In a blockbuster settlement, DOJ unleashed its full power against Allianz Global and key portfolio managers responsible for a massive, long running fraud scheme involving a series of private investment funds managed by Allianz Global Investors U.S. (AGI).  These funds eventually collapsed as a result of the economic hardships caused by the pandemic, resulting in investor losses of billions of dollars.

Gregoire Tournant, Chief investment Officer and co-lead Portfolio Manager, was indicted for securities fraud, investment adviser fraud and obstruction of justice stemming from a scheme to defraud investors.  Along with the indictment against Tournant, the government unsealed two guilty pleas of Trevor Taylor and Stephen Bond-Nelson, who are cooperating in the ongoing prosecution.

AGI plead guilty to securities fraud and pay more than $3 billion in restitution to the victims, a criminal fine of $2.3 billion, and forfeit approximately $463 million in forfeiture to the government.

Simultaneously, the SEC filed a complaint relating to the alleged fraud with a proposed settlement totaling $6 billion, which will be offset by the DOJ settlement fines and penalties.

In announcing the charges, Deputy Attorney General Lisa Monaco emphasized its commitment to prosecution of corporate crimes and underscored the failure of AGI to self-report the violations.

The U.S. Attorney for the Southern District of New York highlighted the disastrous .impact that the fraud had on “[p]ension funds for so many retirees, religious organizations and essential workers — from laborers in Alaska, to teachers in Arkansas, to bus drivers and subway conductors [in New York City].

Between 2014 and 2020, Tournant was the Chief Investment Officer of a set of private funds at AGL known as Structured Alpha Funds, which were marked primarily to institutional investors, including pensions funds for U.S. workers.  Tournant and his co-conspirators misled these investors into believing that the funds were protected against any sudden stock market crashes with specific hedges that were put in place as part of the fund’s investment portfolio.

In 2015, the cost of these hedges increased significantly and Tournant decided to lie and secretly buy less effective and cheaper hedges that provided less protection to investors.  Tournant and his co-conspirators provided investors with altered documents that hid the true riskiness of the funds’ investments, including the fact that they were buying cheaper hedges.

For instance, in one report, a roughly negative 42.1% loss estimate was changed to negative 4.1%, according to the SEC. And in another example, performance data sent to investors was changed from roughly negative 18.2% to negative 9.2%.

In March 2020, following the impact of COVID-19 and the market disruptions, the AGI funds lost more than $7 billion, including over $3 billion in principal, faced margin calls and redemption requests that resulted in the closing of the funds.  More than 100 institutional investors, representing more than 100,000 individuals, were victims of this scheme.

The fraud scheme was long-running and was undetected for years.  The Structure Alpha Funds accounted for 25 percent of AGI’s overall revenue or hundreds of millions of dollars.  Tournant often touted his relationships with AGI as a well-respected financial institution, which was affiliated with Allianz SE, one of the world’s largest financial services and insurance company.

Unfortunately Allianz failed to conduct proper oversight and verification of AGI’s investment activities to ensure that they were adhering to promised investment strategies.  For example, no risk or compliance personnel at AGI verified or attempted to verify that Tournant and his colleagues were purchasing hedging positions within the range represented to investors.

Tournant’s fraudulent scheme operated with AGI’s weak control environment which failed to include procedures to verify that Tournant and his co-conspirators were telling investors the truth.

After the onset of the pandemic in 2020, Tournant attempted to obstruct the SEC’s investigation into the circumstances that resulted in the losses. According to the SEC complaint, Bond-Nelson altered certain documents in an attempt to conceal the fraud and failed to return to his SEC deposition after excusing himself to go to the bathroom.  Thereafter Bond-Nelson agreed to cooperate and shortly after that, Taylor decided to cooperate.  As part of the settlement, AGI is disqualified from providing advisory services to any U.S.-registered investment funds for 10 years