Allianz Global Investors Pleads Guilty to Billion-Dollar “Structured Alpha” Fraud
The SEC has charged Allianz Global Investors U.S. (AGI US), as well as three of its former senior portfolio managers, with a massive securities fraud that lost its investors billions of dollars. Gregoire Tournant, Stephen Bond-Nelson, and Trevor Taylor sold institutional investors a high-risk investment strategy called “Structured Alpha.” The advisers allegedly misrepresented risks and overstated their funds’ performance.
Gregoire Tournant served as the Lead Portfolio Manager for Seeking Alpha. He worked with Trevor Taylor and Stephen Bond-Nelson to persuade investors that the strategy’s risks were worth the reward. The advisers allegedly solicited over $11 billion in investments, fraudulently earning themselves $550 million in fees.
The SEC alleges that AGI US marketed and sold the Structured Alpha strategy to approximately 114 institutional investors, including pension funds for teachers, members of the clergy, and bus drivers.
SEC Fines and Criminal Charges for Allianz Global Investors
Allianz Global Investors, along with parent company Allianz SE, has pledged to pay $5 billion in restitution to victims.
- The advisory firm has also agreed to pay another $1 billion to settle SEC charges.
- The U.S. Attorney’s Office for the Southern District of New York announced criminal charges for AGI US and the advisers. They have all entered guilty pleas.
What Went Wrong with the Structured Alpha Investment Strategy?
Structured Alpha is a complex options strategy. This investment strategy is likely to lose money during periods of high volatility—for example, during a global pandemic. Unscrupulous brokers often market high-risk strategies by touting their potential to earn significant gains.
The Structured Alpha funds lost approximately $5 billion following the COVID-19 outbreak and the subsequent economic downturn. Certain funds lost over 90% of their value. Brokers should know that market volatility poses a huge risk to complex options investors and warn investors of that risk.
How Does Options Trading Work?
Options contracts give investors the opportunity to buy or sell shares at a certain price following a deadline. When an investor buys an option, they are placing a bet that the share price will change according to their hunch.
The option strategy recommended by AGI US Advisers was especially complex. To generate a profit, the brokers used a portfolio of debt or equity securities as collateral to purchase and sell options.
- When an investor buys a call option, they are buying the right to purchase shares at a certain price in the future. The investor is betting that the price of the shares will increase, and they will be able to purchase them at a lower price and potentially sell them at a profit.
- If an investor purchases a put option, they are betting that the price of the shares will decline, allowing them to sell them at a higher price.
- For the option to work in the investor’s favor, the price of the share must fall below or above the “strike price.” Call option investors want the price of the share to rise above the strike price, while put option investors want the price to drop below the strike price.
How Did AGI US Advisers Deceive Investors?
Gregoire Tournant and Stephen Tournant took steps to conceal the risk associated with their Structured Alpha Strategy.
- Misrepresenting “Hedge” Investments. Gregoire Tournant allegedly told investors that the investments were “hedged,” i.e., that he had investments in place in case the Structured Alpha strategy did not work as planned.
- If an investor buys stocks in anticipation of their prices rising, they may hedge by also buying options contracts that take the opposite position, thus mitigating any potential losses. Allianz Gloab Investors US allegedly misled investors regarding the extent to which the Structured Alpha investments were hedged.
- By misrepresenting this safety net, AGI US Advisers violated FINRA Rule 2020, which prohibits investors from misrepresenting investment strategies or using any other manipulative device to secure an investment.
- Manipulated Reports. Gregoire Tournant, Trevor Taylor, and Stephen Bond-Nelson allegedly manipulated reports, including daily performance data and risk evaluation reports.
- Misrepresentation of Alpha Targets. Gregoire Tournant allegedly misrepresented “alpha targets” in order to inflate his compensation. In investing, “alpha” refers to a return on investments that exceeds a standard return. He used an alpha target for a fund that was well above the alpha target that was represented to his client. He allegedly told his Structured Products Group that using this higher alpha target was “worth about 900K to our Comp pool.”
- Structured Alpha Funds Capacity Limits. At Gregoire Tournant’s instruction, investors were allowed to invest in closed funds. AGI US represented to investors that certain Structured Alpha funds had a capacity limit of $9 billion. Once the fund reached that amount, it should have been closed to new investments. According to the SEC, Gregoire Tournant personally approved new investors and made misleading statements to other investors about why new investments were permitted in closed funds. Investors were allegedly concerned about capacity limits since more investors would hurt their returns.
The Cover-Up
Once the Structured Alpha funds began to lose money in March 2020, Gregoire Tournant, Trevor Taylor, and Stephen Bond-Nelson endeavored to hide their misconduct from the SEC.
Gregoire Tournant allegedly encouraged Trevor Taylor to provide false testimony to SEC investors. They allegedly met at a vacant construction site to discuss how to respond to the investigators’ questions. Eventually, the advisers cooperated with investigators.
Allianz Global Investors US Terminates Gregoire Tournant and Stephen Bond-Nelson
According to Gregoire Tournant’s BrokerCheck record, he was terminated from Allianz Global on December 13, 2021, following allegations that he violated firm policies “designed to ensure compliance with industry regulations and standards relating to the preparation and provision of client communications.” On the same day, Stephen Bond-Nelson was fired from Allianz Global for similar allegations.
What Should I Do If Lost Money on Options Trading?
Options trading—even a less complicated strategy than Structured Alpha—is likely to lose money. Investors should therefore not invest more than they can comfortably afford to lose.
Any investor who suspects their investor recommended an options trading strategy with too much risk should get in touch with a securities attorney. Contact us today for a free consultation: (877) 600-0098 or info@kurtalawfirm.com.