Bus drivers, teachers and religious and charitable organizations across the United States lost over $5 billion to a massive fraudulent scheme by a financial industry giant that managed to conceal the "immense downside risks" of its complex options trading system until the coronavirus triggered wild market swings, authorities said Tuesday.
U.S. Attorney Damian Williams said his office took the rare step of bringing criminal charges against Allianz Global Investors US LLC, a New York City-based investment adviser, in part because the company failed to reveal an “egregious, long running and expensive fraud” before the Securities and Exchange Commission discovered it.
“Make sure you call us before we call you,” Williams told a news conference, vowing to remain “relentless in rooting out corruption in our financial markets.”
As part of a deal with prosecutors, Allianz Global Investors US LLC agreed to plead guilty Tuesday to its role in a fraud stretching from 2014 to 2020 and pay $3.2 billion in restitution, a $2.3 billion fine and to forfeit $463 million. Prosecutors called it one of the most significant corporate resolutions in history.
AGI US is an indirect, wholly owned subsidiary of the Munich, Germany-based Allianz SE, one of the world's largest financial services and insurance companies.
The prosecutor also announced conspiracy, securities fraud and obstruction of justice charges against Gregoire Tournant, 55, of Basalt, Colorado, the former chief investment officer for a series of funds at AGI US that was once worth $11 billion. Two other men blamed in the fraud have pleaded guilty and are cooperating, Williams said.
Williams said Tournant and his co-conspirators lied to investors and secretly exposed them to substantial risk to illegally profit.
“Pension funds for so many retirees, religious organizations, and essential workers – from laborers in Alaska, to teachers in Arkansas, to bus drivers and subway conductors here in New York City – invested with AGI because they were promised a relatively safe investment with strict risk controls,” he said.
But he said that despite Tournant's claims that the corporate “master cop” was looking over his shoulder, AGI US was “asleep on the beat” and when the coronavirus-induced market crash arrived, “these investors got soaked and lost billions.”
Still, SEC Director of Enforcement Gurbir S. Grewal told the news conference that victims “have been, or soon will be, made whole” from a fraud that cost them $5 billion.
He said the SEC penalties against AGI US, which included $315.2 million in disgorgement, $34 million in prejudgment interest and a $675 million civil penalty, were the largest penalties in an SEC case brought by the agency in two decades.
In a civil complaint filed in Manhattan federal court, the SEC said Tournant, his co-conspirators and his company had carried out a “massive fraudulent scheme that concealed the immense downside risks of a complex options trading strategy they called ‘Structured Alpha.’”
Grewal said the company earned over $550 million in fees while “the defendants lied about nearly every aspect of a highly complex investment strategy they marketed to institutional investors, including pension funds managing the retirement savings of everyday Americans.”
The SEC said AGI US marketed and sold the strategy to about 114 institutional investors, including pension funds for teachers, clergy, bus drivers, engineers and others.
Meanwhile, Tournant surrendered Tuesday in Denver.
In a statement, his attorneys – Seth L. Levine and Daniel R. Alonso – said the prosecution was a “meritless and ill-considered attempt by the government to criminalize the impact of the unprecedented, COVID-induced market dislocation of March 2020.”
They said Tournant was unfairly targeted, particularly because he was on extended medical leave at the time, and the funds had thrived under his leadership for 14 years.
“The losses resulting from these market events were suffered by sophisticated institutional investors – including Greg himself who had a considerable investment in the fund. While the losses are regrettable, they are not the result of any crime,” the lawyers said.
“The Government’s attempt to characterize them as such is not only unfairly damaging to Greg’s reputation and livelihood, but extremely dangerous to the market as a whole. Greg looks forward to vigorously defending himself in Court against these charges,” the lawyers added
