NEW YORK, NY (WRIC) — UPDATE, 11:31 am – 5/19/2022: The Virginia Retirement System responded to a request for comment after publication, and the story has been updated to reflect their response.

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

The charges are spread across three cases currently being prosecuted in the Federal District Court of Southern 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

According to prosecutors, three employees in charge of a hedge fund under Allianz’s supervision lied to investors systematically for four years, telling them that their investments were protected against a potential market crash when, in fact, they were extremely vulnerable.

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

Prosecutors said Allianz “failed to maintain adequate oversight” of the fund, allowing the fraud to continue unchecked – even as the fund made up about a quarter of their total revenue.

At the center of the scheme were Gregoire Tournant, Chief Investment Officer of the fund, and the two managing directors who served under him, Trevor L. Taylor and Stephen G. Nelson.

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

“Pensions 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,” said U.S. Attorney Williams.

Essentially, the indictments allege that from 2016 to 2020, the three financiers systematically lied to investors, falsifying documents and misrepresenting the fund’s financial situation in order to hide the unacceptable levels of risk the fund had taken on.

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

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

It All Falls Apart

In March 2020, disaster hit for Allianz and the fund. The beginning of the COVID-19 pandemic caused a shock to markets across the United States, but the Allianz fund lost much more than any of its investors expected.

Over a short period of time, “the Funds collectively lost more than $7 billion in value” and were shut down, with victims losing $3.2 billion of the money they had originally invested.

As the SEC began an investigation into the fund’s stunning collapse, prosecutors say Tournant, Taylor and Bond-Nelson were initially uncooperative.

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

A short while later, however, he was back – and ready to cooperate with the SEC.

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

Tournant told Bond-Nelson to begin moving assets overseas, claiming that he had done the same already. Instead, Bond-Nelson went to the SEC.

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

Tournant, meanwhile, has not yet entered a plea, but appears poised to fight the charges in court.

If convicted, Tournant could face up to 45 years in prison on charges of conspiracy to commit fraud, securities fraud, two counts of investment adviser fraud and one count of conspiracy to obstruct justice.

Where’s the Money?

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

That means, according to a press release by the Department of Justice, they will be required to pay over $5.7 billion. Of that total, $3 billion will serve as restitution to the company’s victims, $2.3 billion will be a criminal fine and $463 million in assets will be forfeited directly to the government.

“I previously warned that the Department of Justice would crack down on corporate crime, without regard to size, salary or other privilege,” said Deputy Attorney General Lisa O. Monaco. “For the second time in under a month, the Department has brought charges in connection with a sophisticated Wall Street scheme that cost victims billions of dollars.”

The Virginia Retirement System was not one of 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 sleeve of business mentioned in the Allianz story.”

Records from a meeting of the agency’s Investment Advisory Committee show the agency ended its investments with Allianz just over two months before the federal indictment was filed.

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