Compliance May 18, 2022

‘Massive’ Fraud Charges Trigger Allianz Global Investors U.S. Sale to Voya

The SEC says the charges and settlement show even the most sophisticated institutional investors, like pension funds, can become victims of wrongdoing.

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Allianz Global Investors U.S., the U.S.-based asset management arm of German insurer Allianz SE, has settled charges from the Securities and Exchange Commission that the firm and three former senior portfolio managers conducted what the SEC called “a massive fraudulent scheme” that cost investors more than $5 billion in losses.

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The scheme involved a trading strategy called “Structured Alpha,” which used complex options trading to earn returns for investors. However, the perpetrators of the scam did not reveal the potential immense downside risks of this trading strategy to investors. In March 2020, when the COVID-19 pandemic caused markets to crash, the losses were dramatic. Approximately 114 institutional investors bought the investment product and paid more than $550 million in fees, according to the SEC press release.

“This case once again demonstrates that even the most sophisticated institutional investors, like pension funds, can become victims of wrongdoing,” said SEC Chairman Gary Gensler in the commission’s release. “Unfortunately, we’ve seen a recent string of cases in which derivatives and complex products have harmed investors across market sectors.”

Allianz Global Investors has agreed to pay billions of dollars as part of an integrated global resolution, including more than $1 billion to settle SEC charges and, together with its parent, Allianz SE, over $5 billion in restitution to victims, according to the commission.

As a consequence of pleading guilty, AGI U.S. is automatically and immediately disqualified from providing advisory services to U.S.-registered investment funds for the next ten years and will exit the business. 

As a result of the ban, Allianz SE plans to sell most of the U.S. piece of Allianz Global Investors to Voya Financial Inc.

Voya Investment Management will add about $120 billion of assets under management as well as some investment teams, the company said in a statement Tuesday. Allianz will take a 24% stake in Voya IM. 

The funds will transition over a period of up to ten 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, according to the SEC.

The institutional investors that sued or filed complaints against Allianz include the Arkansas Teacher Retirement System, the Employees’ Retirement System of Milwaukee, San Diego City Employees’ Retirement, Chicago Laborers Pension and Welfare Funds, Raytheon, Blue Cross Blue Shield, the Metropolitan Transit Authority Pension Funds and the J. Paul Getty Trust.

The SEC’s complaint, filed in the U.S. District Court in Manhattan, alleges that Structured Alpha’s lead portfolio manager, Gregoire P. Tournant, orchestrated the multi-year scheme to mislead investors who invested approximately $11 billion in Structured Alpha. The SEC’s complaint further alleges that, with assistance from Co-Lead Portfolio Manager Trevor L. Taylor and Portfolio Manager Stephen G. 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.

AGI U.S. admitted that its conduct violated the federal securities laws and agreed to a cease-and-desist order, a censure and payment of $315.2 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. In a parallel criminal proceeding, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges for similar conduct against AGI U.S., Tournant, Taylor and Bond-Nelson. As part of the parallel criminal proceeding, AGI U.S., Taylor and Bond-Nelson have agreed to guilty pleas. 

AGI U.S. deliberately increased risk levels in its portfolio in late February and early March in order to “recoup” losses that had already occurred earlier in the year, according to information available on the website of Litowitz Berger & Grossman, a law firm leading the litigation on behalf of multiple institutional investors.

In their filing against AGI U.S., San Diego City Employees’ Retirement System claimed the portfolio’s positions left the fund dangerously exposed to even the slightest increase in market volatility or decline in equity prices—the very conditions that Allianz economists, and many others, warned were on the immediate horizon.”

Allianz had marketed Strategic Alpha Funds as safe investments that would be protected from risk in multiple different scenarios.

“The Alpha Funds’ purportedly unique ‘alpha’ component—the actively managed options strategy overlay—was supposed to provide investors with downside protection and possible upside in both bull and bear equity markets, and in times of both high and low volatility,” according to the documents the San Diego retirement system filed in December 2020 to the Supreme Court of the State of New York.

Staff at AGI U.S. manipulated performance and risk data by deliberately changing the numbers in their reports to investors, according to SEC complaints. In one risk report, the defendants reduced the potential losses by changing “negative 42.1505489755747%” to “negative 4.1505489755747%,” according to the SEC.

Once the pandemic hit and losses became more severe, AGI U.S. once again allegedly engaged in data manipulation. Losses reported to investors were reduced. On one particular day, Allianz reported a “-9.2607085709004%” return to its investors instead of the true figure of “-18.2607085709004%,” alleges the SEC complaint.

The SEC’s press release also states that the three senior portfolio managers continued to lie to SEC staff after they began investigating the matter.

“Following the crash of the Structured Alpha Funds, the defendants continued their pattern of deceit by lying to SEC staff, and their fraud would have gone undetected if it weren’t for the persistence of SEC lawyers who pieced together the full scope of the massive fraud,” stated Gurbir S. Grewal, director of the SEC’s Division of Enforcement.

Data & Research May 17, 2022

Why Small Business Owners Often Resist 401(k)s

Two of the reasons most commonly cited by small business owners for not offering a retirement plan are the beliefs that their business is too small to qualify and that they can’t afford a match.

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At a time when many companies are boosting 401(k) benefits to attract and retain employees in a tight labor market, 74% of small businesses still do not offer a retirement plan for their employees, according to survey data published by ShareBuilder 401k.

According to the survey, many small business owners mistakenly believe their business is simply too small and that 401(k)s are too costly.

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The survey, which polled 500 small business owners from across the country, reveals that 26% currently offer a 401(k) plan. Responders cited three main reasons for not starting a plan. Some 58% believe their business is too small to qualify for one, 32% say they can’t afford a match and 24% believe 401(k) plans are too expensive to set up and manage.

“The truth is that any business, regardless of size—and including the self-employed—can offer a 401(k) plan. There are very affordable, low-cost options, and matching is not required,” says Stuart Robertson, president and CEO of ShareBuilder 401k. “This new survey data indicates that, as a society and industry, we have to do a better job of educating the market and de-bunking misperceptions.”

Among the small businesses with a plan, a large majority (71%) started their 401(k) because they felt a personal responsibility as a business owner to provide one. In addition, 47% say they thought it helped their business attract and retain employees; 26% wanted to receive the tax benefits of a 401(k); and 21% wanted to save for their own retirement.

However, the survey found that many misperceptions remain prevalent. Among the most problematic, Robertson says, is the perceived cost of purchasing and maintaining investments.

“Investing can feel intimidating or opaque, and it is important for employers and employees to know to try keep all-in in investment expenses under 1%,” Robertson says. “This includes fund expenses and investment management. The difference of paying 1% more in investment expenses over a 40-year career can result in a nest egg that is hundreds of thousands of dollars less, which can truly impact your retirement. Every dollar spent on expenses is one less dollar invested in the markets.”

As small employers look at ways to offer their employees access to retirement plans, data shows that interest in pooled employer plans has increased significantly.

Created in the wake of the 2019 Setting Every Community Up for Retirement Act, pooled employer plans allow unrelated employers to convene to participate in a single 401(k)-type plan sponsored by a registered pooled plan provider. The goal of many of the provisions in the SECURE Act is to encourage employers that did not previously provide retirement plans to their employees to offer one.

More recently, the U.S. House of Representatives passed the Securing a Strong Retirement Act. If passed by the Senate in its current form, the bill would enhance the retirement plan start-up credit, making it easier for small businesses to sponsor a retirement plan.

In part to address the small business retirement plan coverage gap, various states have adopted state-facilitated retirement savings programs, with the potential to reach a collective 20 million workers. Although many of these efforts are in the early stages, multiple programs—including CalSavers, Illinois Secure Choice and OregonSaves—have already accumulated close to $420 million in assets. These three systems cover nearly 440,000 savers working for 47,000 employers.

According to the leaders of these programs, most small employers would have to do very little for their employees to be able to participate. In Pennsylvania, for example, employers would only have two tasks—to provide an employee census to the Treasury and to allow the system to process payroll deductions. In Virginia, the program will help with basic financial information, education and outreach, along with retirement and education savings. Additionally, the state plans to combine educational and communication resources for citizens who may be underserved and underrepresented.

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