Allianz Global Investors U.S. (AGI) and three former portfolio managers were charged Tuesday with lying to investors about a complex options trading strategy, as well as forging documents to cover up the scheme, leading to multibillion dollar losses.

AGI admitted the misconduct and agreed to pay more than $1 billion to settle fraud charges announced by the Securities and Exchange Commission (SEC). Together with its parent company, Germany-based Allianz SE, the entities will pay more than $5 billion in restitution to victims.

“Structured Alpha,” the fraudulent investing strategy AGI marketed and sold to approximately 114 institutional investors, was exposed after the Covid-19 market crash of March 2020, according to an SEC press release.

The agency’s complaint alleged Structured Alpha’s lead portfolio manager, Gregoire Tournant, concocted the scheme from January 2016 to March 2020, misleading investors that included pension funds for teachers, clergy, bus drivers, engineers, and other individuals. The fund ballooned to $11 billion in total investment during that time, which helped Tourant and his accomplices net over $550 million in fees, according to the complaint.

The complaint further alleged portfolio managers Trevor Taylor and Stephen Bond-Nelson, who each ultimately cooperated with the SEC’s investigation, helped Tournant manipulate financial reports and other information provided to investors to conceal the magnitude of Structured Alpha’s true risk and actual performance.

Specific examples of the fraud included Tournant, Taylor, and Bond-Nelson allegedly manipulating metrics to provide risk assessments under a market crash scenario, with brazen instances of how they “smoothed” performance data sent to investors by reducing losses on one day from negative 18.3 percent to negative 9.3 percent.

The U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Tournant, along with subsequent guilty pleas from Taylor and Bond-Nelson, according to a press release.

“No risk or compliance personnel at AGI 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,” the press release stated.

AGI will plead guilty to securities fraud and pay more than $3 billion in restitution to victims, a $2.3 million criminal fine, and forfeit approximately $463 million to the government, the Department of Justice (DOJ) announced.

U.S. Attorney Damian Williams praised Allianz SE for making the victims of the fraud whole.

“No compliance system is perfect, but the controls at AGI didn’t even stand a chance to protect or prevent a cyber fraud. And of course, AGI did not self-report this fraud. They didn’t even discover it,” Williams said in a press conference announcing the indictment. “I want to specifically commend Allianz and the leaders of Allianz for their willingness to do the right thing and compensate the innocent victims of the fraudulent scheme. That cooperation and the willingness to compensate victims are factors that led to a significant reduction in the fine that AGI will be required to pay.”

In a statement, Allianz SE acknowledged the guilty pleas of AGI but noted the fraud was limited to a “handful of individuals” in a group who are no longer employed by the company.

“The DOJ’s investigation did not otherwise find any knowledge of, or participation in, the misconduct at Allianz SE or any other entity of the Allianz Group,” the company stated.

AGI admitted its conduct violated 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. The company is further disqualified from providing advisory services to U.S. registered investment funds for the next 10 years, following a transition period.

The SEC’s complaint seeks 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 agreed to the entry of partial judgments in which they consented to monetary penalties to be determined by the court in the future. Taylor and Bond-Nelson also agreed to associational and penny stock bars.

The settlements are subject to court approval.

Jeff Dale is the Digital Editor of Compliance Week. He previously worked as a copy editor with the Boston Herald and Patriot Ledger in Quincy, Mass., and is a former city editor of The Hour Publishing Co. in Norwalk, Conn.

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