In the wake of the SEC announcing a $6 billion securities fraud deal against Allianz Global Investors U.S. LLC (AGI U.S.), the firm off-loaded most of its U.S. investment management business as part of the terms of the deal.
The SEC announced May 17 that it had charged AGI U.S. and three former senior portfolio managers with a massive fraudulent scheme that concealed the downside risks of a complex options trading strategy called “Structured Alpha.”
Consequently, AGI U.S. has agreed to pay billions of dollars as part of an integrated global resolution, including more than $1 billion to settle the SEC charges and, together with its parent Allianz SE, more than $5 billion in restitution to victims.
As part of the settlement, AGI U.S. admitted that its conduct violated federal securities laws and agreed to a cease-and-desist order, a censure and payment of more than $315 million in disgorgement, $34 million in prejudgment interest and a $675 million civil penalty, a portion of which will be distributed to certain investors, with the amount of disgorgement and prejudgment interest deemed satisfied by amounts it paid to the U.S. Department of Justice as part of an integrated global resolution.
Meanwhile, in a parallel criminal proceeding, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges for similar conduct against AGI U.S., Structured Alpha’s lead portfolio manager, Gregoire Tournant, co-lead portfolio manager Trevor Taylor, and portfolio manager Stephen Bond-Nelson. AGI U.S., Taylor and Bond-Nelson have already agreed to guilty pleas.
Because of the guilty plea, AGI U.S. is automatically and immediately disqualified from providing advisory services to U.S. registered investment funds for the next 10 years and will exit the business of conducting these fund services. To avoid disruptions to these funds and for the protection of the fund investors, the SEC notes that it will allow a brief transition period solely to transition these services to another investment adviser. The transition period will be 10 weeks for the U.S. mutual funds that AGI U.S. sub-advises and four months for the U.S. closed-end funds that AGI U.S. advises.
Voya IM Deal
Apparently prompted by the disqualification, Allianz Global Investors simultaneously announced that it had entered into an agreement with Voya Financial to transfer selected investment teams and assets comprising most of its U.S. business (AGI U.S.) to Voya Investment Management in return for an up to 24% equity stake in the enlarged asset manager.
The in-scope investment teams, which include income and growth, fundamental equities and private placements, manage approximately $120 billion. As a result, Voya IM’s AUM would increase to approximately $370 billion on a pro forma basis. Following completion of the deal, U.S. vehicles and clients of the transferred investment teams will continue to be managed and advised by those teams.
The terms of the Memorandum of Understanding also include a long-term strategic-distribution partnership whereby AllianzGI would distribute Voya IM’s investment strategies outside the United States.
In a statement announcing the partnership, AllianzGI CEO Tobias Pross stated, “We are very much looking forward to beginning a new chapter in AllianzGI’s development with a partner in the U.S. that complements our own strengths and footprint, and supports long-term growth for both firms.”
AllianzGI and Voya are working expeditiously to finalize the terms of the transaction and are targeting execution of a definitive asset purchase agreement and distribution agreement within the next several weeks, the announcement notes.
In a similar but separate Voya announcement, the firm stated, “Although the transaction will be structured as an acquisition only of selected investment teams and assets from AGI U.S., the terms of the proposed transaction will provide robust protection for Voya Financial against any and all legal or regulatory liabilities related to AGI’s other business activities, including all activities in the United States prior to the closing of the contemplated transaction.”
The SEC Complaint
According to the SEC’s announcement (which includes links to the SEC complaint and the three resulting orders), AGI U.S. marketed and sold the Structured Alpha strategy to approximately 114 institutional investors, including pension funds for teachers, clergy, bus drivers, engineers and other individuals. After the March 2020 COVID market crash exposed the scheme, the strategy lost billions of dollars as a result of AGI U.S. and the portfolio managers’ misconduct.
“Allianz Global Investors admitted to defrauding investors over multiple years, concealing losses and downside risks of a complex strategy, and failing to implement key risk controls,” SEC Chair Gary Gensler said in a statement. “This case once again demonstrates that even the most sophisticated institutional investors, like pension funds, can become victims of wrongdoing.”
Filed in the federal district court in Manhattan, the SEC’s complaint alleges that Structured Alpha’s Lead Portfolio Manager, Gregoire Tournant, orchestrated the multi-year scheme to mislead investors who invested approximately $11 billion in Structured Alpha and paid the defendants more than $550 million in fees.
It further alleges that with assistance from co-lead portfolio manager Trevor Taylor and portfolio manager Stephen Bond-Nelson, 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. Moreover, the complaint alleges that after the COVID-related market volatility exposed the risk and deception, Tournant, Taylor and Bond-Nelson then made multiple unsuccessful efforts to conceal their misconduct from the SEC, including false testimony and meetings in vacant construction sites to discuss sending their assets overseas.
“From at least January 2016 through March 2020, 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,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. “While they were able to solicit over $11 billion in investments by the end of 2019 and earn over $550 million in fees as a result of their lies, they lost over $5 billion in investor funds when the market volatility of March 2020 exposed the true risk of their products.”