. He noted that Tournant and several co-conspirators lied to investors and exposed them to a lot of financial risks to make illegal profits.

Williams said that pension funds for essential workers, retirees, and religious organizations invested with AGI because they thought it was a safe investment without a lot of risks.

However, AGI US wasn’t paying close attention with the COVID-related market crash happened, and their investors got hammered and lost billions of dollars.

SEC Says Victims ‘Will Be Made Whole’ Soon

SEC Director of Enforcement Gurbir Grewal told the media this week that the financial fraud victims do have some good news on the horizon, noting that they will be made whole after the $5 billion loss.

He added that the SEC financial penalties against AGI US were the biggest penalties in an SEC case in more than 20 years. The penalties were $315 million in disgorgement, $34 million in prejudgement interest, and a civil penalty of $675 million.

‘Structured Alpha’ Put Investors At Risk Without Their Consent

In the civil legal complaint that was filed in Manhattan federal court, the financial watchdog said that Tourant and other conspirators carried out a huge scam that concealed the large downside risk of a complicated options trading method that is called Structured Alpha.

Grewal stated that the firm earned $550 million in commissions while the defendants told lies about a really complex investment strategy that was marketed to institutional investors. Some of the money invested were pension funds that contained the retirement assets of regular Americans.

The SEC noted that AGI US sold the investment method to 115 institutional investors, including the pension accounts for bus drivers, engineers, clergy, and teachers.

Five of the Structured Alpha funds lost between 49% and 98% of their value during Q1 of 2020. Allianz did a liquidation of the investments in March 2020 and was been winding down the others.

It is alleged that Tournant and two others overestimated the amount of independent oversight that AGI offered. They also allegedly misrepresented hedging and several other risk-mitigation methods and forged documents to hide how risky the funds were.

But the funds were marketed to investment institutions as offering broad exposure to the markets while maintaining careful risk protections to shield against losses if there was a market crash.

However, in 2015, Tournant was frustrated with how much hedging cost was affecting the fund’s returns. That’s when the fund gave up the hedging strategy and started to purchase less expensive hedges that were riskier if there was a market crash.

Unfortunately, there was a government-induced market crash in March 2020 when public health officials recommended shutting down large parts of the US economy to mitigate the spread of COVID-19.

Tournant’s Attorney’s Vigorously Contesting The Federal Fraud Charges

Tournant surrendered to federal agents this week. His attorneys said in a statement to the press that the federal prosecutors were trying to criminalize the effects of the COVID-induced market disruption in March 2020.

They added that Tournant is being unfairly targeted especially because he was taking medical leave at that time. And the funds had previously done well under his 14-year stewardship.

Also, the losses that came from those negative marketing events were suffered by many institutional investors who had a lot of cash invested in the fund. While the losses are unfortunate, they weren’t caused by a crime, his attorneys said.

They noted that the federal government’s efforts to characterize the losses as a crime are damaging Tournant’s reputation and finances. They also are dangerous to the financial markets, the lawyers claim. But their client looks forward to defending himself in federal court.