Allianz Global Investors has agreed to pay over $6 billion to restitution and Securities and Exchange Commission charges, and plans to move its U.S. investment management business to Voya Financial.
The SEC's charges are linked to what the agency terms as AllianzGI's "massive fraudulent scheme that concealed the immense downside risks" of its Structure Alpha strategies, according to an SEC news release Tuesday.
The settlement, agreed upon by AllianzGI and its parent, AllianzSE, consists of more than $5 billion in "restitution to victims" and more than $1 billion to settle SEC charges.
In addition, AllianzGI is "automatically and immediately disqualified from providing advisory services to U.S. registered investment funds for the next ten years, and will exit the business of conducting these fund services," the news release said.
Following the SEC announcement, Allianz Global Investors announced in its own news release it had entered into a memorandum of understanding with Voya Financial to transfer most of its U.S. business to Voya Investment Management in return for up to a 24% equity stake in that business. Teams that manage $120 billion in income and growth, fundamental equities and private placements, will join Voya, boosting its AUM to $370 billion.
Definitive documentation is to be finalized in the coming weeks and subject to customary closing conditions.
Meanwhile, the SEC complaint, which was filed in U.S. District Court in New York, alleges that Gregoire P. Tournant, AllianzGI's lead portfolio manager for its Structured Alpha strategies, orchestrated a "multi-year scheme to mislead investors" who invested about $11 billion in the strategies and paid over $550 million in fees, the news release said.
With the assistance of Trevor L. Taylor, co-lead portfolio manager, and Stephen G. Bond-Nelson, portfolio manager, the complaint alleges that Mr. Tournant "manipulated numerous financial reports and other information provided to investors to conceal the magnitude of Structured Alpha's true risk and the funds' actual performance."
Messrs. Tournant and Bond-Nelson were dismissed from Allianz Global Investors in December, according to regulatory filings, and Mr. Taylor left at the same time, a person familiar with the matter said, Bloomberg reported.
Mr. Tournant was "discharged for violation of firm policies designed to ensure compliance with industry regulations and standards relating to the preparation and provision of client communications," while Mr. Bond-Nelson's position was terminated for a "violation of firm compliance policies," regulatory filings show. The nature of Mr. Taylor's departure could not be immediately learned.
The SEC's allegations included charges against all three men, and in a parallel criminal proceeding, the U.S. Attorney's Office for the Southern District of New York announced that AllianzGI, and Messrs. Taylor and Bond-Nelson have pled guilty to criminal charges for similar conduct.
Over a dozen pension funds settled lawsuits earlier this year in which they charged AllianzGI had abandoned its investment and risk management strategies in the management of its Structured Alpha strategies that subjected investors to "undisclosed risk and ultimately led to the massive losses the funds incurred in February and March of 2020" when the emergence of the COVID-19 pandemic roiled the markets.
The Allianz Structured Alpha strategies historically have been designed to identify "areas of systematic disagreement with option prices about the probability distribution of future index moves," according to a September 2016 AllianzGI presentation, which added the investment process was designed to be both long and short volatility.
It consisted of taking range-bound spread positions, to sell options that were most likely to expire worthless (short volatility); hedged positions designed to protect against market crashes (long volatility); and directional spread positions designed to generate returns when equity indexes rise or fall more than usual during multiweek periods (long/short volatility).
An AllianzGI spokesman said in an email in June 2020 that the strategies suffered in the face of "unprecedented market turmoil" during March of that year.
During March 2020, the largest five-day percentage change in the CBOE Volatility index was 151.7%, greater than the largest five-day change of the VIX of 55% during the global financial crisis in the 2008-2009 period.
Plaintiffs in the pension fund lawsuits, however, said AllianzGI had purchased hedging puts "further out of the money" than the manager had represented in order to save on costs, purchased hedging puts that expired sooner than the risk-bearing options it hold, bet against large increases in volatility by selling options on volatility indexes and failed to conduct adequate stress tests.
The pension fund lawsuits have since been settled for undisclosed amounts. Allianz Group had announced on Feb. 18 it was setting aside €3.7 billion ($4.2 billion) to cover expected settlements with U.S. investors and government officials, and further announced on May 11 that it was setting aside an additional €1.9 billion to cover more settlements.