N.Y.-based investment firm pleads guilty to fraud scheme that cost Arkansas Teacher Retirement System up to $8M

NEW YORK — Allianz Global Investors US LLC, a New York City-based investment adviser, has agreed to plead guilty to its role in a fraud scheme stretching from 2014 to 2020 that led to more than $5 billion in losses for investors, including the Arkansas Teacher Retirement System.

As part of a deal, Allianz Global also agreed Tuesday to 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.

Bus drivers, subway conductors and religious and charitable organizations nationwide were among those impacted when a covid-induced stock market collapse crushed private investment funds linked to a financial industry giant, exposing the massive fraud, 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 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 said during a news conference, vowing to remain “relentless in rooting out corruption in our financial markets.”

AGI US is an indirect, wholly owned subsidiary of the Munich-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, Colo., 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 covid-induced market crash hit, “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 more than $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.

Tournant surrendered Tuesday in Denver and was released on $20 million bond. 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.

In late February, trustees for the Arkansas Teacher Retirement System approved a $642.8 million settlement of a lawsuit that it filed against Allianz Global Investors U.S. LLC and related defendants. The teacher retirement system netted $507.4 million out of the settlement, system general counsel Martha Miller said after trustees approved the settlement.

The system filed a complaint in July 2020 in federal court in New York seeking to recover losses that the system claimed it incurred as a result of negligence and breaches of fiduciary and contractual duties by Allianz Global Investors U.S., LLC, and related defendants. The securities monitoring firms Kaplan Fox & Kilsheimer LLP in New York and Bernstein Litowitz Berger & Grossman LLP in New York represented the system in the lawsuit.

The system estimated that it suffered $700 million to $800 million in trading losses through three funds managed by Allianz when the board authorized the hiring of the two securities monitoring firms in June 2020 to file the lawsuit.

The teacher retirement system is the state government’s largest retirement system with more than $20 billion in investments and more than 100,000 working and retired members.

Information for this article was contributed by Michael R. Wickline of the Arkansas Democrat-Gazette.

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