US Department of Justice: Allianz fund managers defrauded investors

After a settlement with the US authorities, Allianz is now ready to pay a fine of $174.3 million to the US Department of Justice (DoJ) and $675 million as a penalty to the US Securities and Exchange Commission. Together with the approximately five billion dollars that Allianz paid as compensation to around 25 major US investors, the damage to Allianz totals around 5.85 billion dollars.

“Allianz Global Investors has admitted to having defrauded investors, concealed losses and concealed risks of a complex strategy for several years,” reads the agreement with the SEC, which was also reached on Tuesday. AGI is also said to have failed to introduce important risk controls. In the meantime, the structured products department has been dissolved.

Agreement after more than two years

A good two dozen pension funds and other large investors in the United States had sued Allianz for around six billion dollars after the failed strategy.

She had sold them the hedge funds with a volume of 15 billion dollars as a supposedly safe investment. At the beginning of the corona crisis, however, investors lost a large part of their stake when the stock markets came under pressure. They accused Allianz of deviating from its investment strategy in view of the temporary panic on the markets.

The problems intensified for Allianz last summer when, in addition to the SEC, the US Department of Justice also began investigating the proceedings. Since then, the alliance around CEO Oliver Bäte has been under pressure from investors: They complained that the ongoing proceedings were having a negative impact on the share price. Even a record profit of 13.4 billion euros for the past year gave the course no boost.

With the agreement with the US authorities, the group now wants to end the issue. A spokesman said all amounts were covered by the provisions. CFO Giulio Terzariol had already emphasized last week that the provisions made totaling 5.6 billion euros were sufficient for compensation and penalties

Legal aftermath for fund managers

At the same time, the loss of billions from the failed strategy for fund managers at AGI has legal repercussions. The US Department of Justice said on Tuesday that the chief investor for several “Structured Alpha” funds, Greg Tournant, and two fund managers had manipulated the development of the funds for years. The risks associated with the investments were understated.

Chief investor Tournant is accused of conspiracy, securities and investment fraud and obstruction of justice. A ministry spokesman said he turned himself in to the authorities in Denver.

The three criminally indicted portfolio managers, Trevor Taylor, Stephen Bond-Nelson and Gregoire Tourant, are said to have “tampered with multiple reports and other information provided to investors,” according to the SEC. In one instance, they are said to have reduced the potential losses in a crash scenario “from 42.1505 to 4.1505 percent simply by omitting the two.” In another case, the portfolio managers are said to have “smoothed” a one-day loss by simply halving the number before the decimal point, from 18.26 to 9.26 percent, according to the SEC document published on Tuesday.

Allianz blames the hedge fund debacle on a few people in the structured products department at AGI US who are no longer employed by Allianz. She also refers to the investigation by the Ministry of Justice, which found neither involvement nor knowledge of the alliance or any of its groups.

A few months ago, the prevailing view was that the losses were primarily due to misspeculation. Accordingly, the fund managers misjudged the severe turbulence that prevailed at the beginning of the pandemic and then deviated from the strategy agreed with their clients.

However, the investigations by the US authorities have now shown that the fund managers have been deliberately misleading investors since at least 2014. There were far fewer safety nets than stated to protect major investors from losses in the event of a crash. “No compliance system is perfect, but AGI’s didn’t stand a chance,” prosecutor Damian Williams said at a press conference in New York on Tuesday. Companies are rarely sued in the US, but in this case it was “the right decision.”

Impact on AGI’s US business

There are also consequences for AGI’s further business activities in the USA. Since the AGI pleaded guilty, “it is automatically and immediately disqualified from advising registered US mutual funds for the next ten years,” the SEC clarified. However, there will be a transition period to ensure a smooth handover.

AGI’s management responded by publicizing its plan on Tuesday to work with asset manager Voya IM in the United States. AGI intends to take a stake of up to 24 percent in Voya’s capital.

In addition, selected investment teams and assets will move from AGI to Voya. In an ad hoc announcement by Allianz on Tuesday, assets under management are said to be around $120 billion.

That would be a huge boost for Voya. Assets under management would grow to around $370 billion. The long-term strategic partnership, which is expected to be finalized in the coming weeks, is also expected to include a long-term strategic partnership between AGI and Voya outside of the US market.

It had already been expected in the past few months that the US subsidiary of AGI would no longer be allowed to operate parts of the business in the USA itself. Around a sixth of the managed AGI assets of around 640 billion euros are in the USA. Therefore, not only the penalties, but also the future business restrictions hit the group sensitively, Allianz said on Tuesday. With the participation in the previously unencumbered asset manager Voya, a new beginning is being attempted.

More: “How could you go so wrong?” – Shareholders sharply criticize Allianz