Allianz funds scandal hands US prosecutors a $6bn scalp 

 April 11, 2022

After more than a day of grilling officials from the U.S. Securities and Exchange Commission in May last year, Stephen Bond-Nelson went to the bathroom and shortened his testimony.

The fund manager has just been presented with changes he has made to investor documents designed to create funds that helped them run AllianceEurope’s largest insurance company and one of the world’s leading asset managers, looks less risky than they used to be.

Authorities this week announced that Bond-Nelson and his former colleague Trevor Taylor have pleaded guilty to fraud Alliance $ 6 billion alliance agreed with US authorities On a scandal uncovered during a market storm related to the early 2020 plague – leaving investors worth billions of dollars.

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The US arm of Allianz Global Investors and its fund managers have “materially misled investors about the significant negative risks” of so-called Structured Alpha funds since January 2016, according to the SEC.

An indictment has been filed against Gregor Tornant, the former chief executive of $ 11 billion funds that were marketed and marketed as facing market collapse but have yet to file a lawsuit. He vowed to defend himself in court.

With the U.S. investment unit pleading guilty to fraud and banned from providing local services for a decade, the Munich-based insurance company was stunned by the episode at Allianz Global Investors, a property management business that provided just 2% of the group’s euro. Revenue of 149 billion last year.

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To Wall Street prosecutors who vowed to get stronger White collar crimeIt also provided a significant organizational scalp.

The severity of the case makes it “easy to understand why the U.S. government wanted such an aggressive and punitive outcome,” said Jacob Frenkel, a partner in the law firm of Dickinson Wright.

While Allianz is trying to put the damaging chapter behind him, legal documents from the SEC and the Justice Department show that an opportunity to identify the conduct was missed five years ago and highlight the impact that incentive structures had on the trio that runs the funds.

Following Bond-Nelson’s testimony, after which he and Taylor began collaborating with authorities, Allianz began its own intensive investigation that totaled nearly 17,000 hours of legal time and experts “to scan every email and media,” according to people familiar with the matter.

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While Torrent allegedly played Allianz – who also owns bond giant Pimco – in one conversation as a “master cop”, he told an investor in 2014 that he was “behind one of the largest and most conservative insurance companies in the world that monitors every position I understand,” the Justice Department investigation said. Pointed to “significant gaps and weaknesses” in the control of funds.

An internal audit from 2017 of Allianz’s American Investment Unit in the structured products group, which managed the funds, highlighted inaccuracies in the materials presented to investors.

“Although this audit identified red flags that, if continued, could have led to the identification of at least certain aspects of the fraud scheme, no significant follow-up has been conducted,” the Justice Department said. In fact, it was conducted by experts from the structured product group itself, “whose remuneration was directly related to the quarterly performance of the funds,” Fill says.

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Incentive structures, which included performance commissions and led to bonuses of more than $ 110 million for the three men between 2016 and 2020, were highlighted by regulators.

In an email, Tournament told colleagues that a recalculation he requested from accounting colleagues, based on restrained targets, is “[w]At a distance of about 900K to our Comp repository, “according to the SEC.

“It’s hard to believe [bonuses] “There has not been any criticism from Allianz about how the team has generated such returns,” said Jerome LaGrass, head of research at investment firm Axiom. “It sounds like some executives still believe money grows on trees.”

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Tournament surrendered to authorities in Denver, Colorado, earlier this week. His lawyers said investors’ losses in 2020 were not “the result of any crime.”

A lawyer representing Bond-Nelson declined to comment and Taylor’s lawyer did not respond to a request for comment.

Although the funds were invested over capital, debt and derivatives, regulators highlighted the sometimes rude attempts to misrepresent the funds.

Output from one extreme test of a fund, the tournament removed a digit, the SEC claimed, so that the projected losses of 42.1505489755747 percent were converted to 4.1505489755747 percent.

According to authorities, fund managers “smoothed” the performance data to reduce the size of profits and losses and documents changed the details of the funds’ hedging strategies to make the options they bought look “closer to money”, or more equal in the market. low tide.

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The hedges the funds had were not enough to keep them from running aground in the brutal market sale in March 2020, when governments around the world shut down their economies to stop the spread of the corona virus.

Allianz, whose $ 5 billion investment in compensation has led to a significant reduction in the fine, said the settlements this week resolved the affair “fully.” The investment unit is introducing additional controls over what is passed on to investors, as part of an ongoing government overhaul, according to a person familiar with the subject.

The Alliance arrangement comes as the authorities have promised Take a tougher approach For corporate abuse than during Donald Trump’s presidency, which critics saw as too lax.

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This included increased scrutiny of businesses that violate deferred lawsuits – where companies can dismiss criminal indictments in exchange for remedies and penalties – and a requirement for cooperating companies to identify more people involved in misconduct if they receive relief.

At a news conference on Tuesday, Damien Williams, the U.S. Attorney for the Southern District of New York, called the settlement “one of the most significant corporate lawsuits in history.”

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