The Virginia pension fund invested in a global company that now faces federal fraud charges

NEW YORK, NY (WRIC) – UPDATE, 11:31 a.m. – 05/19/2022: The Virginia Retirement System responded to a post-publication request for comment, and the story has been updated to reflect their response.

Allianz Global Investors, a Germany-based multinational investment firm, is facing federal fraud charges — and the announcement comes just over two months after the Virginia Retirement System closed its account with the firm.

The charges are spread over three cases currently being pursued in federal court for the Southern District of New York. Two are criminal cases, against Allianz itself and three of its employees, respectively, while the third is a civil case against the three employees filed by the Securities and Exchange Commission (SEC).

A risky scheme

Prosecutors say three employees in charge of a hedge fund under the supervision of Allianz systematically lied to investors for four years, telling them that their investments were protected against a possible stock market crash when, in fact, they were extremely vulnerable.

“The scheme was implemented by, among others, the three portfolio managers with primary responsibility for managing the [funds]reads the indictment against Allianz.

Prosecutors said Allianz “failed to maintain adequate oversight” of the fund, allowing the fraud to continue unchecked – even as the fund accounted for around a quarter of its total revenue.

At the center of the plan were Grégoire Tournant, the fund’s chief investment officer, and the two managing directors who served under him, Trevor L. Taylor and Stephen G. Nelson.

Their victims, according to court documents, were largely pension funds looking for a stable, low-risk investment.

“The pension funds of so many retirees, religious organizations and essential workers – from factory workers in Alaska to teachers in Arkansas, to bus drivers and subway conductors here in New York – have invested with AGI because they were promised a relatively safe investment with strict risk controls,” US Attorney Williams said.

Essentially, the indictments allege that from 2016 to 2020, the three financiers systematically lied to investors, falsified documents and misrepresented the financial position of the fund in order to hide the unacceptable levels of risk the fund had taken.

This chart shows that actual strike prices (a measure of short-term risk) are well outside the 10-25% limit frequently touted by Tournant, Bond-Nelson and Taylor. Prosecutors allege they frequently altered investor reports to mask growing risk. (Table included in court filings for SEC v. Tournant et. al.)

Tournant personally altered the documents provided to investors and ordered Bond-Nelson and Taylor to do the same. All the while, Allianz promised investors they had an independent team closely monitoring the investment fund to make sure they were controlling risk – when in fact no such monitoring used to take place.

Everything is falling apart

In March 2020, disaster for Allianz and the fund. The onset of the COVID-19 pandemic shocked markets across the United States, but the Allianz fund lost far more than its investors expected.

In a short time, “the funds collectively lost over $7 billion in value” and were shut down, with the victims losing $3.2 billion of the money they originally invested.

As the SEC opened an investigation into the fund’s staggering collapse, prosecutors said Tournant, Taylor and Bond-Nelson were initially uncooperative.

Bond-Nelson initially lied to investigators, eventually telling them in an interview that he had to leave to use the bathroom – at which point he completely abandoned it.

Before long, however, he was back – and ready to cooperate with the SEC.

Meanwhile, according to court documents, Bond-Nelson and Tournant were meeting at an abandoned construction site, frantically discussing what they would do if the SEC discovered damning documents they still had.

Tournant told Bond-Nelson to start moving assets overseas, saying he had done the same before. Instead, Bond-Nelson went to the SEC.

Now, Bond-Nelson and Taylor have reached a settlement with the SEC in a civil case, which will require them to pay a fine and agree to the facts alleged by prosecutors in exchange for a plea deal, which is likely to carry a reduced sentence.

Tournant, meanwhile, has yet to plead guilty, but appears ready to fight the charges in court.

If convicted, Tournant faces up to 45 years in prison for conspiracy to commit fraud, securities fraud, two counts of fraud to an investment adviser and one count of conspiracy to obstruct the justice.

Where is the money?

Allianz agreed to plead guilty to a securities fraud charge, admitting its role in the case as described by prosecutors.

This means, according to a press release from the Department of Justice, that they will have to pay more than $5.7 billion. Of that total, $3 billion will be used as restitution for company victims, $2.3 billion will be a criminal fine, and $463 million in assets will be forfeited directly from the government.

“I have previously warned that the Justice Department will crack down on corporate crime, regardless of size, salary or any other privileges,” Deputy Attorney General Lisa O. Monaco said. “For the second time in less than a month, the Department has filed charges for a sophisticated Wall Street scheme that cost victims billions of dollars.”

The Virginia Retirement System was not among those victims. A spokesperson for VRS told 8News that the $148 million investment terminated on March 7 was a “convertible bond account” that was “unrelated to the other run of business mentioned in the report.” Allianz history”.

Minutes of a meeting of the agency’s investment advisory committee show that the agency ended its investments with Allianz just over two months before the federal indictment was filed.

“The termination was the result of VRS’ earlier decision to no longer invest in convertible bonds as part of the Credit Strategies portfolio,” the spokesperson said. “Furthermore, the VRS Trust Fund has not lost any money as a result of this termination.”

Dolores W. Simon