Allianz Subsidiary Pleads Guilty to Defrauding Investors as Part of $6 Billion Settlement

The $6 billion will resolve the government’s criminal and civil claims, as well as those from defrauded investors. The agreement is among the largest criminal resolutions between a financial institution and the Justice Department in recent years.

The settlements draw a line under one of the biggest early casualties of the market meltdown sparked by the Covid-19 pandemic. Investors, including pensions that managed the retirement plans of Arkansas teachers, Milwaukee city employees and New York City subway workers, lost billions on the funds.

Allianz in a statement pointed to Justice Department findings that the criminal misconduct was limited to a handful of individuals no longer at the company. It said the Justice Department’s investigation didn’t find misconduct in other parts of Munich-based Allianz.

Three former employees of Allianz Global Investors were also charged in the scheme. Two have pleaded guilty.

Gregoire Tournant, who ran the investment group responsible for the funds’ steep losses, was indicted on several counts, including securities fraud and investment-adviser fraud. Mr. Tournant surrendered to authorities in Denver Tuesday morning.

Mr. Tournant’s lawyers said he was being unfairly targeted and was on extended medical leave during the relevant market events. “We have faith that the justice system will reject this meritless and ill-considered attempt by the government to criminalize the impact of the unprecedented, COVID-induced market dislocation of March 2020,” they said in a statement.

Trevor Taylor, Mr. Tournant’s co-lead portfolio manager of the funds, along with a third money manager in the group, Stephen Bond-Nelson, agreed to plead guilty to charges of conspiring to commit securities fraud, as well as securities fraud and investment-adviser fraud. Mr. Bond-Nelson also agreed to plead guilty to a charge of conspiracy to obstruct justice.

The SEC also sued the three men and accused them of civil securities fraud.

A lawyer for Mr. Bond-Nelson declined to comment. A lawyer for Mr. Taylor didn’t respond to requests for comment.

The case centered on Allianz Global Investors’ Structured Alpha funds, which bet heavily on stock options that effectively sold insurance to other investors that were hedging against a potential market selloff. The strategy had been profitable during the market’s calm stretch, and Allianz managers had assured investors that they had hedged their own trades in the event that the markets turned volatile.

“When there is a catastrophic event, we might have to pay—very much like an insurance company,” Mr. Tournant said during a May 2016 marketing video. “The positions we buy to protect ourselves from those catastrophic shocks—you could label those as reinsurance.”

By 2020, Mr. Tournant’s Structured Alpha funds managed more than $11 billion in assets.

The strategy faced a serious test that March, when the coronavirus swept around the globe and set off a market panic over the pandemic’s effect on the economy. Stocks fell sharply, credit markets seized up and volatility touched a record high.

As options contracts swung dramatically, Allianz managers scrambled to restructure their trades. They struggled to keep up; the stock market was spiraling lower at a pace the managers didn’t expect.

The Structured Alpha funds lost more than $7 billion in March 2020, according to the government. On March 25 of that year, Allianz informed investors that two of its funds would be liquidated.

Within months, investors in the funds began to sue Allianz and the SEC had launched an investigation into the losses.

On Tuesday, Allianz said it would transfer most of Allianz Global Investors’ U.S. business to Voya Investment Management in exchange for a 24% equity stake in the combined money manager.

Following the transaction, Allianz Global Investors would no longer operate as an investment adviser to U.S. mutual funds, a spokeswoman said. A separate unit will continue to advise on private funds in the U.S., she said. Allianz also agreed to distribute

Voya’s

funds outside the U.S.

Allianz said its guilty plea would disqualify Allianz Global Investors from advising U.S. mutual funds and certain pensions. The firm said it expects the SEC to issue waivers on Tuesday that would ensure the agreement wouldn’t affect Allianz Life or its other U.S. money manager, Pacific Investment Management Co.

Prosecutors said the Allianz scheme lasted from at least 2014 to March 2020 with Mr. Tournant reaping more than $60 million in compensation during that time. He and his team misled investors over the risks the funds were taking and how they were producing their returns, prosecutors alleged. The Structured Alpha managers also misrepresented the hedging strategies they had used to protect the funds’ assets, prosecutors said.

The government also alleged that Mr. Tournant sought to obstruct the SEC inquiry into the losses by directing Mr. Bond-Nelson to lie to the regulator.

The SEC in its case alleged Messrs. Bond-Nelson and Tournant manipulated portfolio stress-test reports sent to clients that showed their estimated losses under certain dire scenarios. In one case, Mr. Tournant reduced the projected loss under a market-crash simulation from 42.15% to 4.15%, the SEC alleged.

The men also misstated daily performance results sent to some investors, making returns look better than they were, the SEC said.

Allianz last week said it had set aside an additional $2 billion for legal expenses related to settlements with investors and discussions with the U.S. government. That came on top of the about $4 billion it had already provisioned.

—Dave Michaels contributed to this article.

Write to James Fanelli at [email protected], Justin Baer at [email protected] and Julie Steinberg at [email protected]